Is your mortgage an investment or a debt, a friend or foe? Old time thinking says a debt is an enemy to be rid of as soon as possible. But what if we changed our thinking and looked at our mortgage in two parts, the “EXPENSE” and the “INVESTMENT”.
Break it down to view the aspects of the mortgage, not just the sum of its parts. The first part, the “EXPENSE”, is the cost of having somewhere to live. We all need a place to call home! The second part is the “INVESTMENT” – forced savings allowing you to put away “cash” for the future and accumulate wealth for your later years.
Take a mortgage of $800,000, fixed 5 year term at a rate of 2.99%, amortized over 25 years. The number is only an example and we can work with a specific number when we review your particular situation. The monthly mortgage payment is $3,782. The first part – “EXPENSE” – is the interest that you pay each month until the mortgage is gone. This starts out at $1981.03 and reduces as the months go by, allowing a larger portion of that monthly payment to reduce principal. Pretty impressive when we consider if you were still renting, you could easily be spending $1,500/month in rent.
The second part, the principal repayment, is where the “INVESTMENT” portion of your home purchase lies. In this scenario, it starts at $1800.84 per month and increases each month as the interest portion of your monthly payment reduces and more of your payment is applied to principal. You are now “renting” at $1981.03 per month and able to accumulate $1800.84 per month in equity at the same time. Should the housing market remain stagnant (which is not historically the case), at the end of 5 years you will have accumulated equity of $116,335.21 without ever doing more than paying “rent”! However, given statistics on market increases, your home should increase in value so you have also realized that appreciation.
Now, imagine having the ability to refinance that investment and use the proceeds of that mortgage to further invest in vehicles such as additional income properties. All this while doing nothing more than paying for a home of your own vs paying for your landlord’s investment! Just a simple tweak in how you view your mortgage and the impact it can have on your personal wealth. Compare all of this to the $1,500.00 you may currently be paying in monthly rent. At the end of 5 years, you have helped your landlord to the tune of $90,000.00 on his own investment property, with no equity retained for you. (They owe you a huge thank you!)
So, what are you waiting for? Let’s review your affordability.
You owe it to yourself to see if you should be investing and building your wealth now!
