Two of my sons just bought our house and gave us a Life Estate. Even though they could pay cash, I urged them to borrow the money from the bank. I want them to take out a mortgage on the house.
I gave them two good reasons to do this. First, mortgage loan rates are at an all-time low. They almost for sure can invest their cash and make more in a stock market fund than they will be paying for the next thirty years for the interest on the borrowed money.
Second, they will be paying off the mortgage in cheaper dollars because of inflation and the reduced value of the dollar. This is, in my mind, a sure thing-according to past history (what I could buy with a dollar in 1942 when I was a kid) and to the amount of borrowing and printing of money our government has done recently.
This second point, paying a mortgage off using devalued currency, was harder to get across to them. Today I received an email from Bank of America that gave a great explanation. I have changed it a bit to make it even clearer:
How to Explain the Impact of Inflation
Imagine for a moment that you are going to lend your own money to someone to buy a house. You determine this person is a good credit risk, you process the loan, and you start receiving $1,500 per month as your regular payment. You then of course take that $1,500 and start loading up your shopping cart with the goods and services you need on a monthly basis(food, clothing, medicine, gas, and so on).
But over time, you notice something happening.
Every month, you are getting slightly less in your cart than you did the month before for that same $1,500 you are spending. Why? Because costs are on the rise. That's inflation.
Why Interest Rates Go Up when there is fear of inflation in the air.
Imagine that you are once again going to lend your very own money to another person to buy a house. You want the same shopping cart full of goods that you got last time in return for doing the loan, but this time you realize that you can no longer get that same cart full with $1,500. Due to inflation, you now need $1,700 to buy those same goods and services.
As a result, you will charge a higher interest rate to compensate you for the ongoing impact of inflation.”
Your dollars will be worth less in the future than they are now…
Thank you Bank of America. That makes it plain to see why my kids should use a home mortgage now and put their cash into “inflation proof” investments.
But you must invest your cash! Do not spend it. If you do, as inflation takes place you will become very, very poor.
Another major benefit to my kids is that we sold the house to them for a very low price and it is worth more than that. We worked out a great deal with the bank to pay off our existing loan (for much less than we owed) with the kid's money and gave them the deed. Much better than leaving the house to them as part of our will with all the costs, risks and sibling conflicts that can cause.
We simply (and inexpensively) gave them a Quit Claim deed. They sent the payoff money to the bank. We gave them the deed. The deed we gave them gave us a Life Estate. Thank You, Lord!
Want to know more about how to invest in today’s bargain real estate market? Talk To Ted! I am an experienced and knowledgeable Buyer’s Agent.
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