Mortgage Net Worth is defined as the sum of assets involved in financing your home. It includes the value of your house plus any side fund balances minus any mortgage debt. The side fund is an investment composed of differences in mortgages payments and tax advantages between the original and the new mortgage.
The basic concept of the Mortgage Net Worth (MNW) program is to earn money on the spread between after tax mortgage loan rates and higher investment returns. This spread exists because of the tax deduction of mortgage interest. The spread increases as a client’s tax bracket increases. The following describes a good prospect and a bad prospect for the MNW program.
We assume all the mortgage interest is deductible in the same tax bracket.
A Good Prospect can obtain a 9% new mortgage rate and is in the 40% tax bracket. Since the mortgage is new, practically all the monthly payment is interest. The prospect typical makes a return of 10% after tax in other investments. His after tax mortgage rate is 5.4% (the 9% less 40% tax deduction or .6 X 9%). The client’s after tax spread is 10%- 5.4% = 4.6%.
A Poor Prospect can obtain a 6% new mortgage rate and is in the 15% tax bracket. Since the mortgage is new, practically all the monthly payment is interest. The client typical makes a return of 5% after tax in other investments. His after tax mortgage rate is 5.1% (the 6% less 15% tax deduction or .85 X 6%). The client’s after tax spread is 5%- 5.1% = .1% (minus 1/10%).
Whether the results of the MNW program are positive or negative depends on the following:
- Old and new mortgage rates
- Age of the original mortgage
- Client’s tax bracket
- Client’s after tax investment return
- Term (years) of the new mortgage
- Whether the new mortgage is standard or Interest Only
- Whether excess equity is removed from the house
- Current market value of house
- Previous appreciation of the house’s market value
It is difficult to look at all these variables and predict the outcome (positive or negative). The MNW program does the math for you.
MNW presents or prints both Monthly Spreadsheets and Annual Summary Spreadsheets. These spreadsheets document the math that supports the conclusions presented by MNW.
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