Mortgage Loan Investment Vs. Second Home
Learning to manage your debt and income is a crucial component of financial health. Real estate is often one of the best investments in America. However, if you find yourself with disposable income each month, you may be struggling to decide between more real estate and investments. In order to make a sound decision, you must first have a clear understanding of your finances and your financial goals.
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Risk
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Risk is the way in which investors classify different stocks, bonds, and other financial instruments. If you are market-savvy and have some experience with the stock market, you may be in a better position to contribute your extra income to stocks. However, if you're not familiar with the complexities of the stock market, you'll need to consult with a trained professional.
Second Home
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A second home can offer significant financial benefits. For one, in an up market, you'll have another property appreciating and gaining equity which can translate into real dollars if you decide to sell. Also, mortgage interest, prepayment penalties, closing costs, and origination costs are all tax deductible. While the rules are bit different for vacation and investment properties, you'll still be able to significantly decrease your tax liability with a second home.
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Disadvantages of a Second Home
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Real estate markets are very fickle. If you purchase a second home with less-than-favorable mortgage terms, you'll run the risk of overwhelming yourself in debt. Some consumers become saddled with high mortgage payments and minimal equity if the real estate market plunges.
Investments
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Low risk investments like mutual funds often produce low returns--usually no more than seven to ten percent each year. However, the greater the amount of your investment, the greater the return. Riskier stocks sometimes will give higher returns, but can crash as well. It's important to have an investment strategy before committing large amounts of money to any one pool of stocks.
Disadvantages of Investments
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Unlike real estate, funds committed to stocks are not tax deductible and you'll need to pay taxes on all of your earnings. While there are some accounting tricks that can help minimize these losses, no technique will reduce your total tax liability like a second property.
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