Paying off Mortgage
If you're planning to refinance you're home or apply for a home
mortgage. This could be one of the most the best tips you'll ever
recieve. If you're like majority of the population which applies for
home mortgage and chooses to put a large down payment, with the shortest
term attainable and paying if off as soon as possible and thinking that
their doing it smart. Well, I'm sorry to burst the bubble, but frankly
its not smart from a financial standpoint and such idea could lead you
to a big mistake.
Now I know that could be a shock to you, or make you feel
uncomfortable and you should. This goes against the grain of what the
majority of the population's concept of smart handling of home
mortgages. Nevertheless, read on. I'll share to you the smart way of
doing it.
The answer of how to do it smartly is exactly the opposite what the
majority's idea of smart. Yep, you heard that right! This means the
smart way is applying little amount of cash as down payment (But just be
sure that monthly home mortgage payments only consist 30% of you're
total debt just to be safe), taking the longest term available and never
pay off you're home mortgage! Now this strategy may not be applicable at
all times. It depends, like most financial strategy, on economic
climate. Specifically factors such as home mortgage rates and you're
ability to find a profitable investment vehicle. Yes, you need to start
investing, we're talking about being financially smart and you cant
achieve that if you don't or cant invest.
Lets start to elaborate why our strategy is more financially smart
than the majority's "smart". To better illustrate I'll share to you a
technique that's one of the pillars of wealth building. The technique
I'm talking about is you borrow money, lets say $10,000 with an interest
rate of 5% per year and you invest that money with an investment
vehicle, lets say a mutual fund, with a 10% growth per year. Now let's
do the math. Borrowed Money 10,000
Total Earned 1,000 (10% of 10,000) Total Interest Paid 500 (5% of
10,000) ----------------------------- Total Earned $ 500
You could be sitting on a 500$ net profit! This may not be large
amount of money, but remember you invested nothing of you're money
giving you a Return On Investment of infinity.
How does this relate to applying home mortgage? It's the same thing
concept. * You pay as little amount of cash possible.
- This will increase you're good debt
- Put you're "down payment to be" cash to an investment vehicle.
Earning you 10% or whatever then paying the home mortgage with their 5%
or whatever. Giving you a profit. Important! The numbers may not be the
same for you, but just be sure you're earning percentage is higher than
home mortgage percentage.
* Choose the longest term. This lowers you're monthly payment and
most occasions lowering you're interest rate.
* Don't pay it off as soon as possible. Don't join any programs that
help you achieve that. Instead invest the extra cash to you're favorite
profitable investment vehicle. What you'd rather want? paying 5% or
earning 10%?
By following such steps you're actually borrowing money with 5%
interest rate and earning with 10% interest rate giving you a profit of
5%! Important, this is not an exact calculations, in fact this an
oversimplified example. This articles also is not aimed as an How To,
but rather to give you an idea of the things possible. I still advice
that you sit down with a financial advisor to have solutions tailor made
to you're situation.
by Jed Baguio |
