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House
Alert: Why Paying Down Your Mortgage is Smart! |
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by Grant
Bynum 1 2
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You may have heard how smart it is to pay
down your home mortgage�but, are there some doubts
lingering in your mind as to whether this is a good
investment? Are
your friends telling you that you need to get a
bigger house to lower your taxes�or for investment
reasons? Or, are you thinking that it would be
better to simply invest this extra money in the
some mutual funds? I would propose instead to examine any house
decision from a viewpoint of maximizing your long-term
net worth, instead of just worrying about reducing
current year tax bills. Let me give you an example:
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attention if: |
You
want to get a bigger house to lower your tax bill...and
not just because you need the space. |
| The
Plain Summary
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Buying
a more expensive house will save you on yearly taxes but
will not increase your net worth as much as other
investments. |
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AN EXAMPLE
Let's
say you own a house that is worth $125,000, and you
currently have a $100,000 mortgage.
You have 20 years left on your note, and your
fixed interest rate is 7.5%. You have some extra money�so you are investigating 3
alternatives:
- Buying
a bigger house
for $225,000 (with a 20 year note at 7.5%) because
it�s a �good investment�, increasing the total
mortgage to $200,000
- Investing
the difference
that you would pay for the bigger house using a
mutual fund that gains 11% (the average stock market
return)
- Paying down your current house�s mortgage with the same minimum payment that you would make on
bigger house
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Scenario
1: Buying a Bigger House
In
this scenario, you sell your current house and buy a
bigger house for �investment� purposes.
This scenario will lower your current
year�s tax bill. However, more of your money
is paying for �air� (interest)�and paying
interest is an awful way to increase your net worth!
Here
are some other factors you should consider with the
bigger house:
- Higher
Mortgage Taxes
- Your mortgage taxes will increase. You can
also deduct these, but it works by the same
principal as the interest...you pay for
"air", thus decreasing your net worth.
- Higher
Utilities
- The proposed house is bigger than your current
house...and thus will take more after-tax money to
heat and cool it.
- Higher
Maintenance Cost & Time - Having a bigger house will
mean more to take care of. This will mean
more to replace, more time spent replacing, etc.
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The Housing Market is Unpredictable � Although much of the nation is still in a housing boom,
this will not last forever.
Home prices will fluctuate depending on many
regional economic conditions, driving the value of
houses in your city down.
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