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You both buy comporable $ 500,000 homes next door to eachother. You buy your house free and clear with no mortgage. Your friend puts 10% down with a 30-year mortgage and smiles slyly when you ask her what she did with the rest. What does she know that you don’t? Who is going to be in the better financial situation in the future? If you are going to answer, back it up with a quality discussion!

3 Thoughts on You have $500,000 and your best friend does too…?
  1. Reply
    KnottedBrain
    August 12, 2011 at 8:49 am

    You can invest the $ 500,000 for a substantial monthly payment. While she will be paying more in the end (after the mortgage is all paid) she will still have that $ 500,000 in the account.

  2. Reply
    Alfretz T
    August 12, 2011 at 8:54 am

    Assuming that you both buy your homes to live in and do not intend to sell them during these 30 years, the truth will reveals itself only after she has fully serviced her mortgage. I believe it all boils down to whether she could service the 30-year mortgage without a hitch, i.e. she must have an income to service the loan during these 30 years, and what returns she could generate with the S$ 450,000 as compared to the interests that she would be paying. Meanwhile, you live with lesser stress knowing that your home is fully paid up.

  3. Reply
    Ron B
    August 12, 2011 at 9:09 am

    Your friend has in fact made the wiser decision. you have used your money, and will be starting from scratch. She has leveraged her buying power and will use her money to create more wealth.
    First she will be able to deduct her mortgage insurace from her taxes, so she will be taking home more of her paychecks. Then she can invest the maximum cash in her roth IRA each year. This is again tax free when withdrawn and thus very lucrative. She has a couple of options to invest the remainder of her money. She could repeat her strategy on another 3 houses as investment properties. Renters would cover the majority of her payments thus adding wealth to her name every month. When the houses had appreciated about 25% (2-10 years depending on the market) she could sell them and pay off the original house, plus still have a large portion of the original money. She could also take the money and invest it. Getting average returns of 10% (the average historical return) she would be getting 3-4% on the money after the taxes are figured.
    The first way is one of the most common wealth building strategies America.

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