A Bigger Mortgage and A Higher Rate? How Can That Be Better?

The Issue

A few weeks ago I had a past client call me about refinancing her loan. She only owes $144,000 and has a great rate at 3.75% BUT most all of her credit cards are maxed out or close to it and they have two car loans so even though they make good money, they are living paycheck to paycheck.

Some people might focus on losing that great rate to a higher rate BUT these clients were in a downward spiral. Their credit scores are relatively low because of their credit usage and it wouldn’t be long before they started to have some delinquencies.

The Solution

They had a lot of equity in their house and if you have read any of my posts or seen some of my videos, you may know that the equity in your house has a zero return on investment. Their home appraised for $397,000 so we were able to pay off all of their debt and get them some extra money for investing while leaving a lot of equity in their home – their new loan is at 70% loan-to-value. We saved them over $1,500 per month and the plan is to put an extra $650 per month toward their mortgage (not the best financial decision but that’s what they want) and invest the rest of their monthly savings.

The Results

By doing this, they will pay their home off in about 15 years – that’s 10 years faster than their current pace. By investing the remaining $850 savings per month in a good mutual fund and only getting an 8% return, their investment account would be worth $299,772.99 by the time they pay off their mortgage. After 30 years of investing $850 per month, they will have $1,266,805.52 with only an 8% return. Most good mutual funds over this kind of time period typically average between 12-15% and sometimes higher.  Once their investment account gets big enough, they will have the options to diversify even more and buy an investment property where they can take advantage of leverage, depreciation, and tax-deferred strategies like 1031 Exchanges when they sell their property and buy a new property which allows them to keep all of their assets working for them (to learn more about real estate investing, start with this introductory video:  http://thewunderliteam.com/top-6-things-to-know-when-investing-in-real-estate/)

Cash is King

Because my clients freed up significant cash flow, they were able to pay their mortgage off 10 years faster than under their current scenario and invest a nice chunk of money to create significant wealth.  Is their new mortgage better than their old one?  I believe that it absolutely is in spite of the fact that the rate is higher and the loan amount is larger.  Cash is king and they will be able to do a lot of good things for themselves because they have this cash-flow.  I love helping people improve their overall financial picture – not just the debt side of their balance sheet, but the asset side as well – that’s my favorite. If you would like to see what I can do for you or someone you know, feel free to contact me – 702-812-1214 or 801-893-1737 or email me at jed.wunderli@noblehomeloans.com – whether they are buying a house or might benefit from a refinance, I’ll lay out a plan to help them achieve their financial goals.