Wealth Tactic Rebels
WTR Mortgages Part 1
Mar 6, 2019 · 48 min
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Can you answer this question: What is the most important factor in determining the cost of how you pay for your home? The truth may surprise you.

For many people their home is one of their most valuable assets. The tactics of how you pay for it could potentially save you thousands of dollars, or unnecessarily cost you thousands of dollars that may have been avoided. WTR discusses ALL the truths of how mortgages work, along with the costs, and possible tactics to avoid losses.

NOTES

  • [00:30] Kevin: This is going to be a two part discussion. Today, in part one, we’re going to talk about the different kinds of mortgages and the many factors that go into the true costs and what it means to have you home actually paid off.
  • [01:30] We’re going to start off with a quiz for our WTR listeners. Remember your answers because at the end of the episode, we will see if they are the same as your original answers
  • [01:57] Brian: People don’t usually like taking quizzes, but this one could save you some money, so it’s worth taking. These answers are what clients would originally suspect (the correct answers are at the bottom of the show notes page)[02:05] True or False? A large down payment will save you more money over time than a small down payment.True- you have less loans and you pay less interest
  • [02:33] True or False? A 15 year mortgage will save you more money over time than a 30 year mortgage.True- interest rates are lower for a 15 year mortgage
  • [02:55] True or False? Making extra principle payments saves you money.True- if you make more principle payments, you’re paying it off sooner and hence paying the bank less
  • [03:13] True or False? The interest rate is the main factor in determining the cost of the mortgage.True- the higher the interest rate, the more you pay
  • [03:25] True or False? You are more secured having your home paid off than financed 100%.True- if it’s paid off then it’s good to go, because the inevitable may happen where you can’t pay off the mortgage payment
  • [04:00] The first thing to consider is that there are a lot of types of mortgages out there[04:17] Can be quite confusing when you look at all of the options what is the best type
  • [04:52] It’s up to us to try to figure out from a business perspective which ones we can do the best with (to save the most on or make the most on)
  • [05:03] Everything that you know, you probably think is true (if you know it, it must be true). Every once in a while, however, we come up against an idea that we don’t really know the answer to (don’t know if it’s true or false). When we come up against that kind of information, we can either accept that idea (get a bigger box to accommodate it) or we can reject it because it doesn’t fall within our box of knowledge[05:54] When it comes to mortgages, many people find mortgages to be an emotional subject because it’s tied to their house. What we think is true about mortgages may or may not be true in reality[06:13] If we come up with a different conclusion, it’s not necessarily false just because it’s different
  1. [06:33] Let’s talk about financing in general. There’s two types of financing[06:46] Self-financing: taking money out of your bank account to pay for a house, which results in a cost (not getting interest)
  2. [07:21] Bank financing: using the bank’s money to pay for a house, which results in a cost (interest rate for the use of that money)
  3. [08:25] Reasons/ factors why you may want a mortgage[08:38] The majority of people can’t write out a check to pay in full for your house
  • [08:57] When you have a mortgage, you get to have a possibility of a tax deduction in some cases[09:53] By taking a mortgage, you can actually create a tax deduction for yourself, which isn’t a bad thing
  • [10:02] There’s potentially a spread between the cost of borrowing and what you could earn (let’s call it in a side fund)[10:15] Let’s suppose that you have the option of either writing a check to pay for the house or you could keep that money invested in a side fund and you could borrow the money[10:29] In your side fun, you’d have to be earning more than what the mortgage is costing you to come out ahead [10:51] Let’s say the mortgage was going to cost you 4.5%, and in your side fund you could only earn 3%.[11:02] Not a good deal (might as well just write the check and pay for the house)
  • [11:10] Let’s say the cost of the mortgage was 3% and in your side fund you could earn 6%[11:18] That’s a 3% spread on a large sum of money (I’d like to keep that 3% spread especially over a long period of time)
  • [12:15] Inflation[12:51] Positive inflation: costing you more and more each year for everything you buy[12:58] We equate it to the economy growing (which is a good thing)
  • [13:10] Negative inflation (deflation): in the middle of a significant recession (not a good thing)
  • [13:33] Over the last 50 year period, rate of inflation is about 4.1%
  • [14:30] Let’s suppose that your monthly payment on your house is $1000 per month for your house payment. When we look at that against the inflation rate (4.1%), inflation is eroding the value of that $1000 (over time, value of the dollar decreases)[15:14] If you’re writing out a check for $1000 15 years out from now, it would buy about $500 worth of things 15 years from now
  • [15:33] If you’re writing out a check for $1000 30 years out from now, it would buy about $299 worth of things 30 years from now (would rather pay this)[16:30] Because of inflation, that fixed payment that you have to make on my mortgage isn’t as bad the further you go out in the future
  • [17:14] Opportunity cost[17:26] When buying a house, you have to put down a down payment. Once you write that check for the down payment, you are not earning interest and you’re not going to get that down payment back (there’s a cost to this)[18:53] Opportunity cost: you’re not earning interest on that down payment anymore
  • [19:07] Let’s suppose that your down payment was $200,000, and let’s suppose that if you had kept that invested somewhere, you could’ve earned 6% on it (rate of return) over a long period of time (30 years for instance)[19:25] Your opportunity cost on this would be $1 million (5x what you put into it over a 30 year period)
