A TALE OF TWO HOMEOWNERS

This story begins with two homeowners, each earning $70,000 a year. They each have $60,000 in savings, both are buying $300,000 homes, and they each have an extra $200 each month to contribute. (please see footnotes for explanation of hypotheticals)


HomeOwner "A"

Believes in the "Old" Way, paying off the mortgage as soon as possible.


* 15- year mortgage at 6.25% APR
* $60,000 big down payment
* $0 left to invest
* $2,058 monthly payment (57% is tax deductible/ 33% Average)
* $1,868 Average monthly net after tax cost
* Sends $200 monthly to lender in effort to eliminate mortgage sooner

HomeOwner "B"

Believes in the "New" Way, carrying a big, long mortgage and never paying it off.


* 30-year interest-only mortgage at 6.875% APR
* $15,000 small down payment
* $45,000 remaining to invest
* $1,633 monthly payment (100% is tax-deductible)
* $1,176 monthly net after-tax cost
* Adds $200 plus $692 saved from lower net mortgage payment, into investment account which earns 8% rate of return.


Who made the right decision?

HomeOwner "A"

Believes in the "Old" Way, paying off the mortgage as soon as possible.


Results After Just 5 Years...


* Received $18,116 in tax savings
* Has $0 in savings and investments

HomeOwner "B"

Believes in the "New" Way, carrying a big, long mortgage and never paying it off.


* Received $27,431 in tax savings
* Has $132,584 in savings and investments


What if both homeowners suddenly lose their jobs?
HomeOwner "A"

Believes in the "Old" Way, paying off the mortgage as soon as possible.

* Has no savings to get through the crisis
* Can't get a loan because he has no job, even though he has $115,769 more in equity
* Must sell his home or face foreclosure because he cannot make payments
* At this point, it's a fire sale, so he must sell at a discount, then pay real estate commissions (6-7%)

HomeOwner "B"

Believes in the "New" Way, carrying a big, long mortgage and never paying it off.

* Has $132,584 in savings to tide him over
* Doesn't need a loan
* Can easily make his mortgage payment even if he's unemployed for years
* Has no reason to panic since he is still in control - Remember...Cash is King!

HomeOwner "A", who never wanted a mortgage in the first place, is now in financial jeopardy because he was trying to pay off his mortgage the wrong way.


HomeOwner "A"

Believes in the "Old" Way, paying off the mortgage as soon as possible.

Results After 15 Years

* Received $30,961 in tax savings
* Has $60,485 in savings and investments
* Owns home outright

HomeOwner "B"

Believes in the "New" Way, carrying a big, long mortgage and never paying it off.

* Received $82,294 in tax savings
* Has $457,458 in savings and investments
* Has enough savings to pay off the mortgage balance of $285,000 and still have $172,458 left over.


Results After 30 Years

HomeOwner "A"

Believes in the "Old" Way, paying off the mortgage as soon as possible.

* Received $30,861 in tax savings
* Has $981,375 in savings and investments
* Pay Off home outright

Homeowner "B"

Believes in the "New" Way, carrying a big, long mortgage and never paying it off.

* Received $164,588 in tax savings
* Has $1,820,616 in savings and invesments
* Has enough in savings to pay off the mortgage balance of $285,000 and still have $1,535,616 left over and has decided to never pay off his mortgage!


Now...let me ask you which do you think is the right course of action - the "Old" Way or the "New" Way? Remember, HomeOwner B was able to increase his liquidity, rate of return, and tax deductions and accrued $554,241 more in wealth over the 30 years!

The above hypotheticals are for illustrative purposes only. Plans vary based on the needs and wants of the customer. The tax rate is based on 28% federal income tax only (Delaware does not have a state income tax). The investment account is asuming an 8% rate of return and actual rate of return may vary based on type of investment selected.

Want to learn more? call 410-553-2121