The $25,000 Mistake caused by the "Myth-Conception" of Mortgages

Let's take a look at costly misperceptions held by millions of Americans.

   · Most people believe making extra principal payments on their mortgages saves them money.
   · Most believe mortgage interest is an expense that should be eliminated as soon as possible.
   · Most believe home equity has a rate of return and enhances their net worth.
   · Some homeowners are lured into thinking that bi-weekly payment plans are the answer.
   · Others rely on a 15-year mortgage with higher monthly payments rather than a 30-year term.

In actuality, such methods are not the wisest ways to accomplish a "free and clear" home. Through another strategy you can accumulate sufficient cash in a conservative, tax-deferred mortgage acceleration plan. If homeowners deposited any extra principle payments in a separate, liquid, and safe side fund, instead of giving them to their mortgage company, they would accumulate enough money to pay off the mortgage in as short a time frame as possible. Let me illustrate.

The $25,000 Dollar Mistake Millions of Homeowners Make

If I were to take out a new $150,000 15-year mortgage, my monthly payment would be $1,433.48. Equivalent to fifteen ANNUAL payments of $17, 202. However because of the tax benefit I receive (by deducting the interest on my mortgage payment on Schedule A of my tax return) Uncle Sam is in essence paying part of my annual mortgage payment with money I would have paid in taxes. This saves me $3,935 in taxes. This results in a net after-tax annual mortgage payment of $13, 267.

A homeowner consistently pays more mortgage interest each year with a 30-year mortgage than with a 15-year mortgage. Most people view this as a negative. That's why borrowers are motivated to take out a 15-year mortgage-in order to pay as little interest as possible

There is a Better Alternative

IF we take the annual difference between the net after-tax payment on a 15-year mortgage and a 30-year mortgage each year, (see illustration below) and deposit that money in a tax-deferred, interest-bearing side fund (let's assume an 8% return), you will notice that by year fifteen, the conservative side fund will have accumulated $25,159.00 more than needed to pay off the mortgage!

PRINCIPAL $150,000			RATE 8.00%	TAX BRACKET 33.33%
	[1]	[2]	[3]	[4]	[5]
END OF YEAR	30-YEAR MORTGAGE LOAN BALANCE	15-YEAR MORTGAGE NET PAYMENT AFTER TAX	30-YEAR MORTGAGE NET PAYMENT AFTER TAX	DIFFERENCE BETWEEN NET PAYMENT AFTER TAX	DIFFERENCE EARNING 8% COMPOUNDING
1	$148,747	$13,267	$9,223	$4,044	$4,224
5	142,605	13,943	9,380	4,563	26,188
10	131,587	15,155	9,662	5,493	69,499
15	$115,171	16,960	10,081	6,879	$140,330
				$78,325
	/\ /\ $25,159 EXCESS CASH BEYOND MORTGAGE BALANCE

Do you see why I refer to this as the $25,000 mistake millions of Americans make? You can imagine what a bigger mistake it is if your mortgage is greater than $150,000.

This concept should illustrate that it would be better to use a side fund instead of paying extra principle on the mortgage because it follows the 3 Rules of Prudent Investing. Why?

Because the Liquidity (#1), the Safety (#2), the Rate of Return (#3), and the Tax Benefits (icing on the cake!) you would achieve from your money available in the side fund account far outweigh any hypothetical disadvantages-especially in the event of a financial emergency.

To maximize the results of successfully managing equity, I recommend using a mortgage with an interest-only payment option and have a plan to follow that can help provide the discipline to set aside the difference in the mortgage payments.

In closing; The key is to understand how to have interest work for you rather than against you.

For more information on how to select the correct loan program and tax deferred investment opportunities and receive a free Equity Repositioning Analysis call the Equity Management Team at 949-885-9419 ext 9354 or email at marko@gospf.com.

Mark Oden is a DRE licensed loan officer since 1997. Mr. Oden serves as the Senior Mortgage Planner for the Equity Management Team at Security Pacific Financial. Mark has a solid background in real estate financing, equity repositioning and holds a teaching credential at the community college level. Mark can be reached at 949-885-9419 ext 9354 or emailed at marko@gospf.com

* The above information is from "Missed Fortune 101" by Douglas Andrew, a Financial Planner with over 30 years experience. Available at local bookstores and Amazon.com