To loan or not to loan

Happy New Year!

I thought I'd start this year with an interesting post. I always said that it was better to take a loan vs using your cash. The fear of debt is ridiculous and will financially cripple you. I've got the data to back it up. 

Google Sheet: To loan or not to loan

We are going to build on my previous post: Everything you're told about money is wrong - Buying a house

Assuming you've put 3.5% down and in 15 years, you've decided to do $200,000 in renovations. 

Scenario 1 (8% Rate of Return)

If you took the $200,000 out instead of leaving it in your investment, you would have LOST $587,438.72.

If the money was left in the account, you would have $664,135.35 vs $76,696.63 if you took $200,000 out 15 years in.

	With Loan	Without Loan
8%	$664,135.35	$76,696.63

Is it worth it to pay the $103,788.46 in interest for the renovation to have an additional $587,438.72?

Scenario 2 (10% Rate of Return)

If you took the $200,000 out instead of leaving it in your investment, you would have LOST $759,499.66.

If the money was left in the account, you would have $1,151,660.55 vs $392,160.89 if you took $200,000 out 15 years in.

	With Loan	Without Loan
10%	$1,151,660.55	$392,160.89

Is it worth it to pay the $103,788.46 in interest for the renovation to have an additional $759,499.66?

Scenario 3 (12% Rate of Return)

If you took the $200,000 out instead of leaving it in your investment, you would have LOST $977,422.46.

If the money was left in the account, you would have $1,977,354.86 vs $999,932.40 if you took $200,000 out 15 years in.

	With Loan	Without Loan
12%	$1,977,354.86	$999,932.40

Is it worth it to pay the $103,788.46 in interest for the renovation to have an additional $977,422.46?

Conclusion

Is it worth paying the interest? You tell me.

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Everything you're told about money is wrong - Buying a house

** Addendum 5/4/23 - I added PMI to this calculation. **

So, in this blog we're gonna cover the 20% down myth.

You can buy a house in the USA using the FHA loan. You don't need to wait until you have 20% down. Leverage the 3.5% down and make your money work for you.

Google searches just have too many ads. Here's a direct link to the FHA program via HUD, the government program.
FHA Link: https://www.hud.gov/buying/loans

This blog post is for those that have 20% down, still put 3.5% down. Your parents and realtors will push you to do 20% down for various reasons.

• Your parents don't know any better and will say "save on interest". Little do they realize how little you save because the largest cost of interest is in the first 10-15 years. 

• Your realtor will have various reasons because they want to close the deal quicker, they get paid and don't care about your future. The home owner gets paid regardless. If your realtor pushes it, then find a new one. 

The scenario I have chosen is a $400,000 house.

The interest that your parents claim you save between putting 3.5% vs 20% down? $47,433.87. With PMI costs of $39,602.00 would bring that total to $87,035.87.

If you invested the difference in mutual funds, by only putting down $14,000 vs $80,000, which would leave you with $66,000. If you invested that, this is what you could have at the end of paying off your house.

Scenario	Down	Rate of Return	Cash	House	Total Assests in the end
1	20%	None	In house	$ 400,000.00	$ 400,000.00
2	3.50%	8%	$664,135.35	$ 400,000.00	$ 1,064,135.35
3	3.50%	10%	$1,151,660.55	$ 400,000.00	$ 1,551,660.55
4	3.50%	12%	$1,977,354.86	$ 400,000.00	$ 2,377,354.86

The numbers speak for themselves. Make your money work for you. Your home is an asset that needs to be maintained. Use your money to your advantage.

Do you listen to your parents and save $87,035.87 only to lose out on $664,135.35 to $1,977,354.86? Wouldn't it be great to have a house AND $1,977,354.86??

Food for thought.

I've included the worksheet with the data here: 3.5 or 20 Down

Open Enrollment 2019

Ah, another year of benefits selection and more changes. Here are some tips that should apply for all.

Life Insurance - Be sure to maximize this. Most people don't take advantage and it's a shame. It's one of the cheapest things you can do to benefit your family financially if something happens to you. The group rate from your company is better than any rate from private insurance.

PPO & FSA or HSA - This was an interesting thing we learned. If you're fortunate enough to have both spouses working for a company that provides health insurance, this will apply to you. 

1. My company hits me with a surcharge for covering a spouse that has access to insurance ($75 a month), so we are forced to have 2 separate policies. When she was pregnant, I paid the fee to cover her in case some complications arose. Luckily nothing happened and we paid practically nothing for the hospital visit itself. In the new year, we each have our separate plans, but cover the children under both our policies. 
2. When you have dual coverage for the children, they go by the oldest spouse, not what you select as the primary insurance. So we kinda got screwed because I had the HSA plan and she was the PPO. So we couldn't just pay the co-pay. Be sure to have the older spouse select the PPO and the younger spouse with the HSA. 
3. When you select the HSA, be sure to max out the benefit because there is a tax savings. In 2019 you can put $7,000 for the family. Under my PPO I maxed out my FSA at $2,700. Now remember that you need to spend the FSA money, NOT the HSA, by the end of the year. As a family, you can put away $9,700 pre-tax. 

Also, a reminder, it's close to the new year so get ready to make that annual folder to see where you are financially and have a record of all accounts. 

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