Why Pay Cash for your House Part 1

Summary

In 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.