Mortgages Create Wealth

    Published: 06-16-2009
    Views: 4,426
    Financial Advisor Ric Edelman explains the top reasons for carrying a mortgage including creating wealth.

    Ric Edelman: Hi! I am Ric Edelman. We've been talking about the 11 reasons to carry a big long mortgage and here are three more.

    Reason number seven, mortgages allow you to sell without selling. If you're afraid that your home's value might fall, you should sell your house before that happens or at least refinance to get the equity out. People who took my advice before the housing crash are sure gladly did.

    Reason number eight, mortgages allow you to invest more money and to invest it more quickly, and reason number nine, mortgages allow you to create more wealth than you otherwise would.

    Let's say you make $300,000 when you sell your old house, and you're ready to buy a new home for $500,000.

    Should you use all your cash and make a $300,000 down payment? Or should you place only $50,000 down. With the bigger down payment, your monthly payment will be around $1,300, but the smaller down payment though it's closure to $3,000 a month. So you think you should put down the 300 grand to get that lower payment? Not so fast.

    Choosing between the big payment and the small one is the wrong question. You should be asking, if you should invest $250,000 right now or $1,700 a month for the next 30 years, assuming an 8% return the larger investment right now will produce higher profits compared to investing slowly over time; which means that while a low mortgage payment lowers your overall expenses, it also lowers your overall wealth.

    Well where will you get the money to make that higher payment? Two places, first increase your paycheck, the new loan payments are almost entirely tax-deductible interest and that means you can have less withheld from your paycheck.

    Second, if your paycheck isn't enough, simply supplement from the money you would have right now in savings and other investments. As your income rises, you won't need this crunch so much.