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CONSUMER REPORT– HOME LOANS
SHOPPING AROUND? HERE'S THE INSIDE SCOOP ON HOW TO DO IT RIGHT
First: make sure you are working with an experienced, professional loan officer. The largest financial transaction of your life is far too important to place into the hands of someone who is not capable of advising you properly and troubleshooting the issues that may arise along the way. But how can you tell?
Here are FOUR SIMPLE QUESTIONS YOUR LENDER ABSOLUTELY MUST BE ABLE TO ANSWER CORRECTLY. IF THEY DO NOT KNOW THE ANSWERS… RUN…DON’T WALK… RUN…TO A LENDER THAT DOES!
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What are mortgage interest rates based on?(The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eyes on the wrong indicators.) What is the next Economic Report or event that could cause interest rate movement? (A professional lender will have this at their fingertips. For an up-to-date calendar of weekly economic reports and events that may cause rates to fluctuate, visit our Facebook page Finance of America Mortgage – Bryan
Johnson Lending Team – for daily updates. Want more? Let me know if you want to be added to my weekly distribution list.
When Janet Yellen {Chairmen of Federal Reserve} and the Fed “change rates”, what does this mean… and what impact does this have on mortgage interest rates?(The answer may surprise you. When the Fed makes a move, they can change a rate called the “Fed Funds Rate” or “Discount Rate”. These are both very shortterm rates that impact credit cards, Home Equity credit lines, auto loans and the like. On the day of the Fed move, Mortgage rates most often will actually move in the opposite direction as the Fed change. This is due to the dynamics within the financial
markets in response to inflation. For more information and explanation, just give us a call).
Do you have access to live, real time, mortgage bond quotes?(If a lender cannot explain how Mortgage Bonds and interest rates are moving in real time and warn you in advance of a costly intra-day price change, you are talking with someone who is still reading yesterday’s newspaper, and probably not a professional with whom to entrust your home mortgage financing. Would you work with a stockbroker who is only able to grab yesterday’s paper to tell you how a stock traded yesterday, but had no idea what the movement looks like at the present time and what market conditions could cause changes in the near future? No way!)
Be smart... Ask questions… Get answers! More than likely, this is one of the largest and most important financial transactions you will ever make. You might do this only four or five times in your entire life… but we do this every single day. It’s your home and your future. It’s our profession and our passion. We’re ready to work for your best interest. SHOPPING... PART 2 Once you are satisfied that you are working with a top-quality professional mortgage advisor, here are the rules and secrets you must know to “shop” effectively. FIRST, IF IT SEEMS TO GOOD TO BE TRUE, IT PROBABLY IS. But you didn’t really need us to tell you that, did you? Mortgage money and interest rates all come from the same places, and if something sounds really unbelievable, better ask a few more questions and find
the hook. Is there a prepayment penalty? If the rate seems incredible, are there extra fees? What is the length of the lock-in? If fees are discounted, is it built into a higher interest rate? SECOND, YOU GET WHAT YOU PAY FOR. If you are looking for the cheapest deal out there, understand that you are placing a hugely important process into the hands of the lowest bidder. Best case, expect very little advice,
experience and personal service. Worst case, expect that you may not close at all. All too often, you don’t know until it’s too late that cheapest isn’t BEST. But if you want the cheapest quote – head on out to the Internet, and we wish you good luck. Just remember that if you’ve heard any horror stories from family members, friends or coworkers about missed closing dates, or big surprise changes at the last minute on interest rate or costs… these are often due to working with discount or internet lenders who may have a serious lack of experience. Most importantly, remember that the cheapest rate on the wrong strategy can cost you thousands more in the long run. This is the largest financial transaction most people will make in their lifetime. That being said – we are not the cheapest. Of course our rates and costs are very competitive, but we have also invested in the systems and team we need to ensure the top quality experience that you deserve.
THIRD, MAKE CORRECT COMPARISONS. When looking at estimates, don’t simply look at the bottom line. You absolutely must compare lender fees to lender fees, as these are the only ones that the lender controls. And make sure lender fees are not “hidden” down amongst the title or state fees. A lender is responsible for quoting other fees involved with a mortgage loan, but since they are third party fees – they are often underquoted up front by a lender to make their bottom line appear lower, since they know that many consumers are not educated to NOT simply look at the bottom line! APR? Easily manipulated as well, and worthless as a tool of comparison. FOURTH, UNDERSTAND THAT INTEREST RATES AND CLOSING COSTS GO HAND IN HAND. This means that you can
have any interest rate that you want – but you may pay more in costs if the rate is lower than the norm. On the other hand, you can pay discounted fees, reduced fees, or even no fees at all – but understand that this comes at the expense of a higher interest rate. Either of these balances might be right for you, or perhaps somewhere in between. It all depends on what your financial goals are. A professional lender will be able to offer the best advice and options in terms of the balance between interest rate and closing costs that correctly fits your personal goals. FIFTH, UNDERSTAND THAT INTEREST RATES CAN CHANGE DAILY, EVEN HOURLY. This means that if you are comparing lender rates and fees – this is a moving target on an hourly basis. For example, if you have two lenders that you
just can’t decide between and want a quote from each – you must get this quote at the exact same time on the exact same day with the exact same terms or it will not be an accurate comparison. You also must know the length of the lock you are looking for, since longer rate locks typically have slightly higher rates. Again, our advice to you is to be smart. Ask questions. Get answers. As you can imagine, we wouldn’t be encouraging you to shop around if we weren’t pretty confident that we feel that we can give you a great value and serve you the very best.
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8 Habits of Millionaires By Holly C. Brauer, Financial Advisor and Wealth Manager
Imagine you look back on your life a year from now, and it is the best year of your life! What does it look like? What is your career? How much money did you make? How much did you save? What is your relationship with your family and loved ones? What are the things you are most passionate about that you had the freedom and time to do? All of these questions will help you get to your true why? Why is this important? Because if you want to become a millionaire, you must think like a millionaire. Have you heard the adage “You become what you think about?” Therefore, in order to think like a millionaire, you must study millionaires. From many years of research, daily habits can dictate how successful or unsuccessful you become in life. The good news is that all habits can be changed, and you can start implementing them today!
1
Millionaire Mindset
Millionaires have a mindset they will become successful and wealthy. They envision it every day. Albert Einstein said, “Imagination is more important than knowledge.” If you could have anything in this world, would you go after it? So, what is stopping you now? Many people have a fear to fail. When Thomas Edison was asked how it felt to fail 1,000 times before inventing the light bulb, he replied, “I didn’t fail 1,000 times, the light bulb was an invention with 1,000 steps.” It’s all about how you perceive things, and mindset is everything! There are many millionaires who went broke several times, and even bankrupt, but learned the greatest lessons and never gave up until they succeeded. Start now by getting in the right mindset, and you will be unstoppable!
2
They wake up early and set goals
Many millionaires will have accomplished more by 9am, than the average person does in a day. They wake up early, and have crystal clear goals. More importantly, they pursue their own goals rather than living someone else’s dream. This gives them more passion, determination, and energy creating long-term happiness and success. Your goals act as a roadmap. Could you imagine showing up at the airport, and just hopping on any flight hoping to get to the right place? It would be difficult to plan a trip, without a destination in mind. Goals also create more opportunity and less obstacles. You focus on the positive, and stop noticing the negative. Start today by writing out your goals and dig deep until you get to your true why. Then start tomorrow
by waking up three hours before you begin your workday. This strategy will help deal with disruptions, which can subconsciously make us feel like we have no control over our life. Get up early and tackle the top three things you want to accomplish that day!
3
7
They have successful friends
We often hear you are as successful as the average five people you hang around. It’s the law of attraction. If you’re constantly hanging around negative people, then it will shift your mindset and can stop you from reaching your full potential of success. Remember, great minds discuss ideas, average minds discuss events, and small minds discuss people. If you’re the smartest person in the room, then you’re in the wrong room. Look for mentors and other successful people to surround yourself with, and re-evaluate your circle of influence. Even the negative news media can have an influence on you, and so you must be aware of your thoughts. Set a goal to go 30 days without listening to the news, and instead listen to a positive audiobook, podcast, or TedTalk to learn something new.
Must read books: “The Millionaire Next Door”
by Thomas J. Stanley and William D. Danko
“Think and Grow Rich”
by Napoleon Hill and Steve Harvey
“The Compound Effect” by Darren Hardy
4
while saving time and money. If you’re not up for wearing the same thing every day, then make sure you plan tomorrow today.
They never stop learning
Millionaires read constantly and consistently, and would rather be educated than entertained. They read at least 30 minutes a day and read to maintain or acquire knowledge. They mainly read informative books on history, personal development, or biographies of other successful people. Set a goal to read a minimum of one educational book a month.
Photo Credit: Lark Pronty of Prime24photography
5
They keep their mind and body fit by working out
Exercise is not only good for the body, but is great for the brain. Research shows that cardio helps grow neurons (brain cells) in the brain, and produces more glucose which fuels the brain. The more it grows, the smarter you become. Knock out 30 minutes of cardio a day, and read a book while you’re at it.
6
They are mindful of the choices they make
Did you know on average we make over 35,000 decisions a day! You decide what time to set your alarm, if you hit snooze, should you brush your teeth or shower first, what you should wear, what you will eat, and the list goes on. Have you noticed that Steve Jobs and Mark Zuckerberg wore the same kind of outfits every day? Why? Because it was one less choice they had to make that day. Have you heard the term decision fatigue? It’s when your choices start to deteriorate after having a long session of decisions. The removal of just one decision can leave more room for mental space, and better productivity. By having a routine, your brain doesn’t have to work as hard and reduces stress,
They are aware of their spending habits
They live below their means, and don’t drive the nicest cars in the neighborhood. Have you read the book, “The Millionaire Next Door?” Years of research has gone into this book to study millionaires. What they found is the average millionaire doesn’t live in the biggest house or drive the fanciest car. In fact, often times the millionaire lives next door to you. These are the individuals who you wouldn’t recognize as millionaires unless you saw their bank accounts. They live below their means, and build their wealth in investments such as real estate, the stock market, and have multiple streams of income. Many times, it’s the broke people who make a good income, but overspend to live in a big house with many cars. They are house rich, but cash poor. Challenge yourself to save at least 15% of your income by paying yourself first. Then create a spending plan of needs and wants so you become in charge of your money, and it doesn’t control you. Subconsciously, you will think twice about every purchase.
