These Home Buying Mistakes Can Reduce Your Chances of Becoming a Millionaire
It is settled that making an error when buying a home can affect one’s wealth accumulation ability as time goes on. That is a common discovery among people who studied millionaires. For instance, an author and researcher, Chris Hogan studied ten thousand American millionaires, i.e., people with a net worth not less than $1 million with a research team and made discoveries bordering on mistakes people make when it comes to buying homes.
Hogan has come to the conclusion that there are three major mistakes related to a mortgage that can affect one’s ability to become a millionaire. Those millionaires Hogan studied were able to avoid these mistakes successfully. Doing this plus solid incomes with good saving habits have helped them in building wealth. The mistakes to stay away from are:
Drawing Out Mortgage Longer Than The Actual Period Necessary
Hogan wrote that deciphering why a lot of people do not become millionaires can be easily done if you consider the 30-year mortgage. A lot of people spend a lot of money on loans without even considering the math behind the mortgage. Freddie Mac noted that approximately 90 percent of home buyers in the US go for a 30-year mortgage.
One’s income level, as well as the spending patterns, have roles to play in whether or not a person can become a millionaire. The research also found that an average millionaire was able to pay off their mortgages in eleven years. Six percent of the millionaires Hogan studied were living in homes that had paid-off mortgages.
He stated that it puts the home in the asset category of a millionaire’s net worth and also wipes off the biggest debt in the liability category.
Hogan also compared 30-year mortgage worth $225,000 with a 15-year mortgage worth $225,00, and each of the mortgage considered has a fixed interest rate of 4 percent. He concluded that opting for a 15-year mortgage in place of the 30-year mortgage would have helped you save over $87,000, and that puts a person in a fully paid for a house in a shorter period.
Holding On To Mortgages Simply To Enjoy Tax Advantages
Hogan noted that even though one has the ability to write off the mortgage interest to be paid on the tax return, it wouldn’t help to save more than the cost.
When you still have a mortgage, Hogan said it’s advisable to take advantage of tax deductions. However, it would be counterproductive to use the deduction as a reason to hold on to a mortgage for a period longer than you ordinarily should.
While explaining how this works, Hogan wrote that a $200,000 mortgage that has a 5 percent interest rate attracts an annual interest rate of $10,000 which can be deducted from taxable income. He added that those in a 25 percent tax bracket would be able to save $2,500 annually in taxes.
However, it amounts to giving the bank the sum of $10,000 and saving $2,500 on your tax bill which is like giving a cashier a $10 bill to break for you and you only get $2.50 while you go ahead to thank him for that.
Hogan has a point, but it doesn’t put the new tax enactments into consideration. These new tax laws have changed the narrative about existing federal tax brackets. For instance, a 25 percent tax bracket doesn’t exist anymore and the standard deduction has been increased to $12,000 for the single filers while the married filers have $24,000.
Invariably, that means married homeowners that paid lower than $24,000 as mortgage interest might save more if they decide to opt for standard deduction rather than itemizing their individual taxes and claiming a deduction for their mortgage interest.
3. Taking HELOC
HELOC stands for home equity line of credit and it refers to a revolving loan. It is similar to a credit card and is supported by the actual value of the borrower’s home. This credit line option is made available to a borrower for a fixed duration and he can choose to renew that line or make the repayment of the outstanding balance upon the expiration of the fixed period.
Hogan is, however, not in support of HELOCs. In fact, his research revealed that 63 percent of the millionaires never took out this loan or any other credit line. According to Hogan, taking this loan can adversely affect a person’s financial independence.
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