Parking your money in your own garage can pay off
These days it’s tough to find a good investment strategy, the markets swoon, the dollar and the Euro go up and down, and even Gold could be viewed as a risky prospect if you can’t just buy it, lock it in the dungeon and forget about it for many years.
Suppose someone showed you how to invest a set amount of money every month and almost triple it in seven years? And, to make it even better, you will get some legal tax free cash just for signing up for the program. Your first reaction might be to check and see if Bernie Madoff is missing from prison.
But, if the proposal involves refinancing your $400,000 30-yr home mortgage at 4.5% that you have been paying on for the last two years to a 20-year 3.5% mortgage you had better listen up because it will probably be a very legit suggestion. You won’t be getting this tip from your stock broker either.
If you borrowed $400,000 at 4.5% 2 years ago you are making payments of $2,027/mo and now owe $386,774.00.
If you were to roll that into a new 20-year mortgage at 3.5% your new payment would be $2,245 or $218.00 per month more. Equate this in your mind to investing $218/mo in something, and in this case you are investing it in your home by building equity quicker and paying off your biggest debt.
Ok, that sounds good so far but let’s say you also like putting money in your 401K and this extra would be that much less you will set aside in your retirement account. That’s a reasonable argument but there is a bit more to it than that.
Let’s say you are 58 years old and you plan to stay in your current home until you retire at age 65, then it is off to the beach and the heck with these Rocky Mountain winters, you can come back and ski a few weeks a year and stay warm the rest of the time.
So let’s see what happens with that $218/mo and that 20-yr mortgage vs. keeping your current loan and putting your money in your 401K.
In seven years staying with your current loan you will pay down your principal to $329,901.00. If you rolled your current loan into a 20-year you will owe about $280,619.00 or $49,282.00 less.
You will have increased your house payment by $18,312 over seven years and turned it magically into $49,282 additional equity in your home. That’s a simple 7-year return 269% return on your money, and if you calculated it out only putting the $218 per month it would way higher.
Now if you are smart enough to pick the next Apple stock in invest in you might just do better buying stocks, but I think even Bernie would have blushed a bit offering investors this kind of return. You don’t have to sweat the Dow’s rises and falls as well. When you someday sell your digs and move on, you will walk out of town with an extra 49 big ones in your pocket regardless of what happens otherwise in the world. If you keep paying for ten years you will pay it down even faster and if you hang out for 20-years
because you really like your neighbors you can keep it all because you will have paid off your home eight years earlier.
Oh yes, and I mentioned you might get some tax free cash for signing up. Here’s how that works. Mortgage lenders are only allowed to make a set percentage on mortgage loan originations these days, any overage is given back to the borrower at closing to first cover the hard closing costs on the loan (such as appraisal, underwriting, title and filing fees) and whatever is left over is applied as a deposit to the borrowers escrow account to cover future taxes and insurance payments.
Today, on the 20-year loan at $400,000 at 3.5% with a 740 FICO and 65% loan-to-value that extra credit would be about $1,000.00. That is tax free money the lender is paying you for the trouble of refinancing. No catches, no gimmicks, that’s just how it works. We are doing it every week.
If you have a higher loan-to-value and a lower credit score, your closing cost payment may be a bit less but should be enough to at least cover your hard costs. If you want a lower rate your credit will drop and a higher rate it will increase.
So even if you think you have a great deal with a 4.50% mortgage and don’t want to refi, look at it as a very profitable reallocation of your cash flow to pay down your mortgage in a shorter time.
Call me at 970-748-0342 or click here to e-mail me a question! I serve all the mountain resort communities including Vail, Avon, Beaver Creek, Eagle, Gypsum, Steamboat, Aspen and the Summitt County comminities and Breckenridge.