When most people think of saving money, they traditionally think of a typical savings account — and if they’re really savvy in savings they open up a CD account. However, what smart consumers are finally beginning to realize is that traditional saving methods are just not garnering them the income success they desire. The average bank, CD, or money market will only yield you about 4% interest in a year, and that’s being generous. So if you put $100,000 in the bank and leave it there for a year, at the end of the year you’d make $400 in interest.
Sooo … you walk away with a whopping $400 in profit, meanwhile, the bank is using your $100,000 to lend to home buyers and businesses, yielding more interest than you will yield in a lifetime off your initial deposit.
Think about this, if your bank took your $100,000 and gave a small business owner a loan for $50,000 with a compounded monthly interest rate of 6% (which is pretty average for business loans); in the same year that you earned $400 in interest, your bank would have made almost $8,000 in interest. My question is, how does what the bank yielded benefit you? After all, it’s your money the bank is using so why wouldn’t you be the one to benefit from all the interest gained? I’ll tell you why, because the bank uses what they call leverage and depends on consumers being comfortable not taking risks and leaving their money in a bank rather than taking the risk of putting their own money to work.
My question is why let the bank make more money than you off money you’ve worked so hard to obtain and save?
As an agent, I work with tons of investors, helping them to begin to build an investment portfolio that can replace their traditional savings and act as a forced savings account that allows them to now capitalize off and receive a greater amount of interest from their money.
When most people think of a mortgage, they automatically assume that a mortgage is JUST a liability. And while all mortgages do in some way have elements of liability, they also have so many components that are assets.
Here are some mortgage facts relative to property buying that most people don’t know:
1. A mortgage is a forced savings account: A traditional mortgage that pays down principal and interest monthly, actually“forces” you (or empowers you as I like to say) to save money. How? Because as you pay the mortgage you are decreasing your balance, which in turn increases your equity (and the difference between your mortgage balance and the value of the property is the amount of money you have in savings.)
I worked with a client who, just by paying her mortgage and benefiting from the equity obtained through an increase in property values, was able to “save” $30,000 (in the form of equity) in less than two years.
Ask yourself, are you disciplined enough to save $30,000 in two years? If you answered no, doesn’t the idea of a forced savings in the form of mortgage equity sound that much more attractive? It sure does to me.
2. A mortgage offers even more savings at tax time, in the form of write-offs: Besides giving yourself a raise in the form of a forced savings through equity, having a mortgage is also a huge tax write off. Unlike your rent (which is not tax deductible), a mortgage allows you to deduct the interest and property taxes from your personal income taxes. So if your mortgage payment of $1,300 is comprised of $700 in interest and $170 in taxes, you now have a monthly deduction of $870 ($10,440 in a year). Think about that — having over $10,000 in deductions a year from simply paying your mortgage versus paying $15,600 a year in rent that is not tax deductible. Now, I don’t know about you, but I know that anything that reduces my tax liability and puts more money back in my pocket at income tax time is a win for me.
Bottom line is saving money isn’t easy, but there are several ways to make the money you’re already spending in rent work for you. Now of course there are some other very important mortage aspects to consider, but the main reason for this article is to get you thinking more about how to make your money work for you, versus allowing it to work for others.
If you’re thinking of buying, selling or investing in real estate I can help! Shoot me an email at ccowan@CheshireBridge.com and let’s talk.