Archive for the ‘Financial Planning’ Category

The Financial Consequences of Paying Off a Mortgage

The decision to pay off a mortgage is one that stretches beyond the emotional benefit of owning a home free and clear. There can also be a significant financial cost to paying off a mortgage. Depending upon the overall profile of a homeowner, maintaining a mortgage may be the most financially sound option.

Consider the following investment and its characteristics. How much would you feel comfortable depositing or investing?

1. The monies you deposit are not safe from a loss of principal

2. The monies in the account are not liquid

3. Your income tax liability increases with every contribution

4. Your money earns a 0% rate of return

5. When the investment is fully funded, there is NO income paid out

The investment described above is home equity obtained through a larger than necessary down payment or through pre-payment strategies to pay down or pay off your mortgage. The key point here is that home equity is not an investment at all. It does not earn a rate of return and will not increase in value. The home as an asset may increase or decrease in value depending on the market; however, the cash invested into home equity does not.

A $100,000 Investment VS a $100,000 Mortgage

The primary reason homeowners want to pay off their mortgages is to avoid paying interest. As you may know, the interest paid on a home loan over 30 years can be more than the amount of the original loan! That sounds terrible until you consider the cost of liquidating the investment funds. If you are contemplating pulling cash from an investment account to make a large down payment or to pay down your current mortgage balance, consider the following example:

• $100,000 borrowed at 5% over 30 years will require 360 payments of $536.82, or $193,256 over the life of the loan.
• $100,000 invested earning a return of 4% will be worth $324,339 in 30 years. If the rate of return is 7%, the investment would be worth $761,225.

The True Definition of Being Mortgage Free

If you have a $200,000 mortgage as well as a liquid investment account with at least a $200,000 balance, then having a mortgage becomes a choice. By building your investment account balance and through the power of compounding growth, you have the ability to reach the point where a mortgage is optional more quickly than by making additional principal payments on your home loan. In essence, your investment will grow at a greater rate than the speed at which your mortgage balance will drop.

If you are considering using investment account assets to pay off or pay down your mortgage balance, I would be happy to discuss the pros and cons of your individual situation and determine the most appropriate solution. We can run specific reports for you that will detail the current and future implications of liquidating investments to pay down a mortgage. Call me at 801-501-7950 or send an e-mail to mike@citycreekmortgage.com.

When structured properly, a home mortgage can be a tool to help you build net worth. However, when not properly managed, a mortgage can cause excess burden and be a financial and emotional drain. In the current environment of distressed home values and inevitable interest rate increases, now is the time to ensure your mortgage is properly structured and in line with your long-term goals.

Over the years I have witnessed many homeowners make significant mistakes in how they obtain a mortgage, as well as the way their loan is structured. Below is a list of the top 5 mistakes I continually see homeowners make:

1. Paying closing costs to refinance their home loan each time interest rates drop. Many homeowners have refinanced their mortgage three or more times since mortgage rates began their historic drop in November of 2008. For those who paid several thousand dollars each time, their balance now is significantly higher than it was before the initial refinance. If a no-cost loan is available, I strongly suggest this option. That way, you are able to take advantage of a declining interest rate environment without increasing your mortgage balance. Feel free to call my office for a free analysis and explanation.
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Behaviors repeated over and over become habits. When it comes to personal finance, many of our behaviors have created unhealthy habits that can lead to financial destruction. Whether it is in our own lives or in the lives of people we love and care about (i.e, children, siblings or parents) each of us has witnessed the devastating effects of over-spending, over-leveraging, and living beyond our means.

Prepare your food at home more often. Try to eat-out less often.

The typical family’s largest monthly obligation is their house payment. Today many families have become “House Poor.” This is a situation where the house payment consumes a dangerously high percentage of the household income leaving too little money left to support the family after the house obligation is met. For many other families the amount of consumer debt payments is the culprit for cash flow challenges. Both of these situations tend to cause tremendous anxiety and pain within a family. All too often the results are financial and/or relational destruction.

The first step for people in challenging financial situations is to review the habits that have led up to their current situation. Is there unnecessary spending that has developed into bad habits? Maybe there are small luxuries that can be satisfied in a more cost effective way, or given up entirely. People often discover that eating at home more often, making their own beverages or purchasing less expensive versions of products can save the money needed to live more comfortably.

Once a thorough review of monthly spending has been completed, it is time to review how the debts are structured. Often times, a simple reallocation of debt will reduce the monthly outflow to a more comfortable level. If the budget is still too tight, then it is time to consider items that can be sold or downgraded. This may be a car, boat, or more significantly a home. Given the thousands of homeowners with mortgage payments that will increase as interest rates rise, this will be the best solution for many.

As people go through the process of re-establishing financial habits, it is important to remember that the experience will be emotional. It is difficult to downgrade a lifestyle and/or give up indulgences that have been a part of everyday life. The key is to remember that the joy of feeling financially in control will significantly outweigh the pain of what will be sacrificed.

If you or someone you know is in a situation where the monthly budget has become uncomfortable, perhaps it is time for a no cost, no obligation financial “check-up”. As part of our “Wealth Care” plan my team and I help hundreds of families each year to gain control of their financial habits and re-establish new ones. As part of the process we will evaluate your cash reserves, debt, long-term savings, and equity and make recommendations on ways to improve your situation. If you are comfortable with your budget but you would like to make sure you are getting the best interest rate possible on your mortgage, call 801-501-7950 or e-mail me to see how you can benefit from the unique mortgage experience provided by my team. We look forward to welcoming you into the City Creek Family, your Wealth Care provider for life.