Skip to main content

Dethroning the King (Posted September 19, 2016)

There’s an old saying that you hear bandied about a great deal in the real estate/mortgage world, and it’s “Always wear clean underwear.”  Wait, that’s not it (but I wouldn’t pass up on heeding that advice either)!  The saying is “Cash is king.”  Sure, there’s something much sexier about having an aluminum attaché case with $100 bills banded and stacked all nice and neat than a piece of paper “saying” you have the money – there’s an emotional pull that you can work to your advantage when you’re sitting across from a seller, and you can hand her cash at that very moment and complete the transaction.  In other words, your powers of negotiation are significantly enhanced.  But when you take the emotion out of it, cash shouldn’t be king – it should be YOUR slave.  Let me explain. 

Let’s say you have the cash to purchase a $200,000 home outright (I’ll pause here for all you fans of the movie “Airplane” to join me and say, “You have the cash to purchase a $200,000 home outright”).  Let’s also say you have the annual income to make the monthly payment on a 15-year mortgage at today’s rates – Principal & Interest: $1,380 (“You have the annual income . . .” – sorry, I’ll stop).  So, before you make that purchase, you look at three options: (1) Pay cash outright and have no debt; (2) take out a 15-year mortgage with 20% down; or (3) take out a 30-year mortgage with 20% down.  Which of these three options will be the best FOR YOU for WEALTH BUILDING? 

Cash Option
If you paid cash for the house, your reserves would be completely depleted (theoretically); all you would have to invest would be the $1,380/month a 15-year mortgage would have required.  If you invested this religiously and averaged an annual return of 12%, at the end of 15 years, you would have $691,434; at the end of 30 years, you would have $4,477,046.  Not too shabby.  Not shabby at all, to be honest. 

15-Year Option
If you took out a 15-year mortgage with 20% down, you would have $160,000 at that very moment to invest.  If you invested that with an annual return of 12%, at the end of 15 years, you would have $875,711.  If you then took the $1,380 you were spending on a monthly mortgage and lumped that in religiously with what you’ve already made, at 12% at the end of 30 years, you would have $5,485,022.  I don’t know about you, but an extra $1 million for retirement sounds pretty good to me. 

30-Year Option
If you took out a 30-year mortgage with 20% down, you would have $160,000 at that very moment to invest.  The difference in monthly P&I payments between a 30-yr and 15-yr mortgage is approximately $510, or $6,120/year to invest.  If you invested the difference of $6,120/year along with the $160,000 with which you began, at 12% in 15 years, you would amass a nest egg of $1,131,301; and in 30 years, you would have $6,447,778 – ANOTHER million dollars!


I know what you’re thinking: won’t this strike a major blow to the aluminum attaché case market?  We’re just going to have to take that chance, folks.  Tell King Cash to get off his duff and get us some appetizers or something – and while he’s up, see if he can find “Airplane” on Netflix.  It’s a classic!

Comments

Popular posts from this blog

Numbers Don't Lie, But Wherein Lies the Truth? (Posted November 21, 2016)

Said with enough conviction, you can make almost anything sound true.   Preface the fabrication with “according to a recent bi-partisan government study,” and you’re three quarters of the way to selling the lie to a lot of people.   Seriously, try this. The next time you’re at a dinner party or having coffee with friends, pepper this little tidbit into the conversation: “I read something really interesting the other day.   According to a recent bi-partisan government study – I think it took them three years to get it all done – middle-aged men who drive either a Toyota Camry or a Honda Odyssey have more testosterone than younger men who drive either a Ford F150 or a Dodge Charger.”   You’ll get some raised eyebrows and looks of mild disbelief, but don’t let that deter you.   Just lift up your hands, palms outward, and say, “I just think it’s interesting, and it makes sense when you think about it” – and then change the subject to something completely u...

Dumb as (or Smart as) a Box of Rocks (Posted June 27, 2016)

Obviously, you all want to know what Brexit means to the economy and the housing market specifically.   So do I!   But since my crystal ball is at the cleaner’s, let’s give the Brits and the European Union a little time to work out the terms of their separation and look at something else.   What’s a “fad ”?   With the help of Google, this is what I got as a definition: “an intense and widely shared enthusiasm for something, especially one that is short-lived and without basis in the object's qualities; a craze.” In April 1975, an advertising executive by the name of Gary Dahl invented the Pet Rock.   The idea came from his sitting in a bar with some friends who were complaining about the cost and time required to take care of various types of pets.   He marketed his “pets” by placing a rock in a box cut and shaped like one you would get at the pet store to carry home a puppy or a kitten.   Along with the box and the rock, a booklet was included...

Left Behind (Posted April 4, 2016)

It’s highly likely that almost every single one of you already read the Yahoo! Finance article about the survey that Chase recently completed.   For the seven people who decided to take a nap under a rock last week, I’m going to share some of the major talking points here – the rest of you can step away and have an ice cream or paint your cat’s toenails.   First off, the survey shows that an ALARMING 68% of Americans are starting the home search on their own (gasp!) with 45% using a computer or laptop (as opposed to some other type of technologically advanced processor like a microwave oven) as the first step in this search and 13% using their mobile devices.   (In other related news from the Department of the Obvious, scientists have found that fish still have no use of a bicycle and looking directly at the sun is inadvisable.)   With numbers like these, we should just throw in the towel and join the circus, right?   Here’s the weird thing: in the ...