Maximizing Your Mortgage's Rate of Return

Homes are for storing people and their possessions. Investments are for storing your cash!

Let's look at some examples. Keep these suggestions in mind:

· Separate equity for investment, not consumption
· Invest in moderate to safe investments
· Uncle Sam is your friend…use him
· Seek aggressive but conservative mortgage products.

Example 1

Assuming a borrower can afford the increased monthly payment, a 15-year mortgage is better than a 30-year mortgage…true or false?

Let's do the math:

· A 15-year payment minus a 30-year payment = $758.00
· Now invest the $758 and its additional tax savings into an investment account with a conservative rate (i.e. 6 to 8 percent). You could pay your home off in 13 ½ years or in 15 years with $25,000 to spare.

Example 2

A Tale of Two Brothers

A true story adapted from the book The Rules of Money

Brother "A" has a 15-year mortgage at 6.44 percent; 20 percent down payment.

1. $1,383 monthly payment ($1,227 monthly net after-tax cost)
2. Sends in $100 monthly to bank in effort to help pay off sooner

Brother "B" has a 30-year mortgage with ARM at 7.42 percent APR; 5 percent down.

1. $1,175 monthly payments ($799 monthly net after-tax cost)
2. Adds $100 to his $428 monthly payment savings and puts the $528 into an investment account earning 8 percent ROI.

Fast forward the tale:

Brother "A"

1. After five years: $14, 216 in tax savings; $0.00 in savings
2. After 15 years: $25,080 in tax savings; Owns the house; $30,421 in savings.
3. After 30 years: $25,080 in tax savings; owns the house; $613,858 in savings.

Brothers "B"

1. After five years: $22,557 in tax savings; $83,513 in savings.
2. After 15 years: $67,670 in tax savings; $28, 2019 in savings; $190,000 balance on mortgage; could pay off and own with $92,019 to spare.
3. After 30 years: $107,826 in tax savings; owns the home; $1,115,425 in savings!

One last thing: what if the brothers both lost their jobs?

Example 3

Nest egg economics

Let's look at leveraging home equity to gain just an additional $1,000,000 for retirement.

Pull $200,000 worth of equity out of your home and redeposit it in an investment account with a conservative rate of 6.75 percent.

· In 30 years, the investment account will be worth over $1.4 million
· After taking out interest payments and mortgage payments, you are left with a nest of just over $1,000,000.