8
They become successful and pay it forward
Chances are millionaires had a good mentor along the way. They surround themselves with positive, influential people, and when they succeed they pay it forward. A great mentor, Mr. Bill Walsh, Founder and CEO of Business Coaching/ Venture Capital Firm of Powerteam International, says to create so much value in other people’s life and expect nothing in return. Living by this philosophy will set you up for success, and you’ll be surprised with what you get in return. Remember, small changes over time lead to great results. Implement these habits into your life, and you will be on a great path to success!
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WHO’S WHO IN COLORADO REAL ESTATE
Jennifer Briseno YOUR REALTOR, YOUR FRIEND
Yesterday is History, Tomorrow is a Mystery, Society tells us to fear it, but none of us would be where we are if we hadn’t failed. We all make mistakes, but we learn from them. We all fail at something at some time in our lives, but we get back up and try again. Changing how we think of failure is key. Failure creates opportunity. The more we fail, the quicker we learn, and the more chances we have the next time to do something the correct way. Without failure we wouldn’t appreciate or enjoy our success as much. Rather than fearing failure, be excited for for it, be excited to learn and grow from it. You are one step closer to achieving your goals. Take Risks, step outside the box, nothing good ever happens in the comfort zone. You must step outside the box to grow. Tell Us What Got You into The Real Estate BusinessThere are a few reasons I got involved in Real Estate. I got my real estate license in 2008 when the market crashed. My husband and I saw it as an opportunity to start doing fix and flips. I also wanted to serve and help others accomplish The American Dream of owning a home. I love people and I love working with people!
What Are You Passionate About? People, My Family and My Friends. I love helping people. I have a huge heart and love to give and serve others. Being able to help buyers dreams come true of owning a home and seeing how happy they are is one of the most rewarding feelings and being able to help sellers sell their homes is also very rewarding. Real Estate is a great way for me to help others and serve others. I love it! I love spending time with my family and friends too they bring me so much happiness!! What Advice Would I give myself at the age of 20 years old. The advice I would give myself at 20 years old is Don’t be afraid of failure or mistakes and Don’t be afraid to take risks in life. Failure is necessary.
Are Your Sales #s for the Past 12 Months. As a single agent I have sold $25,875.89 in Real Estate and have helped 78 families dreams come true of owning a home or selling a home in the past 12 months! Do I do anything cool for my clients as closing gifts? I spoil all my clients. Our closing day is like Christmas and I shower them with gifts. It’s their big day and I want them to know how special this day is and how special they are too. I do order a variety of multiple custom gifts for each client. We also do shots or champagne toasts at the closing table. Not only do they get spoiled on closing day but I continue to let them know how much I appreciate them all throughout the years. I love my clients! They are all so important to me and have become lifelong friends!
Today is a Gift, that’s why we call it The Present. What Are my morning Rituals? I wake up every day at 6am and start my day off with gratitude. I write down 10 things and people I’m grateful for, then I write down my affirmations, I pray and thank God for all my blessings and pray for others, I write down my daily goals on what I need to accomplish for that day, I also read something positive. I drink my apple cider vinegar drink with warm water, garlic and lemon then head to the gym to work out. That is my every morning routine. Do I Mentor others, and Do I have any Mentors? Yes, I do mentor 3 people who are on my real estate team. I personally do not have a person who mentors me. I do however have a person who has made a huge impact on my life and that person is my mom. My mom has taught me so much in life. She raised me and my 2 sisters to be very independent. She raised us to work hard for what we want and to keep on moving forward and never give up when things get hard in life. She has always told us don’t wish for it work for it. Love hard, be kind, be giving and forgive quickly. What are my Goals for 2019? I’m a huge believer in goals and writing them down and placing them on the wall or somewhere so you can see them daily. Every year I do a goal board with my real estate team and with my husband and 3 kids. We all get together and make a goal board. Some of my goals for 2019 are to help 100+ families buy or sell homes, help my real estate team achieve their goals, read 20 books, spend more time with the family and take a few vacations, build a cabin in Breckenridge, do 12 fix and flips grow my relationship with God and be heart healthy. What topic would I speak about outside of real estate. The topic I would speak about is The Impact of being kind can have on the world. I’m a true believer being kind and opening your heart to
God can change the world. Kindness is one of the best gifts you can give and its free! As a society we under estimate the power of a hug, a touch, a smile, a wave, a compliment, a listening ear, or a small act of caring, and helping someone out. All these acts of kindness have the power to turn life around and make a difference in someone’s life and the world. What is my favorite Documentary? The Secret, Law of Attraction. Everyone should watch this documentary. I think the message is so powerful and important. The energy you emit attracts the things, people, events, and experiences that resonate with your vibe. It’s important to think positive and not attract that negative energy. My Mission Statement. To be the real estate team of choice because we demonstrate the highest standards of Ethics, Integrity and Value in every action we take in everything we do. We believe that acting with integrity, treating everyone with respect, being helpful, caring, kind, being supportive and committed to each other and the community, communicating effectively and consistently that we will exceed expectations and create memorable experiences.
Jennifer Briseno YOUR REALTOR, YOUR FRIEND EXP REALTY
C: 720.472.2131 F: 720.208.9466 E: MyRealtorToday@gmail.com
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How the Affluent Manage Home Equity to Safely and Conservatively Build Wealth
If you had enough money to pay off your mortgage right now, would you? Many people would. In fact, the ‘American Dream’ is to own your own home, and to own it outright, with no mortgage. If the American Dream is so wonderful, how can we explain the fact that thousands of financially successful people, who have more than enough money to pay off their mortgage, refuse to do so. The answer? Most of what we believe about mortgages which we The answer?and Mosthome of whatequity, we believe about mortgages and home equity, learned from our parents and grandparents, weThey learned fromusour iswhich wrong. taught to parents make a and big down grandparents, is wrong. They taught us and payment, get a fixed rate mortgage, to make a big down payment, get a fixed make extra principle payments in order to pay rate mortgage, and make extra principle off your loan as early as you can. Mortgages, payments in order to pay off your loan as they said, are a necessary evil at best. early as you can. Mortgages, they said, are a necessary evil at best.
The problem with this rationale is it has become outdated. Therationale rules ofismoney The problem with this it has have become outdated. Thegrandparents, rules of moneywe will changed. Unlike our have changed. our job grandparents, no longer have Unlike the same for 30 years. In we will no longer have the same job for many cases people will switch careers five 30 years. In many cases people will switch orcareers six times. Also, unlike our grandparents, five or six times. Also, unlike our we can no longer on ourdepend company’s grandparents, we depend can no longer pension plan for a secure retirement. on our company’s pension plan for a A recent secure survey retirement. A recent Gallup showed that Gallup 75% ofsurvey workers showed that 75% of workers to retire want to retire before the agewant of 60, yet only before thethey age can. of 60, yet only 25% think 25% think they can.
Unlike our grandparents, we will no longer Unlike our grandparents, we will no live in the same home for 30 years. Statistics longer live in the same home for 30 show that the average homeowner lives in years. Statistics show that the average their home only sevenhome years. homeownerfor lives in their forAnd onlyunlike our grandparents, we willour nograndparents, longer keep the seven years. And unlike we will no longer keep the same mortgage same mortgage for 30 years. According to the for 30 years. According to theAssociation, Federal Federal National Mortgage or National Mortgage Association, or Fannie Fannie Mae, the average American mortgage Mae, the average American mortgage lasts 4.2 years. People are refinancing their lasts 4.2 years. People are refinancing homes everyevery 4.2 4.2 years their homes yearstotoimprove improve their interest rate, restructure theirtheir debt,debt, remodel their interest rate, restructure remodel their home, or tomoney pull out their home, or to pull out formoney investing, for investing, or other Given expenses. education or education other expenses. these Given these statistics, it’s difficult to statistics, it’s difficult to understand why understand why so many Americans so many Americans continue to pay a high continue to pay a high interest rate interest premiumrate premium for a 30-year fixed rate mortgage, when they are likely to only use
the first 4.2 years of the mortgage. We can financial planning goal, and in fact how you only conclude theyrate aremortgage, operatingwhen on outdated ultimate handle issuesplanning of homegoal, ownership financial and in may well for a 30-year fixed how you handle issues of home they are likelyfrom to only use thegenerations first 4.2 knowledge previous when factdetermine whether you achieve financial years the mortgage. can than only the 30 year ownership thereofwere few optionsWe other success.”may well determine whether you achieve financial success.” conclude they are operating on outdated fixed mortgage. Wealthy Americans, those knowledge from previous generations with the ability to pay off their mortgage but when there were few options other than Why people fear mortgages, refuse to do understand how to make Why people fear mortgages, the 30 year fixedso,mortgage. Wealthy and whyyou youshouldn’t shouldn’t and why their mortgage for them. Americans, thosework with the ability to pay off their mortgage but refuse to do so, In order to discover how our order to discover howparents our parents and They go against manytheir of mortgage the beliefs of andIngrandparents understand how to make got the idea that a grandparents got the idea that a mortgage traditional work for them.thinking. They put very little mortgage was a necessary evil at best, a necessary evil at best, we must go back money down, they keep their mortgage we was must go back in time to the Great in time toInthe Depression. They go against many the beliefs of choose Depression. theGreat 1920’s a commonIn the 1920’s balance as high as ofpossible, they traditional thinking. They put very little a common clause in loan gave banks adjustable rate interest-only mortgages, clause in loan agreements gaveagreements money down, they keep their mortgage right tothe demand repaymentfull of repayment right full to demand and most importantly they integrate their thebanks balance as high as possible, they choose theof loan at any time. Since this was loan at any time. Since like this was like mortgagerate intointerest-only their overallmortgages, financial plan to askingthe adjustable for the moon and the stars, no one asking for the moon and the stars, no one continually increasethey theirintegrate wealth. This and most importantly their is how worried about it. When the stock market worried about it. When the stock market