Why Pay Cash for your House Part 1
Summary
TLDRIn this video, Kurt Jackson, a certified mortgage planner, challenges the common belief that paying cash for a house is always the best financial decision. He explains that equity in a house yields zero percent return and that mortgage payments can be offset by tax deductions. Jackson introduces the 'Effective Percentage Rate' (EPR) to help viewers make informed financial choices, illustrating that investing the money instead of paying in cash could lead to significant wealth accumulation over time, thus transferring wealth when not fully understanding money's potential.
Takeaways
- 🏡 The speaker, Kurt Jackson, is a certified mortgage planner aiming to help clients make informed financial decisions about their homes.
- 💡 He encourages viewers to watch a follow-up video to consider the implications of paying cash for a house versus financing it.
- 🤔 Kurt raises the question of whether the common desire to avoid mortgages for peace of mind is the best financial strategy.
- 🏚 Historically, the fear of mortgages stems from the Great Depression, when many homeowners lost their homes to foreclosure due to demand features in mortgages.
- 📈 Kurt explains that equity in a house, even 100%, has a zero percent rate of return, contrary to the common belief that it provides a return on wealth.
- 💰 The value of home equity lies in potential monthly savings from not having a mortgage or a smaller mortgage payment.
- 📊 The script discusses the concept of opportunity cost, highlighting that paying cash means giving up the chance to invest and earn returns on that money.
- 📉 Kurt provides an example to illustrate that investing the money saved from not paying a mortgage could potentially yield higher returns than the savings from avoiding mortgage payments.
- 🧮 He introduces the Effective Percentage Rate (EPR) as a formula to help make financial decisions, considering the after-tax cost of debt and the after-tax return on investments.
- 💹 The script uses an example to show that investing the money for a house could result in significant wealth accumulation over time compared to paying cash upfront.
- 🚫 Kurt concludes by advising against paying cash for a house due to the potential loss of wealth through missed investment opportunities and encourages viewers to watch the next part of the series for further insights.
Q & A
Who is Kurt Jackson?
-Kurt Jackson is a certified mortgage planner in Liberty, Missouri with over 17 years of experience in the mortgage industry.
What is the main topic of the video?
-The main topic of the video is about the considerations and potential drawbacks of paying cash for a new house.
Why do people prefer to pay cash for their homes?
-People prefer to pay cash for their homes to avoid having a mortgage payment each month, seeking peace of mind and financial security by having no debt.
What historical event influenced the perception of mortgages in the United States?
-The Great Depression influenced the perception of mortgages, as many homeowners with mortgages lost their homes due to foreclosure during that time.
How has the mortgage system changed since the Great Depression?
-Mortgages no longer have demand features, and banks are insured by the FDIC, reducing the risk of foreclosure if payments are made on time.
What is the rate of return on home equity?
-Home equity has a zero percent rate of return because the value of a house appreciates regardless of whether it is fully paid or financed.
What is opportunity cost in the context of paying cash for a house?
-Opportunity cost refers to the potential earnings lost by paying cash for a house instead of investing that money elsewhere.
What is the Effective Percentage Rate (EPR) formula?
-The EPR formula considers the after-tax cost of debt and the after-tax return on investments to help make financial decisions.
How does having a mortgage compare financially to paying cash for a house?
-Having a mortgage can be financially beneficial as the potential earnings from investing the cash may exceed the cost of the mortgage interest.
What is the long-term financial impact of investing cash instead of paying off a house?
-Investing cash instead of paying off a house can result in significant additional wealth over time due to compounded returns, as illustrated by the example where $400,000 invested at 6.5% after-tax return yields over $814,000 in 30 years.
Outlines
🏠 The Risks of Paying Cash for a House
In the first paragraph, Kurt Jackson, a certified mortgage planner, introduces the topic of paying cash for a house and its potential pitfalls. He explains that while many people opt to pay in full to avoid monthly mortgage payments and seek peace of mind, this decision may not be financially savvy. Historically, the fear of mortgages stems from the Great Depression when many homeowners lost their homes to foreclosure despite making timely payments. This fear has been passed down, leading to a belief that owning a house outright is the best financial move. However, Kurt challenges this notion by explaining that equity in a house, even 100%, has a zero percent rate of return and that the real value comes from the potential savings or investment opportunities that could be gained from not paying cash upfront.
💰 Understanding the Opportunity Cost of Paying Cash
The second paragraph delves into the concept of opportunity cost when choosing to pay cash for a house. Kurt Jackson illustrates that by paying cash, one foregoes the chance to invest that money elsewhere and earn a return. He uses the example of a $100,000 house to show the difference in savings between paying cash and financing with a mortgage, highlighting the tax benefits of mortgage interest deductions. The Effective Percentage Rate (EPR) is introduced as a tool to evaluate financial decisions, comparing the after-tax cost of debt with the after-tax return on investments. Kurt demonstrates that investing the money for a potential return can significantly outweigh the savings from avoiding a mortgage, suggesting that by paying cash, one could be missing out on substantial wealth accumulation over time.
