Text Box: “A Tale of Three Brothers” - This is a story of three brothers, each earning $75,000 per year. Each brother has $60,000 in savings and is buying a $300,000 house.

     

Brother “A” – Believes in Paying Off the Mortgage as soon as He Can.

Brother “B” – Carries a longer Mortgage than Brother “A”, but also adds $100 per Month to His Payment

Brother “C” – Believes that Using    His House as a Financial Tool is a Key to Obtaining Wealth. Brother “C” seeks out the Loan with the Lowest Payment.

·          15-Year mortgage at 5.00%

·          30-Year mortgage at 6.0%

·          Low Payment Loan at 1.951

·          $60,000 as a down payment

·          $60,000 as down payment

·          $30,000 as down payment

·          $0 savings left over to invest

·          $0 remaining to invest

·          $30,000 remaining to invest

·          $1,898 monthly payment

       (52% tax deductible in first year)

·          $1,439  monthly payment

       (83% tax deductible in first year)

·          $991 monthly payment

      (100% tax deductible in first year)

·          $1,624 average monthly after tax payment2

·          $1,105 average monthly after tax payment2

·          $277 average monthly after tax payment for the first year2

·          Wants to eliminate his mortgage as he is afraid of losing his house.

·          Sends in extra $100 per month to eliminate mortgage earlier. Invests the other $3594 per month. Account earns a 10% rate of return.

·          Adds $100 to his monthly investments, plus an average of $8475 per month over for 5 years. Account earns a 10% rate of return.

Who made the right decision?

Results After Just 5 Years

·          Received $14,787 in tax savings

·          Received $19,506 in tax savings

·          Received $19,337 in tax savings

·          Has $0 in savings and investments

·          Has $28,800 in savings and investments

·          Has $115,000 in savings and investments

What if all three brothers suddenly lose their jobs?

·          Has no savings to get through the crisis

·          Has $28,800 in savings to support him

·          Has $115,000 in savings to tide him over

·          Can’t get a loan – even though he has $121,000 in equity – because he doesn’t have a job.

·          Can make his mortgage payment for 1.5 years

·          Doesn’t need a loan – he can make his mortgage payment for more than 8 years!

·          Must sell his home or face foreclosure as he can’t make his payments

·          Doesn’t panic right away

·          Has no reason to panic, has plenty of cash on hand

Results After 30 Years

·          Owns his home outright

·          Owns his home outright

·          Has 25 years remaining?6

·          Has $787,000 in savings and investments

·          Has $812,000 in savings and investments

·          Has $2,510,000 in savings and investments. Retires at will.

·          Can’t even begin to think about retiring – Brother “A’s” nest egg is  more than $1 million short.

·          Did ok, but still is more than $1 million short in order to retire.  

·          Sends a check to the bank to pay off his house…if he wants to!

 

 

 

 

 

 

 

 

Text Box: …Remember  Cash is King – and Brother “C” now has more than $2.5 million in savings in investments. Your best investment is not in your house – people who understand how money works choose a big mortgage, use it to create wealth, and never pay it off! 1  This example is based on a payment driven loan. The minimum payment is based on a rate of 1.95%, whereas the note rate of mortgage is assumed to be 6%. For the illustration above, the index is considered constant throughout the term of the loan. Actual results may vary.

2  Assumes a combined federal/state income tax rate of 28%

3  Assumes a 10% rate of return. Rate of return may vary based on type of investment.

4  The monthly cash flow is determined by comparing the minimum payments against Brother “A” – minus the $100 he sends in as an additional payment on his mortgage.

5  The monthly cash flow is determined by comparing the minimum payments against Brother “A” . The monthly payment changes annually at 7.5% of the previous year’s payment – we have used the average minimum payment over that 5 year period.

6  Brother “C” refinances every 5 years, dropping his minimum payment back down to the low 1.95 payment level and starting all over. He continues to invest his cash flow each month. Because Brother “C” refinanced, every 5 years, Brother “C” has built little equity in the property. The equity he builds is used to cover his refinance costs every 5 years, therefore, he essentially owes what he originally borrowed - $270,000.

 

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