mortgage intoricher. their overall financial plan the rich get crashed on October 29, 1929 millions of crashedlostonhuge October 29,money, 1929much millions of to continually increase their wealth. This is investors sums of The game board is the same, but while most how the rich get richer. lost huge of money, of itinvestors on margin. Back then,sums you could buy much Americans are playing checkers, the affluent $10ofof itstock for a $1. Since value on margin. Back the then, youofcould buy The board is theThe same, but while stocks dropped, wanted aregame playing chess. good news is the the$10 of stock for afew $1.investors Since the value of the most Americans are playing checkers, the so they had to go to the bank strategies used by the wealthy work for the to sell, stocks dropped, few investors wanted to sell, affluent are playing chess. The good news and take out cash to cover their margin rest of America as well. Any home-owner can so they had to go to the bank and take out is the strategies used by the wealthy work call. It didn’t take long for the banks to implement the strategies of the wealthy to tocash coverand their margin It didn’t take for the rest of America as well. Any homeruncash out of start callingcall. loans increase net worth. owner cantheir implement the strategies of the long for the banks to run out due from good Americans who wereof cash and wealthy to increase their net worth. faithfully makingloans their mortgage start calling due from payments good Americans RicEdelman, Edelman,one oneofofthe thetop topfinancial financial planners every month. However, there wasn’t any Ric who were faithfully making their mortgage in the country and aand Newa New York York Times Best demand to buy these homes, so prices planners in the country payments every month. However, there Times Best Sellingsummarizes author, summarizes in The continued to drop. To cover the margin Selling author, in this book wasn’t any demand to buy these homes, so this book The Truth About Truth About Money, “TooMoney, often,“Too people buy calls, brokers were forced to sell stocks prices continued to drop. To cover the margin often, people buy homes in a vacuum, homes in a vacuum, without considering how and once again there wasn’t a market calls, brokers were forced to sell stocks and without considering how that purchase is that purchase is going to affect other aspects for stocks so the prices kept dropping. going to affect other aspects of their lives. once again thereDepression wasn’t a market for stocks Ultimately, the Great saw the of their lives. This can beand a big mistake, and stock market fall more than 75% from its This can be a big mistake, therefore so the prices kept dropping. Ultimately, the therefore you mustthat recognize owning a 1929 highs. you must recognize owning athat home Great Depression saw the stock market fall holds very important implications for the home holds very important implications for more than 75% from its 1929 highs. rest your plan. Although a theofrest of financial your financial plan. Although a fine goal, owning a home is not the
fine goal, owning a home is not the ultimate
More than half the nation’s banks failed and millions of homeowners, unable to raise the
Money, Ric tells the story of two brothers,
More than half the nation’s banks failed
cashand they needed to payoff their loans,tolost millions of homeowners, unable theirraise homes. Out ofthey thisneeded the American Mantra the cash to payoff their loans, lost their homes. Out of this was born: Always own your home outright. thecarry American Mantra was born: Always Never a mortgage. own your home outright. Never carry a
Themortgage. reasoning behind America’s new mantra The reasoning behind ifAmerica’s new fell was really quite simple: the economy mantra was really quite simple: if the to pieces, at least you still had your home economy fell to pieces, at least you still andhad the your bankhome couldn’t take it away from you. and the bank couldn’t take Maybe youfrom couldn’t put foodyouoncouldn’t the table it away you. Maybe putor payfood youronbills, but your home was secure. the table or pay your bills, but your secure. Since Great Since thehome Greatwas Depression lawsthe have been Depression have been introduced introduced thatlaws make it illegal for banks to illegal for banks to call your call that yourmake loanitdue. The bank can no longer loan due. The bank can no longer call you call up youand upsay, and“We’re say, “We’re running a little running a little short on shortcash on and cashneed and you need you to pay your to pay off youroff loan in loanthe in next the next thirtythirty days.”days.” Additionally, the Fed is now quick to
Additionally, the into Fed the is now quick to infuse infuse money system if there is money into the system if there is a run on a run on the banks, as we saw in 1987 Y2K. the in FDIC wasand created the and banks, asAlso, we saw 1987 Y2K. to Also, insure banks. Still, it’s no wonder the fear the FDIC was created to insure banks. Still, of losing their home became instilled in it’s no wonder the fear of losing their home the hearts and minds of the American became instilled in the hearts and minds people, and they quickly grew to fear of the and and they60’s quickly theirAmerican mortgage.people, In the 1950’s grewfamilies to fearwould theirthrow mortgage. In the 1950’s mortgage burning to celebrate paying off their andparties 60’s families would throw mortgage home.parties And so,tobecause this fearoff of their burning celebrateofpaying their mortgage, for nearly 75 years most home. And so, because of this fear of their people have overlooked the opportunities mortgage, for nearly 75 years most people their mortgage provides to build financial havesecurity overlooked the opportunities their mortgage provides to build financial security.
Why people hate their mortgage andtheir whymortgage you Why people hate andshouldn’t why you shouldn’t Many people hate their mortgage because
Many hate the their because theypeople know over lifemortgage of a 30 year loan, theythey know lifeinofinterest a 30 than year the loan, will over spendthe more house cost them in the first place. To save they will spend more in interest than the money becomes veryfirst tempting house costit them in the place.toTomake save a bigger down payment, or make extra money it becomes very tempting to make principal payments. Unfortunately, saving a bigger down payment, or make extra money is not the same as making money. principal Or, put payments. another way,Unfortunately, paying off debtsaving is money is not the as same as makingassets. money.ByOr, not the same accumulating mortgage put tackling anotherthe way, paying pay-off off debtfirst, is and not the the same as accumulating assets. By tackling the mortgage pay-off first, and the savings goal second, many fail to consider the important role a mortgage plays in our savings effort.
Common Home Equity Misconceptions Many Americans believe the following statements to be true, but in reality they are myths, or misconceptions:
Your home equity is a prudent investment.
FALSE Extra principal payments on your mortgage saves you money.
FALSE Mortgage interest should be eliminated as soon as possible.
FALSE Substantial equity in your home enhances your net worth.
FALSE Home Equity has a rate of return.
FALSE savings goal many failistoaconsider Every dollar wesecond, give the bank dollar we important role apaying mortgage plays in our didthenot invest. While off the mortgage savings effort. Every dollar we give the saves us interest, it denies us the opportunity bank is a dollar we did not invest. While to earn interest with that money. paying off the mortgage saves us interest, it denies us the opportunity to earn interest with that money.
A tale of two brothers
Ric Edelman has educated his clients for A tale of two brothers years on the benefits of integrating their mortgage intohas their overallhisfinancial Ric Edelman educated clients plan. Inforhisyears book, The New Rules of Money, Ric on the benefits of integrating their overall financial tells themortgage story of into two their brothers, each of whom plan. In his book, The New Rules of secures a mortgage to buy a $200,000 home. Each brother earns $70,000 a year and has $40,000 in savings. The first brother, Brother A, believes in the old way of paying
off a mortgage, which aismortgage as soon astopossible. each of whom secures Brother A bites thehome. bulletEach and brother secures a fifteenbuy a $200,000 earns $70,000 a year and has year mortgage at 6.38% APR $40,000 and shells out in savings. A, down all $40,000Theoffirst hisbrother, savingsBrother as a 20% believes in the old way of paying off payment, leaving him zero dollars ato invest. mortgage, which is as soon as possible. This leaves him with a monthly payment of Brother A bites the bullet and secures a $1,383. Since he hasat 6.38% a combined fifteen-year mortgage APR andfederal and income taxofrate 32%, as he is left shellsstate out all $40,000 his of savings a 20%an down payment, leaving zero cost with average monthly nethim after-tax dollars to invest. with a of $1,227. Also, This in anleaves efforthim to eliminate his monthly payment of $1,383. Since he has mortgage sooner, Brother A sends an extra a combined federal and state income tax $100 to his lender every month. Brother rate of 32%, he is left with an average B, in contrast, subscribes the new way of monthly net after-tax cost ofto$1,227. Also, mortgage planning, choosing instead to in an effort to eliminate his mortgage carry a big, long-term He secures sooner, Brother A sendsmortgage. an extra $100 to his lender every month. a 30-year, interest-only loan at 7.42% APR. He outlays a small 5% down payment of Brother B, in contrast, subscribes $10,000 and invests the remaining $30,000 to the new way of mortgage planning, in a safe,instead moneymaking account. His choosing to carry a side big, long-term monthly payment is $1,175, 100% of which mortgage. He secures a 30-year, interestis taxloan deductible 15 ayears, and only at 7.42% over APR.the He first outlays small over 5% down payment $10,000 and him 64% the life of theof loan, leaving invests the remaining $30,000 in a safe, a monthly net after-tax cost of $799. Every moneymaking side account. His monthly month he adds $100 to his investments (the payment is $1,175, 100% of which is tax same $100 Brother A sent to his lender), plus deductible over the first 15 years, and 64% the he’sofsaved from his lower over$428 the life the loan, leaving him mortgage a payment. investment earns an monthly netHis after-tax cost ofaccount $799. Every month $100 to his investments 8% rateheofadds return. (the same $100 Brother A sent to his
Which brother madehe’s thesaved rightfrom decision? lender), plus the $428 his lower mortgage payment. His investment The answer can be found by looking into account earns anjust 8% rate return. the future. After five of years Brother A has received $14,216 in tax savings, however he Which brother made the right decision? made zero dollars in savings and investments. The answer can be found by looking into Brother B,After on the hand, has received the future. justother five years $22,557 savings$14,216 and hisin savings and Brother A in hastax received tax savings, however he made zero dollars in investment account has grown to $83,513. savingswhat and investments. Brother B, on thelose Now, if both brothers suddenly other hand, has received $22,557 in tax their jobs? The story here turns rather bleak savings and his savings and investment Brother A. Without any money in savings, for account has grown to $83,513. Now, what he hasbrothers no way tosuddenly get through the crisis. if both lose their jobs? Even though hasturns $74,320 of equity The storyhe here rather bleak for in his Brotherhe A. can’t Without money in savings, home, getany a loan because he doesn’t he has no way to get through the crisis. have a job. With no job and no savings, he Even though can’t make his monthly payments and has no choice but to sell his home in order to avoid foreclosure. Unfortunately, at this point it’s a fire sale so he must sell at a discount, and
3
A Tale of Two Brothers Adapted from the book, The New Rules of Money
Our story begins with two brothers, each earning $70,000 a year. They each have $40,000 in savings and both are buying $200,0000 homes.