  • [20:13] A lot of people ask me if their house is a good place to put their money because they don’t know where else to put it that’s safe[20:35] Let’s suppose that you have a house and the value today is $1 million. You originally paid $500,000 for this house, and you made some renovations that you spent $100,000 over time. You’ve had this house for 20 years. What do you think your equivalent compound interest would be over that time over your gain ($400,000)? Rate of return over a 20 year period would be 2.95%[22:43] If you had paid cash for that house, you didn’t get a good rate of return (not keeping pace with inflation)[23:11] If your rate of return is below inflation, the value of your house has shrunk
  • [24:00] Suppose there are two condos (no major differences) that are both worth today $500,000. One person comes along to house #1 and they decide that they could either take a mortgage or they could pay cash. They decide that they don’t want to pay any interest so they pay cash for the house. Another person comes along to house #2 and they say that they could write a check for $500,000 or they could just keep that $500,000 and invest it in something else and I could use someone else’s money to buy this house (mortgage). They decide to take out a 30 year mortgage.[25:10] 30 years later, the same two houses, are both valued at $1 million. For house #1 that they paid cash for, they have the value of the house. For house #2 that they took out a mortgage, they have 100% equity since the mortgage is paid off and they have their side fund of $500,000[25:22] The person who bought house #1 has one asset (the value of the house), whereas the person who bought house #2 has two assets (have 100% equity and have that side fund of $500,000)[27:00] The house value wasn’t affected by the mortgage
  • [27:28] Appreciation (the value of the house that might increase over time) is separate from the amount of equity you have in the property
  • [28:18] Cost of the loan vs. what you could actually end up with in your side fund (issue of the spread)[28:40] I’m going to assume that on my $500,000 in my side fund, I could earn 6% over a 30 year period. This would mean that it would grow to a value of about $3 million
  • [28:56] Meanwhile, the cost of borrowing $500,000 with about 4.75% interest over 30 years has a value of about $2.6 million
  • [30:00] The true cost of the loan isn’t what the bank is charging you because the government is subsidizing your loan[30:31] The true cost of the loan is less than the bank is charging you
  • [30:36] Let’s assume you’re in a 30% tax bracket making payments on your $500,000 mortgage, and you get to deduct the interest, the true cost of your loan is $3.3 million[31:42] You would have made an additional $800,000 by taking the loan instead of paying cash
  • [32:31] How do you chose a 15 year or a 30 year note? [32:39] Rate of interest is going to be less on a 15 year note than a 30 year note
  • [33:56] I want to compare directly the 15 year note vs. the 30 year note. Two mortgages, both at $500,000. The interest rate for the 30 year note is 4.75%, and on the 15 year note it’s 4%. Let’s suppose that in your side fund, you’re able to earn 6% and your tax bracket is 30%. What rate of return would you have to earn in your side fund to pay off the 30 year note by year 15?[35:17] 4.5% (you’d have enough money to pay off the 30 year note by year 15)
  • [36:09] If you’re using a mortgage strategically and you have actually saved and grown money in your side fund and you have the ability to pay it off but haven’t, that’s a strategic use of your mortgage
  • [36:36] What if you could earn 6% in your side fund? You could pay off the mortgage in under 15 years (approximately 14 years)
  • [37:07] If your goal to get your house paid off was sooner rather than later, I’m saying that a 30 year mortgage you would have it paid off sooner than a 15 year mortgage[37:26] The power of the spread (could have paid it off sooner with the 30 year note by keeping the spread invested and then written the check at a sooner time than 30 years)
  • [38:12] If you’re able to deduct mortgage interest (not everyone can), that’s a good thing. So, when considering the difference between the 15 and 30 year note, which one allows you to deduct more interest (which one has more tax savings)?[38:05] The 30 year note you will have more time for tax savings (would have more interest to deduct)[39:20] In the example of our $500,000 mortgage over a 30 year period, if you had a 15 year note, you would have only deducted about $49,000, whereas in the 30 year note, you would have been able to deduct about $131,000 (much larger tax savings)
  • [40:21] As long as you have money saved in a side fund in a relatively safe way, at the end of the day, if you can find a way to keep that spread in your favor, you can come out way ahead
  • [40:40] Kevin: Isn’t it true though that even if your home is paid off, it’s not secured and you could still lose it if you get into financial trouble?
  • [40:52] Brian: If you have money in your side fund, and a financial emergency came up, could you access that money to help you get out of that emergency? Yes, if it’s accessible. But, if you had put all that money into the equity of a property, could you get it when a financial emergency came up? Depends on the bank’s willingness to lend to you[41:23] If you had lost your job and don’t have any income, the bank is not going to lend money to you[41:43] Why so many people lost their homes during the economic recession (couldn’t access the equity in their houses)
  • [42:20] By having a side fund, you’re maintaining your assets
  • [42:40] Security means having control of your assets and you can access those whenever necessary
  • [42:50] Stigmatization of the quiz (correct answers)[43:01] True or False? A large down payment will save you money over time than a small down payment.False- opportunity cost
  • [43:16] True or False? A 15 year mortgage will save you more money over time than a 30 year mortgage. False
  • [43:34] True or False? Making extra principle payments saves you money.False- other factors (tax savings, destructibility, what you could earn on the opportunity cost and side fund, etc.), may cost you more money
  • [44:02] True or False? The interest rate is the main factor in determining the cost of the mortgage.False- the interest rate is only one factor (even though the 30 year note may have a higher interest rate, over time, that doesn’t mean it’s going to be the most expensive situation when you look at all the other factors surrounding it)
  • [44:34] True or False? You are more secured having your home paid off than financed 100%. False- house paid off means that you have no control over your money (as long as that side fund that you create to hold your extra payments is in a safe place that you can access at any point), security is control
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