Mortgage your way to wealth
By: Larry Lane for InvestorZoo.comWe live in scary economic times. Financial institutions that were in business for over100 years have folded. The banking system has been bailed out by the government.Detroit, once the manufacturing hub of the US is facing close to 20%unemployment. With all this bad news, you may be going through stress andstarting to cut expenses.No doubt you’re hearing about the one million people who have lost their house toforeclosure. You’ve undoubtedly heard stories or read about those that lost theirhouse in the Great Depression. In the 1920’s and 1930’s at the height of thedepression, banks called in loans because they were running out of cash. Imaginehaving a mortgage and then having it cancelled! Thanks to legislation, banks are nolonger permitted to end mortgages early. There was no such thing asunemployment insurance, or loan modifications.
Take advantage of interest rates
Every month, you think “I wish I could get rid of this mortgage.” You could refinanceto a 15 year mortgage or make extra payments to pay it off quicker. Conventionalwisdom says to retire your mortgage debt as soon as possible. That wisdom workedwell in the old days when mortgage rates were 8 to 12% or higher. Given today’seconomic environment, paying off a mortgage early is a bad idea. If have acquired amortgage within the last several years and you’re comfortable with your payments,you should extend your mortgage as long as possible. Today’s interest rates are onsale and at historic lows. You may not see interest rates this low for a very longtime, possibly your lifetime.
Let’s say in round numbers you have a $100,000 mortgage and paying a 6% rate. You are in the25% tax bracket which will effectively bring your actual interest rate down to around 4.5%. Youhave put your standard 20% down. You now control $120,000 worth of property with just$20,000 and you’re effectively paying 4.5% interest after tax breaks. You’ve locked in that$120,000 price and interest rate for 30 years. If your salary just keeps pace with historicalinflation (3%), you’ll be earning twice what you’re earning today in 24 years; your mortgage onthe other hand will be fixed in today’s dollars. Given a very conservative rate of return, at 3%,your home will double in price in 24 years. In addition, you will own your home outright. According to a George Mason study
, over the past 30 years, there has been no nine-year periodwhere the average home price in the metropolitan area has experienced a decline. Home prices havegrown, on average, nearly six percent annually or 50 percent over a nine-year period during the pastthree decades.
For more information on the study,click herehttp://www.rarealtors.com/assets/uploads/RAR%20Housing%20is%20a%20Good%20Investment.pdf