Mindmap
Keywords
💡Mortgage Planner
💡Peace of Mind
💡Great Depression
💡Equity
💡Appreciation
💡Opportunity Cost
💡Effective Percentage Rate (EPR)
💡Tax Deduction
💡Investment
💡Wealth Transfer
💡FDIC Insurance
Highlights
Kurt Jackson, a certified mortgage planner, aims to provide information to help clients make the best financial decisions, especially regarding their homes.
The video series discusses the common misconception of paying cash for a house to avoid monthly mortgage payments for peace of mind.
The desire to own a house free and clear stems from the fear and hatred for mortgages, a sentiment rooted in the Great Depression.
During the Great Depression, banks could call mortgages due at any time, leading to many foreclosures despite timely payments.
Modern mortgages no longer have demand features, and banks are insured by the FDIC, reducing the risk of foreclosure.
Equity in a house has a zero percent rate of return, contrary to the belief that it provides a return on wealth.
The value of equity lies in potential monthly savings from not having a mortgage or a smaller mortgage payment.
Mortgage interest is often tax-deductible, reducing the actual cost of borrowing money.
Paying cash for a house means giving up the opportunity to invest and earn returns on that money.
The Effective Percentage Rate (EPR) formula helps in making informed financial decisions by considering the after-tax cost of debt and return on investments.
Investing the money saved from not having a mortgage can potentially earn significantly more than the savings from avoiding mortgage payments.
Paying cash for a house could result in a substantial loss of wealth over time due to missed investment opportunities.
The video series illustrates the concept of 'transfer of wealth' when people make uninformed financial decisions.
Understanding how money works can alleviate worries about having a mortgage and allow individuals to make smarter financial choices.
The video encourages viewers to watch the second part of the series for further insights on the topic.
Transcripts
hello my name is Kurt Jackson I'm a
certified mortgage planner in Liberty
Missouri in my more than 17 years in
this business I've seen a lot of smart
people make big mistakes surrounding
money and with that experience one of
our goals is to provide enough
information for our clients to be able
to make the best decision surrounding
money especially surrounding their house
today's subject is about is for those
folks those of you that are thinking
about paying cash for your new house now
before you pull the trigger on that I
want you to spend a few minutes to watch
this video and the second in this series
to see if you really want to go through
with that plan the second video will be
right below this one on the computer
screen so all you have to do is scroll
down and click on it what we found is
that people like you that have the
ability to pay cash for their home do so
for many reasons the main reason we
found is that you don't want a mortgage
payment hanging over your head each
month in other words you're seeking
peace of mind that sound about right
almost everyone we talked to a quick
peace of mind with not having a mortgage
on their house in other words Americans
equate financial security with having no
debt let's see if that's actually the
best direction to go our research
uncovered that the reason people feel
this way comes from the fear and hatred
we have for mortgages owning your house
free and clear the concept that's been
ingrained in our psyche since way back
in 1929 when the Great Depression
millions of homeowners with mortgages
lost their homes now these were good
folks that were paying their mortgages
diligently but due to circumstances
surrounding the Great Depression those
good folks lost their homes to
foreclosure see during the Great
Depression mortgages had what they call
demand features this meant that a bank
could call the mortgage due whenever
they wanted to or needed to so millions
of good people lost their homes even
though they were making their payments
on time each and every month and this is
really where our parents or our
grandparents determined that you should
own your house outright and then a
mortgage was an S
very evil at best and it appears that we
haven't changed our thinking for more
than 75 years even though mortgages no
longer have a demand feature and banks
are insured by the FDIC so there's no
chance of a real run on them without the
demand feature the only way you could
lose your house to foreclosure is if you
don't make the payments but somehow
somewhere someway we came to the
conclusion that having no mortgage on
our house gives us some kind of rate of
return on our wealth or the equity
inside the house now let's make sure we
fully understand what having equity in
our house does does either for us or
does to us first of all we found that
the equity in our house has a zero
percent rate of return well let me
explain why if you were to buy a hundred
thousand dollar house and 101st Street
and you paid cash for that house then
you owe nothing on the house and have no
mortgage payment if we assume
appreciation is five percent okay in a
year your house would then be worth a
hundred and five thousand right so let's
say I had the same taste in houses and I
bought essentially the same house across
the street from you at 101 first Street
I paid a hundred thousand dollars also
and even though I had a hundred thousand
dollars in cash I chose to finance a
hundred percent or a hundred thousand
dollars so I could keep all that hundred
thousand dollars in my pocket now I do
have a mortgage and a mortgage payment
that you don't have and I'm going to
