The final option is the option that assumes paying the entire house off right away ($200K) and then subsequently looking at investing the monthly payment and what the house would be worth in the end.
As in the first two examples, the house would be worth approx. $700K in 30 years. No changes here.
I would take the $955 per month that was originally going to the mortgage and invest it at an assumed rate of 10%. This would be worth approx. $1.7M in 30 years. So, combined, the house and stock would be worth about $2.4M in 30 years.
As we can see, these options are in descending/ascending order.
The first option, of making no down payment results in the highest future value based on projections (estimates). However, this is also the most risky equation because it brings a high level of risk into the equation (low beginning equity in the house and the highest monthly payments).
The second option is less risky but it has a lower future value than the first option.
And finally, the third option is the least risky but it also has the lowest potential future value.
Which option do you think I should do?
Friday, September 12, 2014
Cash Flow Part 4
The second option is also a 30-Year option. This would be a 30-Year Mortgage Option w/ $100K down payment - This 30-year mortgage will cost me approx. $272K in today’s dollars in overall costs over 30 years (the $100K down payment, $100K in additional principal and $72K in interest). Essentially, I am trading $100K now for a $72K decrease in total interest payments over the life of the loan. I will be making monthly payments of $478 which is a more manageable amount than the $955 per month in the first option.
As in the first option, the house would be worth approx. $700K in 30 years. No changes here. In addition, as this method of investigation is considering whether or not I should pay cash, it’s also important to look at the future value of the $100K (remember, I put $100K down so now I only have $100K to invest). If I was to take $100K and, instead of putting it towards the house, invest it in the stock market using a 10% rate of return, that $100K would end up as $1.6M in 30 years. Also, I would now have approx. $477 per month of additional money to invest ($955-$478).
With some math this looks like it would be worth approx. $847K in 30 years. In review, I would be paying out $478 per month for 30 years and end up with stock with a value of $1.6M as well as the monthly investment that has grown to $847K and a house worth $700K. In total, this would be $3.14M. This seems to be a nice end result, but we will look at the last option in a later post.
As in the first option, the house would be worth approx. $700K in 30 years. No changes here. In addition, as this method of investigation is considering whether or not I should pay cash, it’s also important to look at the future value of the $100K (remember, I put $100K down so now I only have $100K to invest). If I was to take $100K and, instead of putting it towards the house, invest it in the stock market using a 10% rate of return, that $100K would end up as $1.6M in 30 years. Also, I would now have approx. $477 per month of additional money to invest ($955-$478).
With some math this looks like it would be worth approx. $847K in 30 years. In review, I would be paying out $478 per month for 30 years and end up with stock with a value of $1.6M as well as the monthly investment that has grown to $847K and a house worth $700K. In total, this would be $3.14M. This seems to be a nice end result, but we will look at the last option in a later post.
Cash Flow Part 3
First, I want to look at the 30-Year Mortgage Option - The 30-year mortgage will cost me approx. $344K in today’s dollars in overall costs over 30 years ($200K in principal and $144K in interest). I will be making monthly payments of $955. This method assumes that I put zero dollars down and make monthly payments over the life of the mortgage. In all likelihood, I will be moving out of this house within the next 7 years and would likely use the house as a rental property. However, that’s a story for another time.
It’s important to also look at the future value of the house, assuming that the house increases in value by approx. 3% over 30 years, it would be worth approx. $700K in 30 years. The 3% is roughly in line with inflation and seems to be a conservative estimate. In addition, as this method of investigation is considering whether or not I should pay cash, it’s also important to look at the future value of the $200K. If I was to take $200K and, instead of putting it towards the house, invest it in the stock market using a 10% rate of return, that $200K would end up as $3.2M in 30 years.
In review, I would be paying out $955 per month for 30 years and end up with stock with a value of $3.2M and a house worth $700K. In total, this would amount to $3.9M. This seems to be a nice end result, but we will investigate a few other options in later posts.
It’s important to also look at the future value of the house, assuming that the house increases in value by approx. 3% over 30 years, it would be worth approx. $700K in 30 years. The 3% is roughly in line with inflation and seems to be a conservative estimate. In addition, as this method of investigation is considering whether or not I should pay cash, it’s also important to look at the future value of the $200K. If I was to take $200K and, instead of putting it towards the house, invest it in the stock market using a 10% rate of return, that $200K would end up as $3.2M in 30 years.
In review, I would be paying out $955 per month for 30 years and end up with stock with a value of $3.2M and a house worth $700K. In total, this would amount to $3.9M. This seems to be a nice end result, but we will investigate a few other options in later posts.
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