Credit Cards, Car Loans, & Mortgages, Oh My! Part 3
By Keith Bunn Jr.
Remember all the cable shows of all these companies and individuals buying and flipping houses? And almost as soon as the housing market crashed and burned, those shows disappeared. I have wondered a time or two, if those people or companies got out of that market with there shirts left on there backs.
There is no doubt that the housing market is hurting. When the interest rates dropped, my wife and I tried to refinance our home to get the better rates, but found out after the appraisal, that our home had lost $39,000. of it’s value. OUCH!! And at the time I’m writing this blog, all the news channels are talking about the housing values dropping even more. Let’s hope not!
What kind of mortgage should you get…
Pretty much the standard mortgage today is a 30 year mortgage with a good portion having an adjustable interest rate (A.R.M. or balloon) attached to it. Why a 30 year mortgage? No one really knows why, and it is pretty obvious why they attach an A.R.M. to it. If interest rates go up, so does the bank’s or mortgage company’s profits. But there is an alterative.
If you are out house hunting or you want to take advantage of these great low interest rates out there, try to get a 15 year, fixed rate mortgage that is 25% or less than your annual household income. The reason behind the 25% is if something were to happen, like a job loss, your spouse passes away, something that would have a negative effect on your household income, you would more than likely survive that event and not have to sell your home in the process. Mortgage companies and banks will tell you that you qualify for more than 25%, but remember this, they are looking out for their best interests, not yours. If something were to happen with your income and you get behind on your mortgage, they don’t care.
15 year vs. 30 year mortgage…
When it comes to 15 year vs. 30 year mortgages, the 15 year mortgage is ALWAYS a better deal. Let’s see why…
Let’s say you’re going to buy a home that will have a $225,000. mortgage on it that will have a 6%
APR on it. Your payment on a 15 year mortgage will have a payment of $1,899. per month. The 30 year mortgage will have a monthly payment of $1,349. A difference of $550.
That’s a lot of money, but what does this picture look like 10 years from now…
The balance on the 15 year mortgage would be $98,210. The balance on the 30 year mortgage would be $188,292.! A difference of $90,082.!!! In 10 years, on that 30 year mortgage, you would have paid out almost $162,000. and only paid down the loan $36,708.! On top of that, you still have another 20 more years yet to pay on the 30 year mortgage and only 5 more years on the 15 year mortgage.
Keeping a Mortgage for a tax deduction…
To tell you the truth, I don’t do my own taxes. It just confuses the snot out of me. What can I claim, what can’t I. There is enough crap in the tax code to make you want to pull your hair out! But there is one thing I have learned, and that is you do not want to keep a mortgage on your home and use it as a tax deduction. Let me explain, because I know some of you have been told different.
Let’s say you have a mortgage of $200,000. with an interest rate of 5%. In one year, the interest you would have paid on the $200,000. mortgage is $10,000. $10,000 is your tax deduction, right? Now, if you paid off your home that would mean that you would have to pay taxes on an extra $10,000., right?
If you were at a 25% tax bracket, taxes on an extra $10,000. would be $2,500. So in a sense, what you’re saying when you say, “I want to keep my mortgage for the tax deduction.” is, “I’d rather pay the bank $10,000. to keep from paying the
IRS $2,500.” If you want to have a $10,000. tax deduction, or whatever your deduction is, why not give that amount to your favorite charity or church? You have the exact same math except you don’t have to go into debt to do it.
What would you guess the average millionaire's home costs? $500k? $700k? $1 million? $1.5 million? It's $320k. That's how they became & stay millionaires!
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