If you’re planning to refinance you’re home or apply for a home mortgage. This could be one of the most the best tips you’ll ever recieve. If you’re like majority of the population which applies for home mortgage and chooses to put a large down payment, with the shortest term attainable and paying if off as soon as possible and thinking that their doing it smart. Well, I’m sorry to burst the bubble, but frankly its not smart from a financial standpoint and such idea could lead you to a big mistake.
Now I know that could be a shock to you, or make you feel uncomfortable and you should. This goes against the grain of what the majority of the population’s concept of smart handling of home mortgages. Nevertheless, read on. I’ll share to you the smart way of doing it.
The answer of how to do it smartly is exactly the opposite what the majority’s idea of smart. Yep, you heard that right Now this strategy may not be applicable at all times. It depends, like most financial strategy, on economic climate. Specifically factors such as home mortgage rates and you’re ability to find a profitable investment vehicle. Yes, you need to start investing, we’re talking about being financially smart and you cant achieve that if you don’t or cant invest.
Lets start to elaborate why our strategy is more financially smart than the majority’s “smart”. To better illustrate I’ll share to you a technique that’s one of the pillars of wealth building. The technique I’m talking about is you borrow money, lets say $10,000 with an interest rate of 5% per year and you invest that money with an investment vehicle, lets say a mutual fund, with a 10% growth per year. Now let’s do the math.
Borrowed Money 10,000
Total Earned 1,000 (10% of 10,000)
Total Interest Paid 500 (5% of 10,000)
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Total Earned $ 500
You could be sitting on a 500$ net profit This may not be large amount of money, but remember you invested nothing of you’re money giving you a Return On Investment of infinity.
How does this relate to applying home mortgage? It’s the same thing concept.
* You pay as little amount of cash possible.
– This will increase you’re good debt
– Put you’re “down payment to be” cash to an investment vehicle. Earning you 10% or whatever then paying the home mortgage with their 5% or whatever. Giving you a profit. Important The numbers may not be the same for you, but just be sure you’re earning percentage is higher than home mortgage percentage.
* Choose the longest term. This lowers you’re monthly payment and most occasions lowering you’re interest rate.
* Don’t pay it off as soon as possible. Don’t join any programs that help you achieve that. Instead invest the extra cash to you’re favorite profitable investment vehicle. What you’d rather want? paying 5% or earning 10%?
By following such steps you’re actually borrowing money with 5% interest rate and earning with 10% interest rate giving you a profit of 5% Important, this is not an exact calculations, in fact this an oversimplified example. This articles also is not aimed as an How To, but rather to give you an idea of the things possible. I still advice that you sit down with a financial advisor to have solutions tailor made to you’re situation.
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