Possible Mistakes


How many of the strategies or products below do you currently have as part of your financial life?

Prepaying a Mortgage

Most people would like to have their home free and clear without mortgage payments. Therefore, when one has a mortgage, paying it off earlier with extra payments sounds like a good idea. The logic is that one will save interest payments and therefore save money on the cost of the home. It is true that prepaying a mortgage can save loan interest costs over time.

What is not widely understood is that this savings may come at the expense of paying more in income taxes and experiencing a lost opportunity cost on the extra payments which may result in greater costs than the loan interest saved.  The estimated total cost to the consumer is rarely explained or calculated by many financial institutions while the interest saved is always shown. Consumers should be careful to obtain a complete and proper analysis before spending their hard earned money on paying down their mortgage faster.

Research has found that many consumers would be ill-advised to pay down a mortgage faster in order to save the loan interest. In those cases, the lost tax refunds and the lost rate of return on the extra payments are greater than the loan interest savings over time. The choice is yours, but it should be based on full and complete facts offered by your mortgage broker or banker before making your final decisions.

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10, 20 or 30 Year Term Life Insurance

These term life policies are designed to be temporary insurance coverage for a period of ten, twenty or thirty years. In many cases, they serve as the best protection to insure ones human life value.

The low premium cost is established because the chance of death occurring (actuarial speaking) while these policies are in force is very low. Although term life insurance policies have a low cost in the early years, at older ages they get very expensive and in many cases prohibitive.

Term life policies should be considered as an intermediate step before more permanent policies are included or needed. If kept too long, term life policies can be one of the most expensive ways to buy life insurance.

Historically speaking, since most term life policies either expire or get canceled before they pay a death claim, in those cases the consumer’s cost ist he total premiums paid, plus the potential earnings lost on the premium payments, plus the loss of the death benefit, and eventually any estate assets lost to taxes or other eroding factors brought about by one’s death.

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15 Year Mortgages

Why do banks usually charge less interest for a 15 year mortgage than a 30 year mortgage?

Is one mortgage cheaper than another?

Actually, they may be identical in cost.  In order to get the cheaper loan interest rate, you have to pay a higher premium for the monthly payment. If one took the difference in the payment and invested it into an IRA, Roth IRA, paid off credit cards, or put it into a guaranteed annuity; there is a good chance that they would have more money at the end of the 15 year period.  No guarantees of course, but one needs to consider the alternative.

For a large percentage of American consumers, the net cost of a 15 year mortgage is greater than a 30 year mortgage given similar or even lower interest rates.  Although one can save actual interest costs with a 15 year mortgage, after considering the income taxes paid and the lost opportunity costs on the invested difference in monthly payments, a 30 year mortgage may actually be cheaper in the long run.

A 30 year mortgage may still be paid off in 15 years, and potentially still have more money left over compared to a 15 year mortgage, if the difference in monthly payments had actually been faithfully saved in a conservative alternative.  In addition, the lower monthly payments of a 30 year mortgage versus the higher monthly payments of a 15 year mortgage may provide the consumer with more safety in the event of loss of job, declining real estate market or for any other unforeseen expenses that may come along that need to be made.

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Tax Deferral Strategies

There are several ways to take advantage of the current income tax laws. There are programs or products that have:

  • Taxable assets going in, tax free growth, tax free coming out
  • Taxable assets going in, tax deferred growth, taxable coming out.
  • Not taxable going in, tax deferred growth, table coming out
  • Not taxable going in, tax free growth, tax free coming out.

Which one of those would you choose? Which one of these would you want?

We can show you why, in many cases, a tax deferral strategy may or may not be the best alternative to your wealth building goals. Although tax deferral is important, it could be ineffective when it comes out and income taxes take a large portion. Tax deferral strategies may not only postpone taxes but actually cause a larger tax later if one’s marginal tax bracket increases.

One should consider either reducing or avoiding income taxes as an effective financial strategy than just postponing or deferring taxes. In addition, many consumers are never provided enough information about the potential estate distribution and estate conservations problems of tax-deferred asset strategy or program.

All of the benefits and potential disadvantages of tax-deferral strategy or product should be evaluated before its implementation. Every consumer needs to review all the alternatives with the same outlay before allocating any dollars to a particular program. It may be that a tax-deferral program makes sense and is the best alternative, but until a comparison with a fully integrated program is provided, one may not come to the conclusion that a tax-deferred program is always best.

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