Money Magazine
Money Magazine's undercover financial planner

Home buying: Lies planners will tell you

When deciding how much mortgage to take on, the math is pretty simple.

By The Mole, Money Magazine's undercover financial planner

(Money Magazine) -- Question: I'm nervous about drawing down my savings to buy a small condo. Should I use my savings or get a mortgage after making a 20 percent down payment?

The Mole's Answer: Whenever possible, I almost always like to recommend making home purchases out of savings rather than by taking on debt.

The Mole is a certified financial planner and certified public accountant who, in the interest of fairness, thinks you should know what goes on behind the scenes. Have a topic you'd like him to write about? E-mail
Home Equity Loan
$30K HELOC 3.56%
$50K HELOC 3.68%
$30K Home Eq 5.29%
$50K Home Eq 4.99%
$75K Home Eq 4.99%

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The key reason: The interest rate you can get on your savings is usually lower than the rate you pay for a mortgage (that's how banks make money, after all).

These days, someone taking out a mortgage might pay 6.5 percent. But he might get only 4.5 percent for his money market account. That's a 2-point difference, and it means that for every $10,000 borrowed, it's costing $200 per year.

A lot of financial planners will tell you that the tax deduction on mortgage interest changes that equation. But it doesn't, because the interest earned on savings is also taxable.

Financial planners also sometimes try to argue in favor of debt, the argument being that the less money you put down, the more investment gains will be magnified.

If some financial advisor gives you this line, say "no thanks" in no uncertain terms. These other investments will bring other risk, a ton more in fact. The only thing we know for sure is that the advisor and the mortgage broker will make more money. I've explored this tactic in my column, "Why your planner wants you in debt."

Just how much of your savings do I think is fair game when buying a home? All of it, even your emergency fund - the three to six months in living expenses that we planners always recommend.

That's because, in reality, you don't need this amount of emergency cash sitting around - just access to it.

In buying the condo, you could open a home equity line of credit (HELOC). For example, you could buy a $100,000 condo and get a tax-deductible line of credit for, let's say, $50,000. It usually costs nothing to open and it is there for just such an emergency. It's likely to be at a variable rate but the odds are you won't need it and, in the meantime, you are saving a ton of money by not making that mortgage payment.

My advice is to be your own banker when possible and minimize debt. Always have access to emergency cash - and a line of credit tied to your home is a fair way to do that. Finally, make sure that the savings you do have is working hard for you: These days, you should be getting 4.5% - 5.5% on your money market accounts. Top of page

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More from the Mole in Money Magazine:
Financial advice: Get it in writing: When making investment decisions, believe what your adviser writes, not what he speaks.

The wrong kind of advice: When your planner steers you toward expensive investments, stop and ask the right questions.

Why 'trust me' makes me nervous: Planners try to make money for clients, but also for themselves. Anyone who says otherwise is trouble.