Brother “A” believes in “The Old Way” – paying off the mortgage as soon as possible
Brother “B” believes in “The New Way” –carrying a big, long mortgage
15-year mortgage at 6.38% APR
30-year mortgage at 7.42% APR
$40,000 Big Down Payment
$10,000 Big Down Payment
$0 left to invest
$30,000 left to invest
$1,383 Monthly Payment
$1,175 Monthly Payment
(56% is tax deductible first year/33% average)
(100% is tax deductible first 15 yeas/64% average)
$1,227 Monthly Net After-Tax Cost
$799 Monthly Net After-Tax Cost
Sends $100 monthly to lender in effort to eliminate mortgage sooner
Adds $100 monthly to investments, plus $428 saved from lower mortgage payment where account earns 8% rate of return
Results after 5 Years Received $14,216 in tax savings
Received $22,557 in tax savings
has $0 in savings and investments
has $83,513 in savings and investments
What if both brothers suddenly lost their jobs? Has no savings to get him through crisis
Has $83,513, in savings to tide him over
Can’t get a loan – even though he has $74,320 more in equity than his brother – because he has no job
Doesn’t need a loan
Must sell his home or face foreclosure because he can’t make payments
Can easily make his mortgage payments even if he’s unemployed for years
At this point – it’s a fire sale – he must sell at a discount and pay real estate commissions (6-7 %)
has no reason to panic since he’s still in control – remember... cash is KING!
then pay real estate commissions. Brother B, while not particularly happy at the prospects of searching for a new job, is not worried becauseofheequity has $83,513 in savings to he has $74,320 in his home, tide him get over.a loan He doesn’t need a loan and can he can’t because he doesn’t easily his monthly payments, even if he have amake job. With no job and no savings, can’t make his payments and isheunemployed formonthly years. He has no reason to has no choice but to sell his home in panic, as he is still in control. Remember… order to avoid foreclosure. Unfortunately, at this is point it’s a fire sale so he must sell Cash King! at a discount, and then pay real estate commissions. Now, let’s say neither brother lost his
job. We’ll check in on them after fifteen years have Brother B, whilethey not particularly passed since purchasedhappy their athomes the prospects of searching for a new job, and evaluate the results of their financing is not worried because he has $83,513 in strategies. Brother A He hasdoesn’t now need received savings to tide him over. $25,080 taxeasily savings, $30,421 in a loan andincan makehehishas monthly payments, even if he savings and investments (once his home is unemployed years.saving He hasthe noequivalent was paid off hefor started reason to panic, as he is still in control. of his mortgage payment each month), and Remember… owns his home outright. Not too bad, right? Cash is King!
Now let’s check on his Brother. Brother B Now, let’s say neither brother lost his job. has received $67,670 in tax savings and has We’ll check in on them after fifteen years $282,019 in since savings investments. have passed theyand purchased their If he chooses to,evaluate he can the payresults off the remaining homes and of their financing strategies. Brother A has now mortgage balance of $190,000 and still have received left $25,080 in savings, tax savings, hasclear. $92,019 over in freehe and $30,421 in savings and investments (once
Results After 15 Years Received $25,080 in tax savings
Received $67,670 in tax savings
Has $30,421 in savings and investments
Has $282,019 in savings and investments
Owns home outright
Remaining mortgage balance is $190,000 – and he has enough savings to pay it off and still have $92,019 left over, free and clear
Results After 30 Years Received $25,080 in tax savings
Received $107,826 in tax savings
Has $613,858 in savings and investments
Has $1,115,425 in savings and investments
Owns home outright
Owns home outright – so starts fresh and enjoys the same benefits once again
his homelet’s was assume paid off he started saving Finally, that rather than pay the equivalent of his mortgage payment off his mortgage at fifteen years, Brother B each month), and owns his home outright. decides to ride out the whole thirty years of the Not too bad, right? loan’s life. While Brother A has still received only inon taxhissavings, savings Now $25,080 let’s check Brother.his Brother B and investments grown $613,858, has received have $67,670 in taxto savings and and hasstill $282,019 investments. he owns inhissavings homeand outright. Brother B, If he to, he has can received pay off thea whopping on thechooses other hand, remaining mortgage balancehas of $190,000 $107,826 in tax savings, accumulated and still have $92,019 left over in savings, an incredible $1,115,425 in savings and free and clear. investments, and also owns his home outright. Heassume can start Finally, let’s thatover ratherfresh than and pay enjoy off his mortgage fifteenagain. years,Unfortunately, Brother the same benefitsat once B decides to ride out the whole thirtythe same the majority of Americans follow years of the loan’s life. While Brother A they path as Brother A, as it’s the only path has still received only $25,080 in tax know. Once the path of Brother B is revealed savings, his savings and investments to them, a paradigm shifting epiphany often have grown to $613,858, and he still occurs as they Brother B’sB,path enables owns his homerealize outright. Brother on the homeowners to received pay their ahomes off sooner (if other hand, has whopping they choose to), while significantly increasing
Are you still doing this? “Here is an extra $100 principal payment Mr. Banker. Don’t pay me any interest on it. If I need it back, I’ll pay you fees, borrow it back on your terms, and prove to you that I qualify.”
Money you give the bank is money you’ll never see again unless you refinance or sell.
Many Americans believe the best way to
Certified Financial Planners) contained
$107,826 in tax savings, has accumulated their net worth and maintaining the added year loan and a 30-year loan, as well as the tax 4-5%, the chances are pretty good that you the first academic study undertaken on pay off a home early is to pay extra principal an incredible $1,115,425 in savings and into a safe side investment account can the benefits of liquidity and safety the entire way. savings earnquestion 5% onofyour money. Interest rates 15-year versus 30-year on your mortgage. Similarly, many finance investments, and also owns his home earning a conservative rate of return, you will are relative. In the 1980’s, moneythe was30-year costingloan mortgages. They concluded professors think a 15-year loan saves you outright. He can start over fresh and enjoy have enough to pay your home off in 13½ 15%, but individuals could still earn 15% on is better. Based on the same logic, wouldn’t money by reducing the interest you pay. the same benefits once again.home Unfortunately, Successfully managing years (or in 15Doug yearsAndrew with $25,000 to spare!). their money. Due to the tax deductibility of However, points out in his the majority of Americans follow the same equity increase liquidity, an interest-only loan be better than an book, one Missed Fortune,Fortune that thistalks thinking is mortgage in Missed about path asto Brother A, as it’s the only path they Chapter interest and compounding returns, If mortgage money If you do the made math, you find if youof youamortizing know. Once of Brother safety, rate the of path return, and B is revealed theflawed. $25,000 mistake by millions can borrowloan? at a higher rate and investcost it atyou 4-5%, the chances are pretty good that you set asidewho thechoose monthlythe payment difference to them, a paradigm shifting epiphany often Americans fifteen-year loan. a lower rate and still make a significant profit. tax deductions occurs as they realize Brother B’s path homeowners to pay their homes In enables 2003, Doug Andrew, a top financial planneroff sooner theythe choose while significantly from Utah,(if was first to), to clearly articulate increasing their net worth and maintaining the strategy the wealthy have been using the added benefits of liquidity and safety the forentire decades in his book, Missed Fortune. The way.
book is based on the concepts of successfully managing home equity to increase liquidity, Successfully managing home safety, rate of return, and tax deductions. equity toreaders increase Doug educates to viewliquidity, their mortgage ratethrough of return, and andsafety, home equity a different lens, the same used by the affluent. He shows taxlens deductions how relatively minor changes in home equity In 2003, Doug Andrew, a top financial perception and positioning can produce planner from Utah, was the first to clearly monumental long-term effects in financial articulate the strategy the wealthy have security. been using for decades in his book, Missed
Fortune. The book is based on the concepts Many Americans believe the best way to of successfully managing home equity to payincrease off a home early is to pay extra principal liquidity, safety, rate of return, and ontax your mortgage. Similarly, many finance deductions. Doug educates readers professors thinkmortgage a 15-year to view their andloan homesaves equityyou money by a reducing the the interest through different lens, sameyou lens pay. used However, Doug Andrew pointshow outrelatively in his book, by the affluent. He shows minorFortune, changesthat in home equity perception Missed this thinking is flawed. If and positioning can produce monumental you do the math, you find if you set aside the long-term effectsdifference in financialbetween security. a 15monthly payment
between a 15-year loan and a 30-year loan,
as well as the tax savings a safe side Cram Investment Groupintoteaches an investmentseminar account for earning conservative educational the apublic based rate of return, you will have enough to largely on the Missed Fortune concepts.pay In home we off inbreak 13½ years in 15 years theyour seminar, down(orthe four key with $25,000 to spare!). Chapter one in benefits of integrating your mortgage into Missed Fortune talks about the $25,000 your financial plan (increased liquidity, safety, mistake made by millions of Americans who ratechoose of return, tax deductions) the and fifteen-year loan. in order to look at each one in more detail
can earn 5% on your money. Interest rates are relative. In the 1980’s, money was costing 15%, but individuals could still earn 15% on their money. Due to the tax deductibility of mortgage interest and compounding returns, can cash borrow at a higher and invest By you having available ftor rate emergencies at a lower rate and still make a significant andit investment opportunities, most homeprofit.
