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So people will bring up interest payments as a reason to avoid mortgages and pay cash on homes, but here’s a reason to re-consider.
Let’s say you have a home worth $250,000. You have two options
- 30 Year mortgage, 3.9% interest rate
- Versus Paying Cash.
Why is paying Cash right now in 2020 possibly worse off than getting a mortgage? It’s simple it’s called time value of money/ inflation
- 30 Year mortgage, 3.9% interest rate
- Versus Paying Cash.
Why is paying Cash right now in 2020 possibly worse off than getting a mortgage? It’s simple it’s called time value of money/ inflation
I shall expand below:
Person A decides to Pay Cash $250,000
Person B (let’s say he’s a veteran so he a VA Loan with 0% down) so gets a loan for $250,000, 3.9% interest rate.
Person A decides to Pay Cash $250,000
Person B (let’s say he’s a veteran so he a VA Loan with 0% down) so gets a loan for $250,000, 3.9% interest rate.
Let’s fast forward to June, 2050 and see the outcome.
All things being equal, appreciation, property taxes and others we will assume is the same so the main difference is literally just the purchase of the home.
In 2050, Person A’s $250,000 with a yearly 3% inflation rate will be
All things being equal, appreciation, property taxes and others we will assume is the same so the main difference is literally just the purchase of the home.
In 2050, Person A’s $250,000 with a yearly 3% inflation rate will be
... $606,815.62. Makes sense? Still with me? In other words with a 3% inflation rate $606,815.62 in 2050 will be worth about $250,000 in today’s money 
, makes sense?
, makes sense?
For Person B your P&I (Principal and Interest) for a $250,000 Loan with a 30 year fixed interest loan term 3.9% has a monthly payment of $1,179 which is a yearly total payment of $14,148/ year. So let’s calculate how much will be our total payment in 2050’s money.
So to do this, I used our friend Excel, we know the future value of money F
F = Pv (1+ r)^n
I do that for each year leading up to 2050 to determine 2050’s total money’s worth for the entire period of the loan.
F = Pv (1+ r)^n
I do that for each year leading up to 2050 to determine 2050’s total money’s worth for the entire period of the loan.
... we will also keep our r (inflation rate) at 3% like for Person A.
So for Person B we arrive right at ~$708,000 total in 2050’s money that is to say we are to combine all of Person B’s payments for the entire loan term in 2050’s $ value it will be the above.
Perfect... so the overall difference between person A and Person B is ~$101,000, divided that over the 30 years of the loan that’s $3366.67/ year makes sense? Still with me? Awesome.
Why is this number important? This takes me to opportunity cost. So essentially it’s costing
Why is this number important? This takes me to opportunity cost. So essentially it’s costing
...person B just $3366.67 per year as convenience to take a bank loan versus paying cash upfront. Divide that number by the initial principal thats $3366.67/$250,000 x 100 = 1.35%, ladies and gentlemen this is my punchline. So if you can find any investment and I mean any at all
.. and this could be something as sure as teasury bonds which can yield you 3-4% a year, (greater than the 1.35%), Person B will be much better off than Person A. This is the hidden finance, no one will teach you or tell you about purchasing properties and this is also why rich
... and wealthy people almost never use cash for their properties. If you’re not math savvy it might be a lot to swallow and understand initially but I urge you to learn and study time value of money and then come back and revisit this thread. It’s important to understand this
...if you have any questions my DM’s are open. Happy to discuss further, you hear a lot how people will just quote the total interest over the course of the loan (in today’s money) ignoring the time value of money and ignoring the other intricacies that comes with finances.
.. this is why you learn, learn and learn. Always learn, never stop learning.
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