address that later but if our houses are
basically the same and your house went
up five percent over that year wouldn't
it make sense that mine did too so my
house would be worth a hundred and five
thousand also so the fact you had a
hundred percent equity and I had no
equity both our houses went up five
thousand dollars therefore having any
equity even one hundred percent equity
has a no rate of return it has
absolutely no bearing on the value of
the house and that's where the rate of
return comes from now before we lose you
on that that idea let me say that having
equity does have some value that value
is in the form of monthly savings the
savings you would have by not having a
a mortgage or by having a payment on a
smaller mortgage right so if I borrowed
that hundred thousand dollars at seven
percent I pay seven percent in interest
over a year
I'm sorry seven thousand dollars in
interest over a year but mortgage
interest is normally deductible if I'm
in a twenty eight percent federal
marginal tax bracket and six percent
state I'm able to write off thirty four
percent of my interest that's reducing
my tax bill
well thirty four percent of seven
thousand dollars is two thousand three
hundred eighty dollars so my total cost
is only four thousand six hundred and
twenty dollars
well that equates to a net cost of four
point six two percent so that means that
you are saving four point two six about
four point six two percent by not having
a mortgage on that house now if you gave
your financial advisor a hundred
thousand dollars to invest and he earns
you a non compounding four point sixty
percent on your money each and every
year how long would he be your financial
adviser the next thing our research
uncovered was that when someone decided
to pick cash for their house they aren't
really thinking about what they're
giving up if they had invested that
money instead of paying cash we call
that an opportunity cost when you think
about opportunity cost it becomes
evident that everything we buy is 100%
financed even when we pay cash now why
is that well because when we pay cash
for something we gave up the opportunity
to do something with that money
we gave up the opportunity to invest it
somewhere else now as we discussed
earlier if you paid a hundred thousand
dollars cash for your house you gave up
the opportunity to earn money on that
hundred thousand dollars now remember in
our example since you had no mortgage
you're saving four point six two percent
after-tax so putting the hundred
thousand dollars down means you're
saving four thousand six hundred twenty
dollars each year now that amount
doesn't change or grow unless your tax
bracket drops or goes up so the key
question you should ask yourself is how
much could I earn if I had invested in
that money
now through our research we uncovered a
proven formula to make decisions help
you make decisions with money when we
based decisions on these formulas we
then know that we're properly allocating
all of our assets our formula is called
the EPR the effective percentage rate in
the EPR is really the after-tax cost of
all of your debt oh and the after-tax
return on your investments now we've got
another video that we've done that goes
into much deeper into EPR but let's say
you had a $400,000 you had $400,000 to
pay cash for your $400,000 house you've
got no debt and you're in a thirty four
percent tax bracket so you're six and a
half percent mortgage has an EPR of 4.2
nine percent and let's assume that
you're the epr on your investments is
six point five percent so that means
your after-tax return on your
investments is six point five percent if
you then invest that $400,000 earning
and after tax six point five percent
you're actually earning two thousand one
hundred and sixty six dollars and 67
cents per month and having a mortgage
with a four point two nine percent APR
means you're paying one thousand four
hundred and thirty dollars a month now
that gives you a positive income of
seven hundred and thirty six dollars and
67 cents so if we look at that over a
thirty-year period and assuming you kept
earning six point five percent in that
investment lets you know what let's even
go so far as to say that you invested
your cash flow that's seven hundred and
thirty six dollars and thirty seven
cents you invest that cash flow every
month earning just six and a half
percent after-tax for thirty years well
folks that gives you eight hundred and
fourteen thousand five hundred and fifty
six dollars an additional wealth
now so using conservative numbers you're
losing over eight hundred and fourteen
thousand dollars or more than sixty
seven thousand dollars per year by
paying cash for your house we refer to
this as the transfer of wealth that
happens when smart people don't fully
understand money now if you're worried
about the payments or that you have a
mortgage on the house you still got the
four hundred thousand dollars to pay the
loan off if you want but why in the
world would you want to because your
money is paying your mortgage and paying
you seven hundred and thirty six dollars
and thirty seven cents per month see
what we found is that when folks
understand how money actually works for
them they stop worrying about having a
mortgage and they end up basking in the
glory of knowing that they are being the
banks at their own game
now this is where we're going to go onto
the second section or the second video
of this so please just click on the
video that's shown below here on the
screen just scroll down in scope and
click on it and you will have part two
of this video series about why would you
want to pay cash for your house
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