Large equity in your home can be a big disadvantage
owners are better off than if their equity is tied up in their residence. Large, idle equity, also Large your home called ‘havingequity all yourineggs in one basket,’ Cram Investment Group teaches an Oureducational goal is to help clients conserve their home can be a big disadvantage can be risky if the homeowner suddenly seminar for the public based equity, notonconsume it. Fortune We are concepts. one of theIn needs cash. While employed and in excellent largely the Missed By having cash available ftor emergencies fewthe financial planning firms who health, borrowing on a home is easy, but most seminar, we break down theencourage four key and investment opportunities, most homeclients to secure debt in order become debt benefits of integrating yourtomortgage into people, especially owners are betterretirees, off than if unexpectedly their equity financial plan (increased liquidity, safety, need freeyour sooner. when theyresidence. are sick, unemployed is cash tied up in their Large, idle or rate of return, and tax deductions) in order to haveequity, insufficient income. Obtaining home also called ‘having all youraeggs in In look Aprilat 1998, Thein more Journal of Financial each one detail basket,’ be risky if the loanone under thesecan circumstances canhomeowner be either Planning (published by the Institute of suddenly cash. While employed impossible orneeds very expensive. Our goalFinancial is to help clients conserve their Certified Planners) contained and in excellent health, borrowing on a not consume it. We are one thehome first equity, academic study undertaken on Howhome manyisofeasy, us feel go toespecially the bank butwhen most we people, of the few financial planning firms who the question of 15-year versus 30-year we almost retirees,need unexpectedly need cash when to prove we don’t need thethey encourage clients to secure in order are sick, unemployed or have insufficient mortgages. They concluded thedebt 30-year loanto money before they’ll loan it to us? The bank become debt free sooner. income. Obtaining a home loan under these is better. Based on the same logic, wouldn’t wants to know we have the ability to repay can be how eithera conversation impossible or an Ininterest-only loan be better than an the circumstances loan. You can imagine April 1998, The Journal of Financial very expensive. amortizing If mortgage Planningloan? (published by the money Institutecost of you might go with your banker: “I brought up
mortgage payment, or have an additional There actually primary reasons: n application to the board this board mortgage payment, or have an additional your loan up application up to the thisareThere are three actually three primary reasons:
position. in the world would financial times,times, wouldwould your your rather havehave ny of How us feel when wefeel gowhen to thewe go to the cashWhy position. Why in the worldyou would you$25,000 financial many oftous of equity trapped in rather your home? and Imorning explained them you’re goingyou’recash $25,000 of equity trapped in your home? and I explained to them going want to have the equity removed from your $25,000 of cash to help you make your almost need to prove we don’t 1. Liquidity want to have the equity removed from your $25,000 of cash to help you make your bank we almost need to prove we don’t 1. Liquidity Almost every person who has ever lost their somethrough hard financial times, you’re Almost every person whoanhas ever lost their some hard times,home? you’re There are 2. actually primary payment, or have additional money before they’ll loanfinancial itthey’ll to us? Safety home? There are three actually three primary mortgage mortgage payment, or have an additional need the money before loan it to us? 2. Safety home to foreclosure would have been better oyed, your credit is not so good and home foreclosure would have been better unemployed, your credit isability not so good and reasons: reasons: $25,000 of to equity trapped in your home? k wants know we have thewe $25,000 of equity trapped in your home? Thetobank wants to know have the ability 3. Rate of return 3. Rate of return off if they had their equity separated from hey could lend you some cash to get off if they had their equity separated from maybe they could lend you some cash to get AlmostAlmost every every person who who has ever lost lost theirtheir the loan. Youthe canloan. imagine how a person has ever to repay You can imagine how 1. aLiquidity1. Liquidity their home in a liquid, safe, conservative side these rough times. Their response hometheir to foreclosure would haveconservative been better tion might gothese withmight your banker: “ITheir home in a liquid, safe, side through rough times. response These three elements are alsoarecommonly home to foreclosure would have been better conversation go with your banker: These three elements also commonly 2. “I Safety 2. Safety fund that could be used to make mortgage t chance!’ off if they had their equity separated from up your loan application up to the be equity used toseparated make mortgage was... ‘Fatupchance!’ off if that they could had their from brought your loan application up toused asofthe test ofreturn atest prudent investment. 3.the Rate return used asofthe of a prudent investment. fund 3. Rate their home in a liquid, safe, conservative sideside s morning I explained them to When their home in a liquid, safe, conservative board and this morning and to I explained them evaluating payments during their time of need. payments during their time of need. a potential investment, any people don’t realize is that even What many people realize is that even When evaluating a potential investment, fund that could be used to make mortgage oing through some hard don’t financial fund that could be used to make mortgage you’re going through some hard financial These three elements are commonly These three elements commonly experienced investors will also ask are thealso following experienced investors will ask the following The importance oftheir liquidity all too eu’re consistently been making double The importance oftheir liquidity all too if they’ve consistently been making double payments duringduring time ofbecame need. unemployed, your credit is not payments time ofbecame need. times, you’re unemployed, your credit used is not as the used as the test of a prudent investment. test of a prudent investment. three questions: three questions: so goodthey and maybe they could lend maybe could the stock market crashed mortgage payments for years in ayou row, theevaluating when when the stock market crashed in in eand payments for five yearslend in five ayou row, the When evaluating a potential investment, clear clear When a potential investment, cashhas to these get rough times. The importance of liquidity became all too sh to some get roughthese times. The importance of liquidity became all too October of 1987. If someone had advised bank still no leniency. Ifthey suddenly they October of 1987. If someone had advised l has no through leniency. If through suddenly experienced will following ask the following experienced will ask the 1.investors How is it? 1.investors How liquid isliquid it? response was...the ‘Fat chance!’ clear when the stock crashed ponse was... ‘Fat clear when the market crashed you sellstock your stocks and convert toin cash, experience a chance!’ financial setback, the bank willquestions: three questions: selltoyour stocks andmarket convert toin cash, ce a Their financial setback, bank will three I getback my money when (Can I get my(Can money when back I want it?) I want it?) you to October of 1987. If someone had advised October 1987. have If someone theyofwould been a had hero. if you not They go toand theplead, bank and plead, they would have been a hero. Or,advised ifOr,you hadhad TheyWhat cancare. go to thecan bank 2. How safe is it? you to sell stocks your stocks and convert to cash, many people don’t realize is that1. even 1. How liquid is it? 2. How safe is it? you to sell your and convert to weathered cash, ny people don’t realize is that even How liquid is it? enough liquidity you could have “I never thought in a million years this would liquidity you could ahave weathered hought in a million yearsbeen this would they would if you if they’ve consistently making double Iguaranteed get my back whenit?) I want it?)enough (Is itmoney guaranteed or insured?) they would have have beenbeen a hero.hero. Or, ifOr, you hadhad consistently been making double (Can I get (Can my back when I want (Is itmoney or insured?) the storm. Those with other liquid assets were happen to me, but it did. I’ve been paying my the storm. Those with other liquid assets were o me, but it did. I’ve been paying my enough liquidity you could have weathered mortgage payments for five years in a row, liquidity you could have weathered e payments for five years in a row, 3. What rate ofis return can I expect? enough 2. How safe it? 3. What rate of return can I expect? able to remain invested. They were rewarded mortgage in advance for years, how about if storm. Those with other liquid assets the bank still no leniency. If suddenly able to the remain invested. They were rewarded estill in has advance for has years, how about if 2. How safe is it? the storm. Those with other liquid assets no leniency. If suddenly (Is it guaranteed or insured?) as the market rebounded and recovered I just coast on my mortgage payments for a (Is it guaranteed or insured?) were able to remain invested. They were they experience a financial setback, the bank aswere theable market rebounded ast on my mortgage payments for a Home equity Home equity fails all three tests of a prudent to remain invested.and Theyrecovered were erience a financial setback, the bank fails all three tests of a prudent fully within 90 days. However, those without few months?” They get theto same answer every investment. Let’s examine each of these core rewarded as the market rebounded and will not care. go the bank and within 90the days. However, those without ths?”They They get theThey same answer every rewarded as market rebounded and are. can go to thecan bank and 3.rate What rate of return investment. Let’s examine each of thesecan core fully 3. What of return can recovered fully withinto90 days. However, plead, “I‘Fat never thought in ajust million years this liquidity were forced sell while the market time... chance!’ Banks don’t work that recovered fully withinto90 However, never thought in ajust million liquidity were forced selldays. while the market at chance!’ Banks don’tyears workthis that elements in elements in more detail tounderstand better understand I expect? more detail to better those without liquidity were forced to sell would happen to me, but it did. I’ve been I expect? was down, causing them to accept significant Regardless ofyou’ve how paid your why home equity fails the tests of a prudent those without liquidity were forced to sell ppenway. toofme, but it did. I’vemuch been was down, causing them to accept significant ardless how much paidyou’ve your while the market was down, causing them paying my mortgage in advance for years, why home equity fails the tests of a prudent while losses. In Missed Fortune, Doug Andrew mortgage or how market was down, causing them tells mortgage in down advance for many years,extra payments investment, Home equity and, fails allmore three tests of a prudent importantly, why losses.the In accept Missed Fortune, Doug Andrew ey down how to significant losses. In Missedtells howorabout ifmany I just extra coast payments on my mortgage Home fails allmore three tests of a prudent and, importantly, why the story of a young couple who learned what made, nextmortgage month’s paymentinvestment, is stillequity to accept significant losses. In Missed ut if I you’ve just coast on my investment. Let’sbenefit examinebyeach of these core home-owners separating thestory the of a young made,payments next month’s payment still gethome-owners Fortune, Dougcouple Andrewwho tellslearned the storywhat of a for a few months?”isThey the investment. Let’s examine each of these core benefit by separating the Fortune, Doug“The Andrew tells the story ofLiquidity”. a s for adue few months?” They get the he calls $150,000 Lesson onhe inanswer its entirety notime... matter what. elements in their morehome. detail to better understand from who Lesson learned on what calls sameno every ‘Fat chance!’elements equity callsyoung “The couple $150,000 Liquidity”. sswer entirety matter what. more detail to better understand he equity fromin their home. youngIncouple whocouple learned what he calls home every time... ‘Fat chance!’ why home equity fails the tests of a prudent 1978 this built a beautiful “The Lesson Liquidity”.home In Banks just don’t work that way. Regardless why home equity fails the tests of a prudent In“The 1978 this$150,000 couple built aonbeautiful $150,000 Lesson on Liquidity”. In st don’t work that way. Regardless investment, and, more importantly, why that would be featured in Better Homes and 1978 this couple built a beautiful home that of how separate much you’veequity paid yourfrom mortgage investment, and, more importantly, why Why that would be featured in Better home Homesthat and 1978 this couple built a beautiful uch you’ve paid your mortgage home-owners benefit by separating the Separating equity to increase Gardens. couple’s home appreciated would be The featured in Better Homes and down or how many extra payments you’ve home-owners benefit by separating the Gardens. The couple’s home appreciated wouldinGardens. be featured in Better Homes and how made, many payments you’ve equity from their home. your extra home? The couple’s home appreciated next month’s payment is still due in its value, and, by 1982, it was appraised for liquidity equity from their home. The by couple’s home appreciated ext month’s still due in its inGardens. value, and, 1982, it was appraised for in value, and, by 1982, it was appraised for entiretypayment no matteriswhat. just under $300,000. They had accumulated In the in value, and, by$300,000. 1982,They it was appraised for no matter what. book, Missed Fortune, Doug What just under $300,000. had accumulated is the biggest secret in real estate? under They had accumulated Separating equity to ajust significant amount of equity, not because book, Missedsuggests Fortune, people Doug strongly Andrew What is the biggest secret in real estate? just under $300,000. They had accumulated Separating equity to a significant amount of equity, because a significant amount of equity, notnot because Your mortgageliquidity is a loan against your income, Why separate fromYour increase they had been making extra payments on suggests people equity strongly consider separating as much equity a significant amount of equity, not because mortgage is a loan against your income, they had been making extra payments on eparate equity from increase liquidity not a loan against the value of your house. they had been making extra payments on the property, but because market conditions separating as can much your they had making extra payments on What is thethe biggest secret in real estate? Your as theyhome? possibly from equity their house, thebeen property, but because market conditions not and a loanWithout against valuein of your house. an income, many cases you cannot the property, but because market conditions ome? improved over that four-year period. What is the biggest secret in real estate? Your possibly can from their house, and mortgage is a loan against your income, not a the property, but because market conditions improved over that four-year period. place it overMissed in a cash position. in the an income, In the book, Fortune, DougWhy Andrew Without in many cases you cannot loan. If you suddenly experienced improved mortgageget is a aloan against your not aWithout loan against the value ofincome, your house. improvedover overthat thatfour-year four-yearperiod. period. over in a cash position. Why inhave the theget ok, Missed Fortune, Andrew world would youDoug want to equity suggests people strongly consider a loan. If you suddenly experienced This couple thought they had the world by difficult financial times, would your rather loan against the value of your house. Without an income, in many cases you cannot get a This couple thought they had the world ould youstrongly want have the asequity people consider separating asto much equity they possibly removed from your home? This couple thought they had the world by difficult financial times, youryou rather the tail. tail. TheyThey hadthey a home valued at $300,000 have $25,000 of would cash to help make your in many cases youexperienced cannot get a loan. If you suddenly difficult This couple the valued world at by the thought had had a home gfrom as can much equity theyand possibly from their as house, place it overan in income, a your home? tail. They had a home valued at $300,000 have of cashexperienced to help you make loan. $25,000 If you suddenly difficultyour the by the tail. They had a home valued at their house, and place it over in a
eparate equity from ome?
