Saturday, February 10

More on mortgages...

There was another post I read today about mortgages, in which a young person was considering saving $200K as downpayment for a $350-$400K house. I had to restrain myself from writing a novel in response because I think that this is so misguided.

One of the biggest advantages of mortgages is that it is almost the only time that ordinary people experience the power of leverage. For example, I put about $35,000 down on my first house. When I sold it less than two years later I got back $212,000. Now some of this was due to the payments I made on the mortgage but most of it was from crazy house appreciation in my area. It will probably be the only time in my life that I make 500% in two years, and it has had a profound effect on my financial standing.

The benefit of leverage is something that I didn't mention in my post yesterday, and perhaps I really should have. Right now, I am actually under-leveraged in my home. I have about 43% equity in it and almost any bank in the country would give me a 75% mortgage. So there is about $85,000 in equity that I could access at a very low interest rate and long amortization if I was willing to make payments on it. (if I got the same rate as the rest of my mortgage it would be about $510 per month)

If I took this money out of my mortgage and invested it, the following would occur:

  • I would still get the same appreciation from my house. No change.
  • I would have an extra $85,000 in investments appreaciating. :)
  • I would owe an extra $510 per month. :(
  • BUT, the interest portion of this would be tax-deductible. (Unfortunately, my tax rate is pretty low so I don't get the maximum benefit from this.) So my net cost might be around $400 per month (very approximate). :)

If I make more than $400 per month after taxes on the $85,000 investment then I should be ahead. A 7% return would acheive this and anything more would be gravy.

Of course, these numbers are all approximate and there is risk involved, but there is opportunity as well. I'm not rushing out to do this tomorrow, but I do consider it to be a valid option, and a good argument against paying down a mortgage.

Today was Saturday. No hours worked.