bran987 said:
incorrect. as I said before, certain individuals have the ability to allocate investable cash in such a manner as to earn a higher rate of return than paying the money toward a mortgage each month. In this way, we are looking at a mortgage interest rate as a cost of capital, to use traditional financial terms. If you can return higher than the mortgage rate in other investments (i.e. invest at a rate higher than your cost of capital) you will create wealth. If you cannot, you are destroying wealth. The value of the home is independent of this decision. If a house loses $500,000 of value, it doesn't matter what kind of mortgage you have. You also have to adjust the rate you believe you can return in other investments for RISK, as I said, paying down your mortgage is a 100% risk free investment, returning your the rate on your mortgage. And also have to adjust for the tax deductible nature of interest on a mortgage.
interesting. but i'd rather have cash on-hand, making good rates - then in someone else hands, making a lousy rate. The key is to invest (not spend) and provide protection in case u lose a job or have a medical emergency.
---- here's the original post i read: -----
All the stuff you posted is basicly what I'm doing except for one part -how to handle debt - this might be kind of a long read too but worth it.
I have sat down with my accountant - mortgage broker and my investment consultant at Ameriprise to set up my plan - this might not work for everyone but for me this is the perfect plan.
Here is my debt plan that we are putting into place next week actually when we close on our new refinance. Here it goes - I hope it will help some of you -
I had a long two hour conversation with my mortgage broker. What he told me blew my mind. People today look at debt the wrong way - esp since the old way of debt no longer holds true. This is what we disscussed for me as the best plan.
Back when our parents generation finally had gotten enough money to buy a house they took out a 30 year mortgage - why 30 years?? Who came up with that number?? Well - people used to work for the same company from 18 till retirement - my father for example started at First National City Bank as a bike messenger at the age of 18 - left Citibank at the age of 58 as a Vice President!!!! With no college education mind you - just night school. He had 10 years of no mortgage payments to add to his savings and then sell the house - buy a retirement house in FLA or some where cheaper - live on the difference (the equity that was built up over the 40 years) and his stock options and investments in retirement accounts and 401k's.
My father died 2 weeks after he retired. What did paying down his mortgage get him??? Well in the end - nothing. None of us know what our future brings - is this going to happen to everyone?? No - but it could. No one knows.
The plan I am putting in place.
I sold the house my parents bought just last year. They paid $19,000 for it in 1962 - I sold it in 2005 for $440,000.(my father passed away in 1991) That is serious growth. I also sold at the peak time in the market so that helped. I owed $100k so I walked away with $300k in equity.
My wife and I bought the house we live in now for $677,000. We took out a frist mortgage for $450k and a second for $100k. Between those loans and our credit cards and car payments school loans we were still $600k in debt but we were paying between 6.5% and 29% on various loans and credit cards.
Here's where I had my mind blown -
My motgage guy and account almost at the same time said - " Just take out a single $600k loan- INTEREST ONLY!!!!!"
WTF - HOW THE HELL IS THAT GOING TO HELP ME?????
Here's how - now this only works IF you are willing to SAVE MONEY on a regular basis.
My mortgage guy does a lot of BIG loans - $1mil loans on a daily basis - almost all of them are interest only - why is that?? Rich people know how to SAVE MONEY!!!! He started doing a little research with some of his buddies that only work with really wealthy clients - those with assets over $5 mill. They all had a mortgages that are interest only and total 80% of their homes value when they bought it.
First he asked me - do I intend to move again with in 5 years?? My wife and I have really bought our dream home and we pretty much won't sell till we retire - maybe not even then. Then he asked me if we were done with any improvments that needed to be done for the next 5 years?? We are - we have done over $100k in inprovments on the house over the last year.
He had me add up what I send every month to ALL of my debt. Mortages - car payments - school loans etc. My monthly nut was $6100 a month just in debt payments which included paying $500 a month towards principle every month for the big mortgtage.
A $600k interest only mortgage - $3750 a month!!!!!!!!! Add on $1100 a month for prop taxes and insurance - we would save $1250 a month.
We take $1000 a month and automaticly put it into an online savings account like ING getting 4.5% interest - we have already doubled our "savings" of $500 a month in "equity" if we were to still pay a reg mortgage.
In 5 years - we would have gained approx. $35,000 in house equity by paying the mortgage down - when we put $1000 a month in savings @ 4.5% in 5 years we have $67,000+ in the bank - I put the plus there cause here is where it gets crazy.
The government will "pay" basicly two of your mortgage payments!!!!!!!!! WTF - Yes - the interest of a first mortgage is tax deductable -credit cards are not - my tax returns - with the added child deduction - sholud be about $7500 - put that into savings as well- do not pay down your mortgage with it - save it - that equals $37,500 in 5 years - you now have $105,000 IN CASH IN THE BANK!!!!!!!!
Here is an extra bouns - my house was just appraised for $800K - if we add only 3% increase in value each year - that is what the market should be not the 15-20% it has been - in 5 years the home is now worth $920K -and you still only owe $600K - on top of the $105 in the bank - I now have $320k in value again!!!
Now you have $100k CASH in the bank and lets say you lose your job - how different is your life now??? What bank is going to give you your $35k in equity back with no job???
The last part - and here is why I told you all the story about my father - I have over $1 mil in life insurance - god forbid something happens to me - the house is paid off - with tax free life insurance money - my wife and child now have no mortgage payments - over $500k in the bank and a house worth over $1 million dollars.
That is how the rich get richer - and you ain't going to learn that in school......
My numbers might seam big to some people - it's the principle and putting it into action - you could start with much lower numbers and come out with the same result - it just might take 10 years instead of 5 - the math works.
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