Separating equity to increase liquidity
“It’s better better to to have haveaccess access “It’s to equity or or value value of ofyour yourhome home to the the equity and not need need it, it, than than to toneed needititand and and not not be be able able to to get getat atit.” it.” not
with and second mortgages owing only $300,000 with first and second mortgages withfirst first and second mortgages owingowing only $300,000 with first and second mortgages owing only $150,000. They had “made” $150,000 in four $150,000. They had “made” $150,000 in only$150,000. $150,000.They Theyhad had“made” “made”$150,000 $150,000ininfour four four short years. shortyears. years. short short years.
They had the misconception that the They had the misconception that the They had the misconception that the They had the misconception that theequity equityinin equity in their home had a rate of return when, their home had a rate of return when, in equity their home had of a rate of return theirinhome had a rate return when, when, infact, fact,initinit act, it was just a number on a sheet of paper. wasitjust number on a on sheet of paper. fact, wasajust a number a sheet of paper.
was just a number on a sheet of paper.
Then, a aseries ofofunexpected events reduced Then, aseries ofunexpected events reduced Then, events reduced Then, aseries series ofunexpected unexpected events reduced heir income to almost nothing for nine months. their income to almost nothing for their income to almost nothing for nine months. their income to almost nothing for nine nine They couldn’t borrow money totokeep their They couldn’t borrow money keep their months. They couldn’t borrow money totokeep months. They couldn’t borrow money keep mortgage payments current without mortgage paymentspayments currentbecause because without their current because theirmortgage mortgage payments current anan income they did not have the ability totobecause income they did not have the ability without ananincome they did not the ability without income theythey didhad nothave have the ability epay. repay.Within Withinsixsixmonths monthsthey hadsold soldtwo two to repay. Within six months they had sold two to repay. Within six months they had sold two other otherproperties propertiestotobring bringtheir theirmortgage mortgageout outof of other properties to bring their mortgage out other properties to bring their mortgage out delinquency. They realized that ininorder delinquency. Theysoon soon realized that orderto to of delinquency. They soon realized that inin protect their $150,000 of equity they would have of delinquency. They soon realized that protect their $150,000 of equity they would have oto sell their home. As Murphy’s Law would have order to protect their $150,000 of equity they sell their home. As Murphy’s Lawofwould order to protect their $150,000 equityhave they t, it, the would have to sell their home. As Murphy’s the would have to sell their home. As Murphy’s previously strong real market previously strong real estate marketturned turned soft. Law would have it,estate the previously strongsoft. real
Law would have it, the previously strong real estate estatemarket marketturned turnedsoft. soft.
Although Althoughthey theyreduced reducedtheir theirasking askingprice priceseveral several imes – from $295,000 down to $195,000 they times – from $295,000 down to $195,000 they Although they reduced their asking Although they reduced their asking––price price could not find a buyer. Sadly, they gave up the could not find a buyer. Sadly, they gave up the several severaltimes times – – from from $295,000 $295,000 down down toto home ininforeclosure totothe mortgage lender. home foreclosure the mortgage lender. $195,000 $195,000– they – theycould couldnot notfind findaabuyer. buyer.Sadly, Sadly, Sometimes Sometimessad sadstories storiesonly onlyget getsadder. sadder.The Thetwo two they gave up the home in foreclosure to they gave up the home were in foreclosure to the the mortgages ininthe mortgagesononthe theproperty propertywere theamounts amounts mortgage lender. Sometimes sad stories mortgage lender. Sometimes sad stories ofof $125,000 $125,000and and$25,000, $25,000,respectively. respectively.The The only get sadder. The two mortgages on only get sadder. The two mortgages on the the second mortgage holder outbid the first one second mortgage holder outbid the first one property were in the amounts of $125,000 property were in the amounts of $125,000 atat the ensuing auction, feeling that, like the ensuing auction, feeling that,much much like he original owners, position. the original owners,itrespectively. itwas wasininaagood good position. and $25,000, The second and $25,000, respectively. The second Knowing thatthe the house hadbeen been appraised for Knowing that house had appraised mortgage holder outbid thefirst first one atatfor the mortgage holder outbid the one the $300,000, and theobligation obligation owing waslike onlythe $300,000, and the owing was only ensuing auction, feelingthat, that, much like the ensuing auction, feeling much $150,000, it thought it could turn around and $150,000, it thought it could turn around and originalowners, owners,ititwas wasininaa good good position. position. original sell theproperty propertytotocover coverthe theinvestment. investment.ItIttook took sell the Knowingthat thatthe thehouse househad hadbeen beenappraised appraised Knowing nine longmonths monthstotosell, sell,during duringwhich whichtime timethe the nine long $300,000, and the obligation owing forforwas $300,000, obligation owing lender wasforced forcedtoand topay paythe thefirst firstmortgage mortgage and ender the and was only$150,000, $150,000, thought itofcould could turn was only ititthought turn also accrued anadditional additional $30,000itof interest also accrued an $30,000 interest around and sell the property cover the around and sell property toto cover the and penalties. thethe time thehome home finally sold, and penalties. ByBy the time the finally sold, investment. It took nine long months to sell, less the $30,000 in accrued indebtedness, guess investment. It took nine long months to sell, ess the $30,000 in accrued indebtedness, guess
during which wasbalance forced toof toof who got stucktime withthe the lender deficiency balance during which was forced who got stucktime withthe the lender deficiency $30,000 on their creditand report? The original pay the alsoThe accrued an $30,000 on mortgage their creditand report? original pay the first first mortgage also accrued an owners, of course! additional of interest interest and and penalties. penalties. owners, of$30,000 course! of additional $30,000 By the time the home finally sold, less the the ByThis thecouple time the homehad finally sold, less not only a foreclosure This couple not only had a foreclosure guess $30,000 in accrued indebtedness, $30,000 intheir accrued indebtedness, appear on credit report report for for seven sevenguess years, appear on their credit years, who got stuck with the deficiency balance who got stuck with the deficiency balance ofof the report also showed a deficiency balance the report also showed a deficiency balance $30,000 on credit report? The original $30,000 on their theiron credit report? owing on home theyThe hadoriginal lost owing $30,000 $30,000 aa home they had lost owners, of course! nearly one year owners, of course!
