Should You Bother To Own … ANYTHING!? Part 1… by neil smith
http://www.takingstuffapart.com/articles/1644/1/Should-You-Bother-To-Own-hellip-ANYTHING-Part-1hellip-by-neil-smith/Page1.html
Neil Smith
LET'S GET AHEAD is dedicated to finding new and creative ways to make money, save money and live better. Neil Smith researches and reports on Home Matters, Auto, Banking, Money Saving Strategies and much more! Your input is always welcome and LET'S GET AHEAD is intended to be a community where ideas are shared. By Neil Smith
Published on 02/28/2008
A friend and I were having a chat one night regarding home finance and he told me of a strategy he was investigating that really took me aback and and made me wonder if I had gotten things all wrong! Should I continue on in my horse-and-buggy strategy of paying down my mortgage towards my dream of owning my home outright, or should I get with the times and follow this new groovy path of enlightenment that states you should purchase your home with little money down, a low-rate interest-only plan and then just make the required monthly payments and invest the money you would have paid towards principle elsewhere and let it earn a higher rate of return.
Should You Bother To Own … ANYTHING!? Part 1… by neil smith
2/27/08
PAY OFF THAT MORTGAGE OR INVEST ELSEWHERE?
A friend and I were having a chat one night regarding home finance and he told me of a strategy he was investigating that really took me aback and and made me wonder if I had gotten things all wrong! Should I continue on in my horse-and-buggy strategy of paying down my mortgage towards my dream of owning my home outright, or should I get with the times and follow this new groovy path of enlightenment that states you should purchase your home with little money down, a low-rate interest-only plan and then just make the required monthly payments and invest the money you would have paid towards principle elsewhere and let it earn a higher rate of return.
His position was that mortgage interest is tax deductible, and the money you turn around and invest elsewhere is no less risky than the housing market. The idea is finding a long term investment which over time has a history of performing well, but in the short term may be prone to some instability, hence a high enough rate of return to warrant a strategy such as this.
Paying Off Your Home:
I have always thought of paying off my home as being one of the best things I could do. The stability of knowing a bank can never come after me foaming at the mouth with foreclosure threats and not having that huge monthly bill is a feeling of security I and many others have dreamt about our whole lives.
However, some advisers suggest that when you have a lower-interest home loan, the likelihood of earning better returns on the cash you would have paid towards principle by investing elsewhere instead, improve greatly.
One thing to consider is that you always have to factor in UNCLE SAM. Yep, the ol’ IRS! If you have an interest-only mortgage at 6%, you would need to earn a rate of return of around 8.5% just to come out even. But depending on your tax bracket, if you are able to itemize on your federal return and make the net amount fall a percent or two, this could actually make sense considering you can find an investment returning this much. That's a very big "IF!"
Gut Check Time:
My gut tells me that the percentage you stand to do better in the investment world rather than paying off the mortgage and freeing those funds for things like entrepreneurialism and self-improvement is just not worth the risk involved. Writers such as Rick Edelman apparently would have us believe otherwise, and while I have not personally read his book, I have seen and heard the ads and he just comes off to me as some guy trying to sell a book. My trusted and true method of trusting the hairs on the back of my neck have served me well through the years and I think I need a WHOLE BUNCH MORE CONVINCING before I go jumping on this bandwagon.
I would love to know your thoughts on this. Have you or anyone you know tried a strategy such as this? Please share your thoughts and also visit my website at http://www.letsgetahead.com for more great articles like this one!
Part 2 of this series will explore owning vs. leasing a car.
PAY OFF THAT MORTGAGE OR INVEST ELSEWHERE?
A friend and I were having a chat one night regarding home finance and he told me of a strategy he was investigating that really took me aback and and made me wonder if I had gotten things all wrong! Should I continue on in my horse-and-buggy strategy of paying down my mortgage towards my dream of owning my home outright, or should I get with the times and follow this new groovy path of enlightenment that states you should purchase your home with little money down, a low-rate interest-only plan and then just make the required monthly payments and invest the money you would have paid towards principle elsewhere and let it earn a higher rate of return.
His position was that mortgage interest is tax deductible, and the money you turn around and invest elsewhere is no less risky than the housing market. The idea is finding a long term investment which over time has a history of performing well, but in the short term may be prone to some instability, hence a high enough rate of return to warrant a strategy such as this.
Paying Off Your Home:
I have always thought of paying off my home as being one of the best things I could do. The stability of knowing a bank can never come after me foaming at the mouth with foreclosure threats and not having that huge monthly bill is a feeling of security I and many others have dreamt about our whole lives.
However, some advisers suggest that when you have a lower-interest home loan, the likelihood of earning better returns on the cash you would have paid towards principle by investing elsewhere instead, improve greatly.
One thing to consider is that you always have to factor in UNCLE SAM. Yep, the ol’ IRS! If you have an interest-only mortgage at 6%, you would need to earn a rate of return of around 8.5% just to come out even. But depending on your tax bracket, if you are able to itemize on your federal return and make the net amount fall a percent or two, this could actually make sense considering you can find an investment returning this much. That's a very big "IF!"
Gut Check Time:
My gut tells me that the percentage you stand to do better in the investment world rather than paying off the mortgage and freeing those funds for things like entrepreneurialism and self-improvement is just not worth the risk involved. Writers such as Rick Edelman apparently would have us believe otherwise, and while I have not personally read his book, I have seen and heard the ads and he just comes off to me as some guy trying to sell a book. My trusted and true method of trusting the hairs on the back of my neck have served me well through the years and I think I need a WHOLE BUNCH MORE CONVINCING before I go jumping on this bandwagon.
I would love to know your thoughts on this. Have you or anyone you know tried a strategy such as this? Please share your thoughts and also visit my website at http://www.letsgetahead.com for more great articles like this one!
Part 2 of this series will explore owning vs. leasing a car.