Your Mortgage Banker Wants You to Invest in Your IRA ( Because It Makes Him Rich )
Your Mortgage Banker Wants You to Invest in Your IRA ( Because It Makes Him Rich )
New homeowners are to be congratulated for building their financial future. Like most people, you want a good job, to own your own home, and have a fat retirement account that will provide you and your family a secure future. Perhaps you read Dave Ramsey and believe in his advice. Well, if you’re just starting off and you’ve purchased a home, you most likely also have a good job. At this point, you are considering your retirement strategy.
There’s lots of investment opinion out there. In addition to Dave Ramsey, there’s no shortage of info about how to invest your money and with which brokerage firm. Everywhere you look, on TV, the internet, and in print, the talk is about money and how to make it grow. What’s your favorite investment: equities, municipal bonds, cd’s? How about futures; you know, pork bellies, gold, frozen concentrated orange juice? You may even have seen commercials that tout “the excitement of Forex trading”, where you are lured by prospect of speculating in foreign currencies. Brokerage firms are not the only places to invest your money. Many banks that sell mortgages also offer investment accounts. It’s likely that the bank where you got your mortgage is among them. Bear in mind, we’re talking about saving for the future – as in retirement.
Certainly, a big attraction of retirement accounts is that most are tax-deferred. In other words, there’s no tax due on the money you deposit into the account, and also no tax on on the account’s earnings. You only pay tax upon withdrawing funds. Most people think this is wonderful since they won’t be withdrawing from the account until they retire, and at that time they’ll be in a lower tax bracket. This certainly sounds fantastic, and it fits in with most people’s view of the American Dream.
It’s not unexpected that you agree with this logic. The snag is, it’s all wrong! In spite of the recommedations exhorting you to invest for the future, it can be a very big mistake. Moreover, it may put you off from ever being able to retire. Followers of Dave Ramsey know that his advice is to reduce your debts.
You probably realize first and foremost that sellers of investment “products” do so for their interest, not yours. Second, they are trying to persuade you that it’s in your best interest to save for the future as early as possible. They don’t disclose that for homeowners with a relatively new mortgage, you’re mortgage interest cost will be much higher than any earnings that will accrue from a retirement account. For instance, a homeowner with a 6%, 0,000 mortgage will pay ,000 in interest the first year alone. What will your IRA earn? Well, if you contribute ,000, and your account earns 8% (a high number by today’s standards) you’ll earn 0 in year one.
On the other hand, let’s see the results if you listen to what Dave Ramsey and others advise. You use that money to pay down your mortgage each year. In four years, your IRA will earn ,730. But if you pay the tax on the ,000 each year and use that money (about ,600) to pay off your mortgage, your mortgage balance will be reduced by ,400. It’s In fact it’s more, because reducing the principal each year will cause more of your monthly check to reduce it further.
Here’s the result: after four years, the accerated reduced principal will save you ,000 of interest payments. ,000! How does that compare to the ,730 earings from your IRA? It’s not even close. And since interest saved = interest earned, you’ll have earned ,000 tax free! The time to pay off your mortgage will also be reduced by many years. That’s why Dave Ramsey has so many followers. Mortgage acceleration is the better choice for homeowners than any investment, especially in the early years of the mortgage. Find out how you can use mortgage acceleration and debt reduction at http://iounomore.wordpress.com.
Category: Mortgage broker