nearly one year earlier. In time of financial financial setback setbackthey theylost lost earlier. In aanot time of This couple only had aa foreclosure foreclosure appear This couple not only had appear one of their most valuable assets due to a one of their most valuable assets due to a on their credit report for seven seven years, the on their credit report for years, the lack of they had had separated their lack of liquidity. liquidity. IfIf they separated their report also showed a deficiency balance owing $150,000 in equity andbalance repositioned report also showed deficiency owing $150,000 in home homeaequity and repositioned $30,000 on a home they had lost nearly one it into a safe side account, they would have $30,000 on a side homeaccount, they had lostwould nearlyhave one it into a safe they easily been to make make their mortgage mortgage year earlier. aa time time of financial financial setbackthey they easily beenIn able to their year earlier. Inable of setback payments and prevented this series series ofdue to lost one of their most valuable assets payments and prevented this of lost one of their most valuable assets due to events. aaevents. lack they had had separated separatedtheir their lack of of liquidity. liquidity. IfIf they At this point in the story, story, Doug Doug admits admitsthe the At this point in the $150,000 in home equity equity and and repositioned repositioned $150,000 young was really really he he and and his hiswife, wife, young couple couple was ititSharee. into a safe side account, they would have into Despite objections account, they have objections fromwould hiseditor, editor, Sharee. Despite from his easily been able to make their mortgage easily make their mortgage Doug story remain inthe the book Doug insisted the story remain in book payments and prevented this series of events. payments this series of events. because his readers readers to toknow knowhe he because he wanted his understands the importance importanceof of understands first hand the At this story, Doug admits the the Atpositioning this point in the story, Doug admits financial instruments positioning assets in financial instruments young couple was really he and his wife, really heevent and ofof hisan young that in the the event anwife, that maintain maintain liquidity in Sharee. Despite objections from his editor, Sharee. objections from his editor, emergency. and Sharee Sharee had hadaccess access emergency. If Doug and Doug insisted remain the book book to home’sthe they could have used Doug storythey remain ininhave the to their their equity, could used it to weather the it to weather because he wanted his readers to know he because readers to know he financial storm until they could get back financial they the couldimportance get back ofof understands first hand the importance understands on their feet. Doug learned from hisown own on their learned from his positioning financial instruments instruments positioning assets in financial experience importance of of maintaining maintaining experience the importance that in the the event event ofof an an that maintain maintain liquidity in flexibility in order to ride flexibility ride out out market marketlows lows emergency. Sharee had access emergency. If Doug and Shareehighs. hadAnd, access and take take advantage of and of market market highs. And, tomost theirimportantly, they have used to their home’s equity, they could could have usedaa most importantly, he learned never to learned never toallow allow to financial storm until they ititsignificant to weather the financial storm until they significant amount of equity inin equity to to accumulate accumulate could could get back on their feet. feet. Doug Doug learned learned his property. property. his Home cash from the importance ofof Home is not the the same same as cashininthe the from hisequity own experience the as importance bank; only cash in the bank isis the bank; bank the same as maintaining in totosame ride out maintaining flexibility in order order rideas out cash in inlows Being house cash cash the bank. Being house rich richof and cash market advantage market market and take advantage ofand market poor is a dangerous position to be in. It is poor is position to be in. It is
highs. And, most importantly, learned better to have access to the equity or value o highs. most importantly, hehelearned betterAnd, to have access to the equity or value of your home and not need it, than to need it an never to allow a significant amount of equity yourtohome not need amount it, than toofneed it and never allowand a significant equity not be able to get at it. Keeping home equity accumulate hisproperty. not be able in toinhis get atproperty. it. Keeping home equity totoaccumulate safe is really a matter of positioning yourself t safe is really a matter of positioning yourself to
actinstead instead ofnot react market conditions over Home equityisofis not the same ascash cashin inthe the act react toto market over Home equity the same asconditions which you have no control. bank; only cash in the bank is the same as which youcash haveinno bank; only thecontrol. bank is the same as cash in the bank. Being houserich richand andcash cash cash in the bank. Being house Separating equity poor dangerous position Separating equity toto poor isisaadangerous position totobebein.in.It Itis is better to have access to the equity value increase safety principal better to have access to theofof equity ororvalue of of increase safety principal yourhome homeand andnot notneed needit,it,than thantoto need it and your need it and TheSeattle SeattleTimes, Times, inananarticle article published The in published notin ableto2004, toget getatreported, atit.it.Keeping Keeping homeequity equity not bebeMarch able home “Remember that in March 2004, reported, “Remember that safehousing isreally reallyprices amatter matter of positioning yourself safe is a of positioning yourself canand anddodo level housing prices can level off.off. actinstead instead of react to market conditions They sometimes decline – witness Southern totoThey act of react to market conditions sometimes decline – witness Southern over which you have no control. California just a little more than a decade over which you nomore control. California justhave a little than a decade
ago,when whenprices pricestook tooka a2020 percent ago, percent to to 3030 percentcorrective correctivejolt joltdownward.” downward.” Real estate percent Real estate equity is no safer than any other investment equity is no safer than any other investment whosevalue valueisisdetermined determined external whose byby anan external marketover overwhich whichwe wepersonally personally have market have nono The Seattle Times, an article published control. fact,due due tothe the hidden “risks life The Seattle inin article published control. InInTimes, fact, toan hidden “risks of of life,” real estate equity is not nearly as safe as man in March 2004, reported, “Remember that real estate equity is not nearly as safe as many in March 2004, reported, “Remember that otherconservative conservative investments and assets. other investments and assets. housing pricescan canand and dolevel leveloff.off. housing prices do homethat thatisiseither eithermortgaged mortgaged AAhome toto thethe hilthilt They sometimes decline witness Southern owned totally freeand and clear provides They sometimes decline – –witness Southern ororowned totally free clear provides thethe greatest safety for the homeowner. greatest safety for the homeowner. California just a little more than a decade ago, California just a little more than a decade ago,
Separatingequity equitytotoincrease increase Separating safetyofofprincipal principal safety
whenprices pricestook tooka a2020percent percenttoto3030percent percent when correctivejolt joltdownward.” downward.”Real Realestate estateequity equity corrective is no safer than any other investment whose is no safer than any other investment whose valueisisdetermined determinedbybyananexternal externalmarket market value “Home equity is not “Home equity is not over overwhich whichwe wepersonally personallyhave havenonocontrol. control. InInfact, due to the hidden “risks of life,” real fact, due to the hidden “risks of life,” real the thesame sameas ascash cashininthe the estate equity nearly asassafe many estatebank. equityisisnot not nearly safe many Only cash inasinas the bank. Only cash the other investments and assets. other conservative conservative investments andas assets. bank isis the bank thesame same as AAhome homethat thatisiseither eithermortgaged mortgagedtotothethehilthilt cash ininand the bank.” cash the bank.” ororowned free clear provides ownedtotally totally free and clear providesthethe greatest greatestsafety safetyforforthe thehomeowner. homeowner.
“Home equity is not the same as cash in the bank. Only cash in the bank is the same as cash in the bank.”
the Enron Corporation collapsed a few years ago, and thousands lost their jobs and homes, again in Houston, Texas. What would happen in the Seattle area if Microsoft or Boeing had major lay-offs? Money you give the bank is money you’ll never see again unless you refinance or sell. When the people in Houston pleaded, “Mr. Banker, I’ve been making extra mortgage payments for years. I’m well ahead of schedule. Will let you let me coast for a while?” The bank replied, “Fat Chance!”
Americans typically believe home equity is a very safe investment. In fact, according to a recent study, 67% of Americans have more of their net worth in home equity than in all other investments combined. However, if 100 financial planners looked at a client portfolio that was 67% weighted in a single investment, 99 out of 100 of them would immediately To reduce the risk of foreclosure recommend the client diversify to reduce during unforeseen set-backs, their risk and increase safety of principal. keep your mortgage balance as Holding large amounts of home equity puts the homeowner at unnecessary risk. This risk high as possible could be greatly reduced by diversifying their Is your home really safe? Unfortunately, home equity into other investments. many home buyers have the misconception An example of the necessity of keeping your that paying down their mortgage quickly home’s equity safely separated from your is the best method of reducing the risk property can be can be found in Houston, of foreclosure on their homes. However, Texas. When oil prices fell to all time lows in reality, the exact opposite is true. As in the early 1980’s the city of Houston was homeowners pay down their mortgage, hit hard. Thousands of workers were laid off they are unknowingly transferring the risk and ultimately forced to sell their homes. from the bank to themselves. When the With a glut of homes on the market, housing mortgage balance is high, the bank carries prices plummeted. Unfortunately, there the most risk. When the mortgage balance were far too many sellers and far too few is low, the homeowner bears the risk. With a buyers. Homeowners were unable to sell and low mortgage balance the bank is in a great unable to make their mortgage payments. position, as they stand to make a nice profit As a result, 16,000 homes were foreclosed. if the homeowner defaults. In addition to Did these 16,000 families suddenly become assuming unnecessary risk, many people who bad people? No, they just couldn’t make their scrape up every bit of extra money they can to mortgage payments. Just prior to this series apply against principal often find themselves of events many of these people were making with no liquidity. When tough times come, extra principal payments. Unfortunately, they they find themselves scrambling to make could not coast on those extra payments, and their mortgage payments. with so many houses on the market for sale, Assume you’re a mortgage banker looking some people literally had to walk away from at your portfolio, and you have 100 loans their home. that are delinquent. All of the loans are The equity these people had worked so hard for homes valued at $300,000. Some of to build up was lost completely. They learned the loan balances are $150,000 and some the hard way that home equity is fragile, and are $250,000. Suddenly, there is a glut in certainly not as safe as they once thought. the market and the homes are now worth Could this happen today? Just look at when $200,000. Which homes do you as the banker foreclose on FIRST? The ones owing the least
amount of money, of course. After all, as a banker you’d make money taking back those homes, however you’d lose money trying to sell a home for $200,000 that still owed $250,000 on it. Banks have been known to call delinquent homeowners with high mortgage balances and offer assistance, “We understand you are going through some tough times, is there anything we can do to help you? We really want you to be able to keep your home.” The last thing they want to do is take back a home that they will lose money reselling. It’s interesting to note, during the Great Depression, the Hilton chain of hotels was deeply affected by the stock market crash and couldn’t make their loan payments. What saved them from financial ruin? They were so leveraged, in other words they owed so much more on their property than it was worth, that the banks couldn’t afford to bother wasting their time foreclosing on it. The Hiltons understood the value of keeping high mortgage balances thereby keeping the risk on the banks. The Houston homeowners would have been better off if they had removed a large portion of their equity and put it in a safe and liquid side fund, accessible in a time of need. Ask yourself, if you owned a $400,000 home during an earthquake in California (and you didn’t have earthquake insurance), would you rather have your equity trapped in the house or in a liquid, safe side fund? If it were trapped in the home, your equity would be lost along with the house.
