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Dethroning the King

There’s an old saying that you hear bandied about a great deal in the real estate/mortgage world, and it’s “Always wear clean underwear.” Wait, that’s not it (but I wouldn’t pass up on heeding that advice either)! The saying is “Cash is king.” Sure, there’s something much sexier about having an aluminum attaché case with $100 bills banded and stacked all nice and neat than a piece of paper “saying” you have the money – there’s an emotional pull that you can work to your advantage when you’re sitting across from a seller, and you can hand her cash at that very moment and complete the transaction. In other words, your powers of negotiation are significantly enhanced. But when you take the emotion out of it, cash shouldn’t be king – it should be YOUR slave. Let me explain.

Let’s say you have the cash to purchase a $200,000 home outright (I’ll pause here for all you fans of the movie “Airplane” to join me and say, “You have the cash to purchase a $200,000 home outright”). Let’s also say you have the annual income to make the monthly payment on a 15-year mortgage at today’s rates – Principal & Interest: $1,380 (“You have the annual income . . .” – sorry, I’ll stop). So, before you make that purchase, you look at three options: (1) Pay cash outright and have no debt; (2) take out a 15-year mortgage with 20% down; or (3) take out a 30-year mortgage with 20% down. Which of these three options will be the best FOR YOU for WEALTH BUILDING?

Cash Option
If you paid cash for the house, your reserves would be completely depleted (theoretically); all you would have to invest would be the $1,380/month a 15-year mortgage would have required. If you invested this religiously and averaged an annual return of 12%, at the end of 15 years, you would have $691,434; at the end of 30 years, you would have $4,477,046. Not too shabby. Not shabby at all, to be honest.

15-Year Option
If you took out a 15-year mortgage with 20% down, you would have $160,000 at that very moment to invest. If you invested that with an annual return of 12%, at the end of 15 years, you would have $875,711. If you then took the $1,380 you were spending on a monthly mortgage and lumped that in religiously with what you’ve already made, at 12% at the end of 30 years, you would have $5,485,022. I don’t know about you, but an extra $1 million for retirement sounds pretty good to me.

30-Year Option
If you took out a 30-year mortgage with 20% down, you would have $160,000 at that very moment to invest. The difference in monthly P&I payments between a 30-yr and 15-yr mortgage is approximately $510, or $6,120/year to invest. If you invested the difference of $6,120/year along with the $160,000 with which you began, at 12% in 15 years, you would amass a nest egg of $1,131,301; and in 30 years, you would have $6,447,778 – ANOTHER million dollars!

I know what you’re thinking: won’t this strike a major blow to the aluminum attaché case market? We’re just going to have to take that chance, folks. Tell King Cash to get off his duff and get us some appetizers or something – and while he’s up, see if he can find “Airplane” on Netflix. It’s a classic!

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