Reasonable people, quite frequently, look at the same set of facts and come to conclusions that are 180 degrees apart. It doesn`t necessarily make either of them ”wrong.”
Q-I have followed your arguments about accelerating the payoff of your mortgage interest and have come to the conclusion that you`re all wet. Haven`t you ever heard of ”leverage” and the wisdom of using the other fellow`s money to make money for yourself? Your emphasis on speeding up the payoff of a mortgage flies right in the face of this conventional wisdom.
A-It certainly does, doesn`t it? On the face of it, nothing has quite the appeal in theory – except for finding the Fountain of Youth – that leverage has. For example: You buy a $100,000 house with a 5 percent down payment. Two years later you sell the house for $150,000 (we`re ignoring selling expenses and whatnot for simplicity`s sake). How much of a gain do you have? 50 percent, right? No, not really. After paying off the mortgage, you have a gain, sure enough, of $50,000, but, since you only put up $5,000 in the first place you`ve got a solid gain of $45,000, nine times your actual investment.
Now, what`s wrong with that? Not a cockeyed thing, of course. The only problem is that it requires a neatly meshing set of circumstances that has become rare to the point of non-existence. What if the house, instead of appreciating 50 percent, declines in value 25 percent? So you sell it and where are you? Again ignoring selling expenses, you`re going to come out of it with $75,000, but unfortunately you still owe the lender $95,000 over and above the original $5,000 down payment, which is already down the old rat hole. So you take a walk.
Why do we have record foreclosures today? In large measure for this very reason: reliance on leverage, which blew up in the face of thousands of home buyers. And this is also the reason why lenders have tightened up and the old 5 percent down payment, and a casual attitude about the buyer`s debt load, are out the window.
I don`t like to belabor a point, but I think that something very fundamental has changed since ”leverage” hit the peak of its popularity:
Leverage, as personified by debt, is very much out of fashion and equity is very much ”in.” If leverage is such hot potatoes, how do you explain the shambles that is the junk bond market today, the very soul of the ”leveraged buyout” fad prevalent the last few years? Certainly, if you can find a house that, sure enough, is going to appreciate 50 percent in value in a couple of years, then go for it.
Just don`t try to sell the idea to a man who is a product of the Great Depression and who, for some odd reason, finds the horrendous debt that goes with leverage just a tad less desirable than a case of prickly heat.
Q-Recently, my wife and a friend each purchased a one-half ownership in a time share in Mexico. The total contract balance is $5,000 and they plan to occupy the unit for 30 days every year. My question: Can the interest on the contract be fully deducted, the same as mortgage interest, or is it treated as ordinary personal interest and subject to being phased out?
A-Depends on a couple of tricky things, the Internal Revenue Service tells me. For one thing, to be deductible in the same way that mortgage interest is, it has to be a ”deeded” time share – one in which you are actually buying your share of the property and can rent it, sell it or pass it on to your heirs. If it`s a non-deeded time-share, however, all you`re buying is a ”right to use” the unit for X number of years, after which it reverts to the developer, and the interest isn`t deductible.
The other fly in the ointment is that if you already have one ”vacation home” somewhere on which you are deducting the mortgage interest, then that`s it. The time share won`t qualify.
I might add, too, that most, if not all, Mexican time shares with which I am familiar are strictly non-deeded. Mexican law prohibits conventional land ownership by foreigners along its coast line, which, not surprisingly, is where most time shares are located.
Q-I have been negotiating on the purchase price of a foreclosed property. There are two options: Pay $160,500 with $8,000 down and a rate of 9.75 percent or pay $159,500 with $8,000 down and a rate of 9.875 percent. How long will it take me to recoup this $1,000 price difference if the principal and interest payments are $1,310 a month if I opt for the $160,500 offer and the lower rate of 9.75 percent?
A-My handy-dandy computer puts it between seven and eight years before the lower interest rate offsets the $1,000 higher price. And, as slight as the difference in interest rates seems to be (one-eighth of a point), the lower rate (9.75 percent) will save you a total of $13,305 in interest if it goes the full 30 years.
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What`s ”smart” about borrowing $60,000 for a home and, over the next 30 years, paying the lender $137,591 in interest alone (at 10.5 percent)? By painlessly accelerating the payoff of your mortgage you can save thousands in interest and cut many years off that awesome 30-year indebtedness. Our leaflet, ”Free and Clear: Getting the Mortgage Monkey Off Your Back,”
explains all. Send a long, stamped, self-addressed envelope and $2 to cover costs to Don Campbell, P.O. Box 80260, Phoenix, Ariz., 85060.
