GOOD DEBT

MORTGAGES
Here it is in a nutshell – real estate good, most other debt not so great!

Fact: THERE IS GOOD DEBT

Why is real estate “Good Debt”? Because,it is an appreciating asset. Over time it will be worth more than you paid for it. Therefore, improving your financial position, in other words, helping you to look good on paper It increases your net worth. And, that makes you feel good and if that isn’t enough, also makes it much easier for you to get a loan, just in case you want to buy even more real estate.

Most of our purchases are not investments at all but are depreciating assets.

Another reason home ownership is terrific is because it is tax advantaged. We always want to take advantage of any break the IRS bestows upon us. We are not taxed on the growth (increase in value) of our home, even when we sell it.

As we make our mortgage payments, a small piece of that check we write to our mortgage company goes toward building equity in our home. We can use this money to build our net worth even more.

APPRECIATING ASSET

Here is how it works.

Let’s say Mary and Joe bought their house for $250,000, it’s now 10 years later and now it is worth $350,000! Oh boy, that makes us feel terrific. Our home as appreciated.

With rental property you can get someone else to pay the debt and you get to take advantage of all the appreciation.

DEPRECIATING ASSETS

On the other hand, when you buy that new car for $25,000 you drive it off the lot and it is now worth $20,000! Not so terrific.

TAX ADVANTAGED

The payments are tax deductible and in the early years that is almost all of your payment which reduces your net cost

No tax when you sell (certain conditions apply)

You may be able to earn more on your money by investing it than you are paying in mortgage interest

EQUITY

The equity in your home earns zero/nothing. Your home value grows whether you put 100% down or zero down.

REAL ESTATE 101

When you are ready to purchase a home a number of choices come into play:

1. What priced house can I afford or how much can I afford to pay every month on my mortgage?

One of the first things you might want to do is find a good mortgage broker so they can check your credit score, and look at all your “numbers” like what is your debt load and cash available. This will help you determine if it is time to start looking for a house.

It is important to understand the tax deductibility of your mortgage payments, homeowners insurance and property taxes.

2. How much to put down?

Obviously, the more you put down, the lower your monthly payment but it’s important to understand a little known fact. And, this is a really, really important fact – THE EQUITY IN YOUR HOME (the difference between the value of the house and the amount you owe) EARNS NOTHING.

3. What kind of loan do I want? Interest only, variable, fixed etc.

4. What are the other costs associated with the purchase?

These might be closing costs, taxes, and home owners insurance. One decision you will have to make is whether you want to pay them yourself of have them “escrowed” which means you pay them along with your mortgage payment to the mortgage company so that you pay a portion every month instead of having to come up with a lump sum when they are due.

5. When you buy your own home, you can change your withholding at work because of the tax write off you now have and this increases your monthly income to help pay the loan