A Tale of 3 Brothers This is a story of three brothers, each earning $75,000.00 per year. Each brother has $60,000.00 in savings and is buying a $300,000.00.

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Presentation transcript:

A Tale of 3 Brothers This is a story of three brothers, each earning $75, per year. Each brother has $60, in savings and is buying a $300, house.

Brother A – believes in paying off the Mortgage as soon as he can. 15 year mortgage at 5.00%. $60, as a down payment. $0 savings left over to invest. $1,898 monthly payment (52% tax deduct table in the first year). $1,624 average monthly after tax payment. Wants to eliminate his mortgage because he is afraid of losing his house. Brother B – Carries a longer mortgage than Brother A, but also adds $100 per month to his payment 30 year mortgage at 6.0% $60,000 as down payment $0 remaining to invest. $1,439 monthly payment (83% tax deductible in first year). $1,105 average monthly after tax payment. Sends in extra $100 per month to eliminate mortgage earlier. Invests the other $359 per month. Account earns a 10% rate of return. Brother C – Believes that using his house as a financial tool is the key to obtaining wealth. He seeks out the loan with the lowest payment. Low payment loan at 1.95 $30,000 as a down payment. $30,000 remaining to invest. $991 monthly payment (100% tax deductible for the first year). $227 average monthly after tax payment for the first year. Adds $100 to his monthly investments, plus an average of $847 per month over the 5 years. Account earns a 10% rate of return.

Who made the right decision? Results after just 5 years!

Brother ABrother BBrother C Received $14, 787 in tax savings. Received $19,506 in tax savings. Received $19,337 in tax savings. Has $0 in savings and investments. Has $28,800 in savings and investments. Has $115,000 in savings and investments.

What if all three brothers suddenly lose their jobs?

Brother ABrother BBrother C Has no savings to get through the crisis. Has $28,000 in savings to support him. Has $115,000 in savings to tide him over. Cant get a loan – even though he has $121,00 in equity – because he doesnt have a job. Can make his mortgage payment for 1.5 years. Doesnt need a loan – he can make his mortgage payment for more than 8 years. Must sell his home or face foreclosure because he cant make his payments. Doesnt panic right away Has no reason to panic, has plenty of cash on hand.

Results After 30 years

Brother ABrother BBrother C Owns his home outright. Has 25 years remaining. Has $78,000 in savings and investments. Has $812,000 in savings and investments. Has $2,510,000 in savings and investments. Retires at will. Cant even begin to think about retiring – Brother As nest egg is more than $1 million short. Did ok, but still is more than $1 million short in order to retire. Sends a check to the bank to pay off his house…if he wants to.

Remember: Cash is King – Brother C now has more than $2.5 million in savings and investments. Your best investment is not always in your house – people who understand how to make their money work for them hold 1 of the keys to financial freedom.

1.This example is based on a payment driven loan. The minimum payment is based on a rate of 1.95%, whereas the note rate of the mortgage is assumed to be 6%. For illustration above, the index is considered constant throughout the term of the loan. Actual results may vary. 2.Assumes a combined feral/state income tax rate of 28%. 3.Assumes a 10% rate of return. Rate of return may vary based on type of investment. 4.The monthly cash flow is determined by comparing the minimum payments against Brother A – minus the $100 he sends in as an additional payment on his mortgage. 5.The monthly cash flow is determined by comparing the minimum payments against Brother A. The monthly payment changes annually at 7.5% of the previous years payment – we have used the average minimum payment over that 5 year period. 6.Brother C refinances every 5 years, dropping his minimum payment back down to the low 1.95 payment level and starting all over. He continues to invest his cash flow each month. Because Brother C refinanced, every 5 years, Brother C has built little equity in the property. The equity he builds is used to cover his refinance costs every 5 years, therefore, he essentially owes what he originally borrowed - $270,00.