Friday, March 6, 2009

Mortgage Interest, A Great Investment

I have several acquaintances who are financial advisers. Most of them have been very successful. They are really earning their fees right about now, in this quagmire of an economy we find ourselves in.

One consistent place that advisers have always counseled their clients to invest is in a home. Mortgage interest is a hedge against taxes as the interest is tax deductible. That has been the case ever since I have been aware. If you have a new mortgage and your Principal and Interest monthly payment is $1000.00 then you have approximately $12,000 to claim as a deduction when taxes roll around. What are the taxes on $12,000? We have a graduated income tax system so if we determine that you are in a 20% tax bracket, that does not mean that you are actually going to pay 20% of your income in taxes. Let's say that you pay more like 12% of your income in taxes.

So we see that having a home will save you 12% of the $12,000 that you paid out on your mortgage loan. All the payment is pretty much interest until you get into the last 15 years of the payback period. So how much cash does that home save you? 12% of $12,000 is $1,440. That is your total cash saving. Divide that by 12 months and you are adding a tidy additional $120 to your monthly cash flow, just by owning a home. Throw in the property taxes, which are also deductible and you add more to the cash flow. Let's say you pay $2,000 in property taxes. At your 12% tax rate that amounts to an additional $240 you save. Divide that by 12 and you add an additional $20 per month to your cash flow. So now we are up to $140 in monthly cash to your bottom line.

If you are putting out $1,000.00 rent per month you are not eligible for any savings at all. Makes you wonder why so many people rent, doesn't it. I suppose that a lot of folks just don't know how easy it is to purchase. That is what we Realtors do. We advise people on that front.

Now let's do one more little exercise. Let's say that you owe $100,000 on your home via a mortgage. You have your home financed for 30 years at a fixed rate of 6%. Using one of the calculators on my website we can posture an exciting scenario.

Let's say that you have an additional $125 extra per month coming in and you would like to invest it in something. You already own your home so you are thinking about investing in something else. What is that something else going to be? Is it going to be the stock market? Not a bad idea because there are a lot of great deals out there currently. How about gold? Some people think that is a solid place to look right now.

I read in the USA Today that people were buying Treasury bonds at 0% interest. Why would people do that? Because they trust that to be a place to put their money that would be safe. Do we have all that much confidence in wherever we have our money currently? 401k's have become fodder for late night comedians.

Here is something to consider. According to the calculations that I just made on one of the calculators on my website, you ought to consider investing that money in paying down your mortgage. If you were to pay an extra $125 a month on that $100,000 mortgage do you know that it would knock 10 years off of the length of your mortgage? It would save you somewhere around $42,800 in interest. Where could you put your money to get that sort of return?

If you pay that extra $125 per month and you save $42,800 it would mean that you are getting return on your money at the rate of 142%. Do the math. $42,800 divided by 20 years is $2140 per year. Compare that to the $1500 per year you are paying extra on your mortgage. My calculator tell me that is 42.7%. Sure beats treasury bonds at 0%, doesn't it?

Something to think about. If you are paying rent, please call me and let's get you into a home. Man, you would not believe the deals there are on homes in the Tallahassee area. Let's get started.

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