Your home is more than a place to live, it can be one of the best investments you’ll ever make. Even the size of your mortgage makes a difference.
There are four positive uses of a mortgage:
1. To increase the return on a real estate investment through the power of leverage
2. To buy a home without paying cash
3. To free up real estate equity for higher-return investments
4. To pay off nondeductible consumer loans with tax deductible equity loans
Leverage is the use of other people’s money (OPM), and a home mortgage is an easy method of putting OPM to work. Earning $10,000 in a savings account at 10% would require an investment of $50,000 for two years. Thirty percent of your interest would be lost to taxes. Buy a $100,000 home with a $10,000 down payment, and if the home appreciates 5% per year, you have earned the same $10,000 in two years with no taxes. You only needed $10,000 of your own money instead of $50,000 to earn the same $10,000 over the two-year period. Based on your investment (down payment), your investment return on the home was 50% per year instead of just 10% in the savings account.
Tags: investment tips, mortgage tips