Episode 103 – Mortgage and Equity

Hi Everyone, this is Dan wise money tools.com. Thanks for joining us on another video. Today I wanted to get a concept across to you, when it comes to your mortgage. You know, so often when we go buy houses, we go into the mortgage or bank where we’re getting our loan from. And we find out what the most amount of money we can get in a mortgage, I should say, the highest mortgage payment we can get. So they’ll run their calculations, they’ll take your income, taxes, all that stuff, and they’ll say, you are approved for this amount of mortgage. And typically, then that’s how we go shop. Now it might be a little different, you may look for a house first and then try to decide if that’s going to fit into your budget.

But for the most part, people max out the mortgage payment that they are approved for. So let me give you a couple scenarios here. Let’s just say that you’ve got two houses to choose from. And they’re both 3000 square feet. And you’ve been approved for a $2900 mortgage. But you can buy houses in you know, maybe a more popular high trafficked area, however you want to call it, maybe it’s downtown, maybe it’s in a rural area that’s really popular, and maybe just 8-10 miles away, you can get a similar home, size wise, but it’s for less money. So I call this the out of town millionaire. So here we go, we’re going to look at these two scenarios.

So the first home and you know, your neighborhood, your area is going to be different. But this is happening. This is real life example, where we’re living. And if you go into this one particular city and could be again, your city, you’re gonna pay $210 a square foot right now. So if we look at that 3000 square foot home, and again, we’ve been approved for a $2900 a month mortgage, so we can buy a $630,000 house, our down payments going to be $126,0000. So we’re gonna finance or have a balance of our mortgage of $504,000. On a 30 year mortgage at 4%. Well, there we have our payment for this is principal interest, taxes and insurance. So this is an all encompassing payment of 2900 and 21 bucks.

Now, let’s just assume this house appreciates at 3%. Again, it might be 4 or 5 or 6% in your area, it might be 1 or 2%. Who knows. But let’s just use three, that seems to be kind of a good national average, well, in 30 years, that house is going to be worth $1.5 million. We did good, good investment. The problem is everything we have pretty much because we maxed out our mortgage payment is tied up in our house. We may or may not be able to access that capital. Now we take that same scenario, but we move out of town just a bit, maybe 8,10, 15 miles, whatever that might be. And now we’ve got this same house, the same thousand 3000 square foot home, but it’s only $162 a square foot. So we’re buying that same house essentially, for 486,000. We only have to put 97,000 down instead of 126. And our mortgage balance is 388.

Again, a 30 year 4% mortgage, our payments $2314. But we were approved for $2921. So we have $607 a month extra. And this is really the gist of this thing. And it doesn’t really matter if you’re comparing houses of the same size, what we’re trying to do is give ourselves some room to save some money and not put it all into a mortgage payment. So this $607 a month, if we go down just a few more lines, that’s $7284 a year that we get to save. Plus we get to save the extra 28,000 that we were going to have to put down had we bought the more expensive house. And now we’re gonna put this into an account, we’re gonna save it and we’re just going to assume we’re gonna get 9% on that over time.

Now using our banking system, that means you’re probably going to be using some of your cash value and going out and making some other investments. And over time, you’re gonna average that 9%, it might be 7, 8, it might be 10 or 12. But there’s just kind of a good rule of thumb in 30 years, if we were to save that $600 a month. We’re gonna have $1.3 million in our cash account. Now when we’re comparing it to the other house, the other house was worth a little bit more. At the end of the day, if we go back up here, our house in the lower cost area was worth 1.1 million. And the house and the higher cost out area was worth 1.5 million. So basically, there’s about a $350,000 difference.

So we’re gonna subtract that of the account value that we have, so that we’re playing apples to apples. But the difference is, we’re gonna have a million dollars in our account, over and above the house value that we have. Our net worth is going to be 2.2 million, instead of just having a house worth 1.5 million. Moral of the story is this, don’t max out your mortgage. By house it’s adequate, maybe you can buy the exact same house by moving out 8, 10, 15 miles. And save that difference. And if you save that difference consistently, you literally can create yourself a nice little nest egg. What if that was only 200,000, or 500,000, 800,000 doesn’t really matter, that’s actual cash that you can put your hands on and do something with when all your net worth , if you will is in your house.

you may or may not be able to access it, only way to get it is to sell it or to get another loan or to ask the bank if you can get a home equity line. And oftentimes, like we saw in oh 8, 9, 10, it was really difficult to pull cash out of your house, you pretty much had to sell it. Not to mention the values, especially for more expensive homes were sometimes cut in half or even more. So what I’m trying to show you is do one of two things, when you’re looking for a house, don’t max out your mortgage, save the difference. If you know and you have the capacity to put a $2,900 a month into a mortgage backed out off a little bit, try to find a home that’s going to let you save some money in addition. And again, this is exactly what’s happening in our city where I live, things are a little bit more expensive, where we’re building houses just 8, 10 miles away, you can literally save hundreds of thousands of dollars.

So that was fast and furious. I know I’m gonna leave these numbers on the screen here for a second so you can look at them. If you have any questions make sure you shoot questions at wise money tools.com. Don’t forget to subscribe never miss a video if you want to have a quick strategy session talk about some of these concepts. Just click on the link below and choose a time and we’ll have a quick little call together. But that’s about it. Hope this was informative. Hope you enjoyed it, and I’ll talk to you next time. Take care.

Now the opposite is true on this same scenario. And that is if you were bent on spending that full amount that’s that full $2,900 a month, and no one’s gonna talk you out of it. Just think about the value again moving 8, 10, 12 miles away, you could get 3800 square foot home for the same cost as a 3000 square foot home. Now when you factor in the growth of 3800 square feet, you’re actually doing much better over time with the equity appreciation, then you would in the 3000 square foot home. Bottom line is value, value, value, look for value and look for a way where you can say But literally, you could put 2, 5, 8 hundred million dollars in your pocket if you just don’t max out your mortgage and you look for other ways to save.

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