Creating Wealth

Roger Schlesinger
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Posted: Feb 21, 2014 12:01 AM
Creating Wealth

Read it and reap!

It is so simple it is scary: two moves and you are there. The absolute easiest way for the youth of this country to become wealthy is to be wise enough to listen to someone who has answers and will give them the planning so they can succeed. Let me help you be that person.

There are two keys to wealth: using the current tax law and understanding the uniqueness of the 15 year loan. Once you study these two and realize that if things do not change you are on your way to a very nice experience and reward, I imagine your focus on this goal will be unwavering.

Let's start with the tax law. The current law allows those who are single or married to own a house, condominium, duplex, tri-plex or 4 plex, for at least 2 years and reap a tremendous tax benefit. You must own the property and live in it as your owner occupied for 2 years, or (if longer) two out of 5 years, in any order. If you do this then the first $250,000 in profit is tax free for an individual, or $500,000 tax free for a couple. Imagine you buying and selling a house every 5 years as an individual and having the luck, ability or both to create $250,000 in profit each time, you will have made a million dollars ($1,000,000) after owning and selling 4 houses.

Now let's look at the other key, the 15 year mortgage. 15 year seems to be the ideal loan to help you accomplish the above. Some will argue that even with a 30 year you can do this, although it might take a little longer. I am going to show you why I prefer the 15 year and use the example of a 15 year fixed versus a 30 year fixed.

Before I show you the example I am going to give you the reason it turns out the way it does -- This fact, more than any other example, gives you the understanding about any type of loan you are seeking and whether it will solve what you are hoping to accomplish. A loan payment is made up of principal and interest. Principal is the amount going to pay down the loan. Interest is the cost of using the banks money. From the first payment until the last one the amount going to principal increases and the amount going to interest decreases.

A 30 year loan at 4.375% has only 27% of the payment going to principal on the first payment and will take 14 years and 1 month for the principal to be equal to the interest. That means that during almost the first half of the loan the majority of every payment is interest. Compare that with a 15 year fixed at 3.5% which has 59% of the FIRST payment going to principal. That means every payment you make for 15 years has the majority of that payment being used to pay back the loan

For a 30 year fixed $275,000 mortgage, your monthly payment would be $1,373/month (principle and interest.)

For a 15 year fixed $275,000 mortgage, your monthly payment would be $1966/month (principle and interest.)

Term: Bal. left after 2 yrs: Bal. left after 5 yrs: Total Pmts after 2 yrs: Total Pmts after 5 yrs:

30 year fixed

$265,726

$250,206

$32,952

$82,38

15 year fixed

$246,110

$198,000

$47,184

$117,960

Compare the 2 year balance of the 15 year with the 5 year balance of the 30 year. The 15 year payment has amortized a larger portion of the loan while only costing 57% of the amount spent on the 30 year loan. I believe you can readily see why you must take the 15 year over the 30 year.

Now we need to see how the tax savings play into this equation. If this house goes up 72% in 5 years you will have made $250,000 in a combination of amortization of the mortgage and profit which will be tax free. Money yielded from amortizing the mortgage is not a taxable event because profit is the difference from the price, or adjusted price from monies put into the house to improve it, subtracted from the net proceeds of the sale of the house.

A) With a 30 year loan you would only need the house to go up by $225,000 which is 13%. The other $25,000 comes from the amortization (pay down) of the loan.

B) With a 15 year loan you would only need $173,000 which would be a 10% increase a year for 5 years. You would have amortized $77,000 off your mortgage.

Basically the combination of the tax savings and the amortization of the loan can make this much better than I have been stating if you have a 15 year loan. A 10 year loan would make it easier if you could afford the payments. A 20 year fixed will also work and will also allow you to have lower and more affordable payments if needed.

One does not have to make all the money with one house. At a point where you feel the house has appreciated and amortized enough to go to a better candidate for appreciation then you sell, take the first portion of the profit and move on. You can move as fast or as slow as you want with the only caveat being the fact that the tax law can be changed.

If you are financially able you can start another house going and use it as a second home or rental until you sell the first one. Then you can move in and reap the benefits of the appreciation you have already had as well as the amortization by simply living in it as your owner occupied house for 2 years.

Anyone with determination can become wealthy if they take this program and work it. You might be lucky and score with a rapidly rising house price or maybe find a way to add more each month to your mortgage payment and get the house paid for faster than you imagined. Maybe both will happen. The only one holding you back is you.