There may be a significant difference between how much you have to pay to finance your house and what you may be able to earn with your money invested. |
It is interesting to note that it costs the same to live in your house whether you finance it or you pay cash. Let's look at the possible opportunities if we can potentially earn more return with our money than it costs us to borrow. |
Changeable Options: You may toggle between illustrating a lump sum investment or monthly deposits. You may toggle between displaying the [Sum of Interest and Principal], the [Opportunity Cost of the Monthly Payments] and [Transferred Dollars from Interest Paid]. •The Sum of Interest and Principal is the sum of the nominal value (no adjustment for time value of money) of the Interest and Principal. •The Opportunity Cost of the Monthly Payments is the future value of the ENTIRE MONTHLY PAYMENT compounded at the investment account rate of return. •Transferred Dollars from Interest Paid is the future value of the MORTGAGE INTEREST PAID compounded at the investment account rate of return. You may toggle the loan rate between a [Before Tax Rate] and a [Net Cost to Borrow (after tax rate)]. The first click will request the client’s effective tax rate. The word “effective” in tax bracket means to use the client’s average tax rate on interest. For example, if half the interest is deductible at 15% and half the interest is deductible at 25%, the effective tax rate is 20% (15% +25%)/2 = 20%. The Net Cost to Borrow is calculated as the Before Tax Rate times (1 minus the tax bracket). Documentation/Validation: Calculations are performed in a series of worksheets defined as follows: Lump Sum Investment Column 1: Balance at beginning of month (beginning with initial lump sum). Column 2: Monthly interest earned: (Column 1 * Investment ROR/12). Column 3: Account balance at the end of the month: (Column 1 + Column 2). Monthly Deposits Investment Column 1: Balance at beginning of month. Column 2: Monthly interest earned: (Column 1 * Investment ROR/12). Column 3: Monthly deposit (E.O.M.). Column 4: Account balance at the end of the month: (Column 1 + Column 2 + Column 3). Mortgage Payments as an Investment Column 1: Balance at beginning of month. Column 2: Monthly interest earned: (Column 1 * Mortgage Interest Rate/12). Column 3: Monthly payment (E.O.M.). Column 4: Balance at the end of the month: (Column 1 + Column 2 + Column 3). Transferred Dollars from Interest Paid Column 1: Annual Interest Paid Column 2: Cumulative Interest Paid (Sum of Column 1) Column 3: Annual Lost Opportunity Cost: Previous Year Transferred Dollars * Investment ROR [compounded monthly]. Column 4: Cumulative Transferred Dollars: Previous Year Transferred Dollars + Column 1 + Column 3. |