I sat down with Ray Kay of Searchlight Financial today. He reminded me of how low rates are… and I don’t mean the average 3.5% rates. I’m talking about rates even closer to zero. This is how it works. You get an interest rate of 3.5% but you’re in a 40% combined federal and state tax bracket so you get the 40% tax deduction. This calculates out to: 3.5% X .6 = 2.1% after your deduction.
Essentially you are paying 2.1% on the money you have borrowed!
Here’s another important perspective that Ray points out: You buy a home for $500,000 with 20% down and that home is worth $750,000 in 10 years. (I think you will agree that this is pretty conservative.) What is your profit? Most people would say 50% because $750,000 – $500,000 = $250,000 which is 50% of the original $500,000 sales price. But this is wrong. You only put 20% of the $500,000 down so let’s see:
Initial Capitial Investment = $100,000 (20% of $500,000)
Value of Home After 10 Years = $750,000
Increase in Equity = $250,000 ($750,000 – $500,000)
Profit on Your Original $100,000 is $250,000 or 250%
That’s not a bad investment!