How to Increase Your Net Worth by $1,000,000 With a Mortgage!
Whether you’re renting a house, apartment, condominium, townhouse or already a mobile home, other than affording you shelter, your rent payment is like throwing money out the window every month. There are many reasons owning your own home is considerably more advantageous than renting, though you will seldom hear about or see the concepts presented in this report.
Aside from the obvious benefits of owning a piece of the American Dream, you: 1) get a place of your own to do with as you wish; 2) unprotected to equity in real estate with the eventual goal to own it free and clear; and 3) never have a landlord deciding when you need to vacate the premises. Also, owning a home can have tremendous financial advantages that renting can never accomplish.
Real estate is the single best route to getting high in this country. And, owning a home is the first step to becoming a millionaire. Your home mortgage is a marvelous tool to assist in creating wealth for yourself, and the right mortgage strategy is as important as anything.
Let’s take a quick look at some financial benefits of owning a home before we delve into a more complicated – but effective – strategy of using a mortgage as a meaningful financial tool in your wealth building strategy. Here are some major benefits you’ll enjoy when paying your mortgage versus a rent payment:
o Mortgage Interest Tax Deductibility;
o Historically consistent payments;
o Appreciation in your largest investment;
o Ability to tap into the home’s equity and accessing large sums of cash when needed; and
o Tax-free gains on dominant residences upon sale (talk to your CPA or tax advisor for specifics).
Let’s use an illustration to give a better demonstration of what a mortgage can do for you. For this scenario, we’re assuming that we’re renting a townhome for $1200 per month and the rental payment increases at 5% per year. We’re going to compare this against the buy of a $250,000 home using 100% financing at an interest rate of 6.875% fixed for 30 years. For our example, we’re comparing the true mortgage payment versus the true rental payment excluding character taxes so as to have an accurate “apples to apples” comparison.
With our mortgage of $250,000, we’ll have a before tax payment of $1642. If you’re in the 28% tax bracket, your true interest rate is no longer 6.875%. It’s really 4.95% because of the tax deductibility of mortgage interest. Your monthly mortgage payment is now really $1182 – technically less than the rent payment! Out of your total monthly payment of $1642, $210 is truly going toward the principal of your loan (i.e. creating equity for you), leaving the $1432 as tax deductible mortgage interest. (Bear in mind that over time, more of your payment gets applied to principal and less toward interest).
With mortgage interest totaling approximately $17,184 per year, and with your 28% tax bracket deduction, Uncle Sam will give you back over $4800 on your taxes!! Try getting some of your rent payment back each year! This tax deduction is about $400 per month of real money. Now, here’s where the strategic part comes in: While many people will use their mortgage tax refund as a forced savings plan and consume that money yearly on vacations, new clothes, jet skis or other money draining expenditures, you should think about reinvesting that money back into your mortgage.
Taking your yearly mortgage tax refund and applying it to your mortgage is the same as sending in about $400 additional dollars each month toward your mortgage principal. However, because the amount of principal that gets paid versus interest increases over time, you’ll get less and less of a tax write-off over the years.
Though the benefits are nevertheless huge and the concept here nevertheless works, and because your refund will decline over time, we’ll assume you were able to only send in $3960 per year ($330 per month) (already though if your income increases you may find yourself in a higher tax bracket.) By applying an additional $3960 each year towards your $250,000 mortgage, you will have it paid off in just 18 years!! Now you no longer have a mortgage or rental payment, and you own your home free and clear! Another way to look at it this: Uncle Sam paid for 12 years of your original 30 year mortgage. Talk about a tremendous assistance!
Ok, so now what? You were already making a monthly mortgage payment of $1642 to the mortgage company, and already though your house is paid off, you’re going to continue to make that payment – but this time to yourself. If you were able to earn a modest return of 6% per year by investing that money in that last 12 years, you would build up a nest egg of approximately $333,000. Conversely, by year 18, the renter is no closer to owing his home than he was when he started, and his rent payment has reached about $3000 per month!
Your $250,000 home has been earning a very modest 3.5% appreciation per year, is now worth over $701,000 by the end of year 30. This figure, plus your investment account nest egg of $333,000, gives you a net worth of about $1,034,000!!