Future net worth depends on how home is financed

Real estate news By Jack Guttentag
Feb 26, 2007, 4:00 am PST

"I am buying a house for $180,000, which I could pay for by selling assets, but everybody tells me to leave my assets alone and take out a mortgage. Their advice makes me nervous because it is always based on generalities, such as 'you want the mortgage as a tax shelter' or 'you should leave your investments alone.' They don't know anything about my tax status or my investments. Is there a better way to make this decision?" There is a better way. Use a spreadsheet called "Future Net Worth," which can be downloaded from my Web site.

The spreadsheet allows you to measure your future net worth on the assumption that you pay all cash, then measure it again on the assumption that you take a mortgage, and see where you end up in each case. The spreadsheet calculates your net worth year by year in both cases. I will illustrate the process, using my own assumptions, which will be simplified to make the explanation easier to follow.

I assume you are purchasing a house for $180,000 and your nest egg also amounts to $180,000. You can use the nest egg to pay for the house, or you can leave it untouched and borrow the $180,000. (Of course, the spreadsheet also allows any combination in between, such as making a 20 percent down payment from the nest egg and borrowing the balance.) The loan would be a 30-year fixed-rate mortgage at 6 percent with a monthly payment of $1,079. I assume that you have $1,500 of income on top of that available for investment.

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