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House
Alert: Should
You Get a Bigger House? 1
2
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Scenario
2: Investing
the Excess in a Mutual Fund
What
would happen if instead you simply invested only the
interest portion of the higher payments for 3 years in a
mutual fund? This
would probably give you an 11% annual return (this is
the overall average stock market return historically).
However,
here are some other things to consider:
- Higher
Risk � The mutual fund might make more than 11%...but it
might make less, at least for our example�s time
frame. No
one can predict the market.
- More
Hassle & Time � Having to monitor the performance of your
funds will involve extra time and stress
- Higher
Tax � You will most likely have to pay yearly income taxes
on the mutual fund profits.
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Scenario
3: Buying a
Smaller House and then accelerating the mortgage
payments
The
final scenario involves accelerating payment on your
current house using the difference between the 2 minimum
payments on the $225 house and the $125 house.
If
you compare all 3 together:
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Moving
into the $225 K House, making the Minimum Payment
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Investing
the Difference in Minimum Payments in an 11%
mutual fund
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Paying
Off the Balance of $125K House using the same
payment as the $225K house
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Commission Paid on Selling the $125,000 house
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($7,500)
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N/A
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N/A
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Principal Paid for 3 years
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$14,531
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$7,624
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$39,676
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Extra Tax Savings (due to more deductible interest)
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$6,737
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$
0
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$
0
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Year 3 Investment Balance (net of 20%
annual tax on earnings)
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$0
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$32,871
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$0
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Appreciation in House Value (15%)
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$33,750
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$18,750
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$18,750
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Increased Utilities, Upkeep, Taxes, etc.
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($8,100)
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N/A
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N/A
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TOTAL Net Worth Increase
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$39,418
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$59,245
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$58,426
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Amazingly, paying down your house brings about the same
return on your money as if you invest it in a mutual
fund...and with a LOT less risk! And,
you have the security of knowing that your
mortgage is that much closer to being totally paid off,
which will free you up to start working on other
investment goals. Finally, the �buying a bigger
house for investment reasons� argument is a total
money loser!
Houses are For Needs, not Investments
The smart way to buy a house is to buy only for
what space you need...and pay off your loan fast!
For example, if your family is currently just you and
your spouse, why do you need a 5 bedroom 2-story house?
And, if you do have some later additions to the family,
consider adding on rooms (instead of moving) to avoid
real estate commissions, moving costs, etc. The
bottom line? Buy
a house based on need�not for investment! |
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