Separating equity to increase rate of return What do you think the rate of return on home equity was in Seattle for the last 3 years? What about Portland? Careful, this is a trick question. The truth is, it doesn’t matter where you live or how fast the homes are appreciating, the return on home equity is always the same, ZERO. We have a misconception that because
our mortgage our home home appreciates, appreciates, or our mortgage balance isis going down, the equityhome has aa the appreciation. home balance going down, that thatTherefore, the equity has thehome’s home’s appreciation. Therefore, rate ofof return. not Home equity equity simply sits the does rate return. That’s notin true. HomeItItequity equity simplyThat’s sits idle idle intrue. the home. home. does not earn any rate of return. Assume you has NO rate of return. Home values fluctuate rate of Home return.values Assume you hasnot NOearn rateany of return. fluctuate have home $100,000 which you due toto amarket conditions, not due to toyou the have amarket home worth worth $100,000 due conditions, not which due the own free and clear. IfIf the home appreciates own free and clear. the home appreciates mortgage balance. Since the equity in the mortgage balance. Since the equity in the 5%, you own an asset worth $105,000 at 5%, has you own an assetto $105,000 at home the value, home has no no relation relation toworth the home’s home’s value, the end of the year. the end of the year. itit isis inin no the home’s home’s no way way responsible responsible for for the appreciation. Therefore, home equity simply appreciation. Therefore, home equitythesimply Now, Now,assume assume you you had had separated separated the sits idle ItIt does earn anyitrate rate sits$100,000 idlein inthe theofhome. home. does not not earn any home placed in $100,000 of home equity equity and and placed it in ofofareturn. Assume you have a home worth return. Assume you have a home worth safe, conservative side account earning a safe, conservative side account earning $100,000 which you free clear. the 8%. side beclear. worth $100,000 you own ownwould free and and IfIf the 8%.Your Yourwhich side account account would be worth home appreciates 5%, you own an asset worth $108,000 at end of Youworth still home appreciates ownyear. an asset $108,000 at the the5%, endyou of the the year. You still own the home, which appreciated 5% and $105,000 at the end of the year. own theathome, which appreciated 5% and $105,000 the end of the year. isisworth the equity equity worth $105,000. $105,000. By By separating separating the
Now, assume you had separated the you was also also Now, assumeaa new you asset had which separated the youcreated created new asset which was $100,000 of home equity and placed it in able aa rate of $100,000 of home and Therefore, placed it in aa ableto to earn earn rateequity of return. return. Therefore, safe, conservative side account earning 8%. you earned than you would would safe, conservative sidemore account 8%. you earned $8,000 $8,000 more thanearning you have if the money were left to sit idle Your side would $108,000 have the money werebe to sit$108,000 idle Your sideif account account would beleftworth worth the home. To be fair, you do have atatinthe end of the year. You still own the inthe theend home. fair, you aa the of To thebeyear. You do stillhave own mortgage payment you didn’t have before. home, which appreciated 5% is before. worth mortgage payment you didn’t have home, whichsince appreciated 5% and and is worth However, interest are relative, relative, However,By since interest rates rates are $105,000. separating the equity you $105,000. By separating thereturn equity you ififwe are assuming aa rate of of 8%, 8%, we are assuming rate of return of created aa new asset was also able able to created new assume asset which which was also we can also aa strategic interest-to we can also assume strategic interestearn aa rate Therefore, you atearned earned earn rate of of return. return. Therefore, you only would be available 5%. onlymortgage mortgage would be available at if5%. $8,000 more than you would have the $8,000 moremortgage than youinterest would ishave the Also, since 100%if tax Also, since mortgage interest is 100% tax
moneywere wereleft lefttotosit sitidle idleininthe thehome. home.ToTobebe money fair, you do do have have mortgage payment deductible, thenet net costofofthe the moneyisyou isyou fair, you aa mortgage payment deductible, the cost money didn’t have This before. However, since interest only 3.6%. 3.6%. This produces 4.4% positive didn’t have before. However, since interest only produces aa4.4% positive spread between the cost of money and rates are relative, if we are assuming a rateofof spread betweenif the costassuming of moneyaand rates are relative, we are rate the earnings on that money. return 8%,we we can also assumeaastrategic strategic the earnings oncan thatalso money. return ofof 8%, assume interest-only mortgage would be available interest-only mortgage would be available atat The story gets muchmore more compelling The story gets much compelling 5%. Also, since mortgage interest 100%tax tax 5%. Also, since mortgage interest isis100% over time, although the mortgage debt over time, although the mortgage debt deductible,the thenet netcost costofofthe themoney moneyisisonly only deductible, remainsconstant, constant, throughcompound compound remains through 3.6%. This produces a 4.4% positive spread 3.6%. This the produces a 4.4% continues positive spread interest, sideaccount account interest, the side continues toto between the cost of money and theThe earnings between the cost of money and the earnings grow at ataafaster fasterpace paceeach eachyear. year. grow The on that money. onearnings that money. earnings on$100,000 $100,000ininyear year1 1are are on $8,000. Then in year 2, the 8% earnings
$8,000. Then in year more 2, the compelling 8% earningsover The story gets gets much much The story more In compelling on $108,000 are $8,640. year3,3,the theover on $108,000 are $8,640. In year time, although the mortgage debt remains time, although the mortgage debt remains earnings on$116,640 $116,640 8%are are $9,331. earnings on atat8% $9,331. constant, through compound interest, the constant, through compound interest, Since the mortgage debt remains the the Since the mortgage debt remains the side account continues grow ataaof faster same, thespread spread between thecost cost the side account continues toto grow at same, the between the offaster the pace each year. The earnings on $100,000 mortgage money and the pace each year. The earnings on $100,000 mortgage money and the inearnings year 11 are are $8,000. Theninin year2,2,the the8% 8% earnings on$8,000. theseparated separated equity in year Then year on the equity continues to widen further in the earnings onto $108,000 are$8,640. $8,640. year3,3, continues widen further in the InInyear earnings on $108,000 are homeowner’s favor every year. If we allow the earnings on $116,640 at 8% are $9,331. everyatyear. If we$9,331. allow thehomeowner’s earnings on favor $116,640 8% are home equity to remain idle in the home, Since the mortgage debtidle remains thesame, same, home equity to remain in thethe home, Since the mortgage debt remains we give giveup upthe theopportunity opportunitytotoput putitittoto we the spread between the cost of the mortgage thework spread thegrow cost of thecompound. mortgage andbetween allowitittoto and work and allow grow and compound. money and the earnings on the separated money and the earnings on the separated equity continueswould widen further the equity continues toto widen further ininoff the Homeowners actually bebetter better off Homeowners wouldevery actually be homeowner’s favor year. If we allow homeowner’s favor every year. If we allow buryingmoney money theirbackyards backyards than burying inintheir than
homeequity equitytotoremain remainidle idlein inthethe home, home home, wewe giveupup theopportunity opportunity it to work paying down their mortgages, money give the totoputput it since to work andand paying down their mortgages, since money allowitinittointo grow andcompound. compound. buried the backyard liquid (assuming allow grow and buried the backyard is is liquid (assuming
youcan canfind findit),it),and and safe (assuming you itsits safe (assuming Homeowners would actuallybeneither bebetter better off Homeowners would actually no one else finds it). However, no one else finds it). However, neither is isoff buryingamoney intheir their backyards than paying earning amoney rateofin of return. actually losing burying backyards than paying earning rate return. It’sIt’s actually losing downdue their mortgages, since money buried value due to inflation. Few people today down their mortgages, since money buried in in value to inflation. Few people today the backyard is liquid (assuming you can find bury money in the back yard or under their the backyard liquid (assuming you can find bury money inisthe back yard or under their mattresses, because they have confidence anditsitssafe safe (assuming no one else finds mattresses, because theyno have confidence it),it),and (assuming one else finds it).it). in thebanking banking system. They also understand However, neither is earning a rate of return. in the system. They also understand However, neither is earning a rate of return. idlemoney moneyloses loses value while invested idle value while invested actually losing value dueto to inflation. Few It’sIt’sactually losing value due inflation. Few money grows and compounds. As Albert money grows and compounds. As Albert peopletoday todaybury burymoney moneyininthethe back yard people back yard or or Einstein said,“The “The most powerful force Einstein said, most powerful force in in under their mattresses, because they have under their mattresses, because theyAfter haveall, theuniverse universe compound interest.” the isiniscompound interest.” After all,also confidence the banking system. They confidence in the banking system. They also homeswere werebuilt built house families, store homes toto house families, notnot store understand idlemoney money losesto value while understand idle loses value while cash. Investments were made store cash. cash. Investments were made to store cash.
investedmoney moneygrows growsand andcompounds. compounds.As As invested Albert Einstein said, “The most powerful force Takenfrom froma adifferent different angle, suppose you Albert Einstein said, “The mostsuppose powerful force Taken angle, you inthe the universe is compound interest.” After offered investment that could never inwere universe is compound interest.” After were offered anan investment that could never go up in value, but might go down. How all,up homes were built house families, go in value, but might down. How notnot all, homes were built totogo house families, much of it would you want? Hopefully none. store cash. Investments were made tostore store much of it would you want? Hopefully store cash. Investments were made tonone. Yet, this is home equity. It has no rate of cash. Yet, this is home equity. It has no rate of cash. return, so it cannot go up in value, but it could return, so it cannot go up in value, but it could go down if the real estate market Taken from adifferent different angle, suppose go down ininvalue if the real estate market Taken from avalue angle, suppose youyou declines or the homeowner experiences an were offered an investment that could never declines or the an were offered anhomeowner investment experiences that could never uninsured loss (e.g. an earthquake), disability, value, butmight might down. How much uninsured loss but (e.g. an earthquake), disability, gogoupupforeclosure ininvalue, gogo down. How much orora aforeclosure
5%.we It’sgive whatupmakes millionaires, millionaires! $100,000 of equity in of it would you want? Hopefully none. Yet, this TheLet’s home, the “opportunity” to earn a The power of leverage costsayofyou nothadborrowing Learn to be your own banker. By using the your home that could be separated. Current
is home equity. It hasano ratecan of return, so it 5 percent return on the money. Let’s be clear, buying home be a great (employment cost vs.isopportunity cost) principles that banks and credit unions use, mortgage interest 5%, so the cost of that cannot go up in value,thebutwealthy it could gothe down investment. However, buy you can amass a fortune. A bank’s greatest money would be $5,000 per year (100% tax By separating the equity we give it new life. in value if as thelittle realofestate market declines home with their own money as or When homeowners separate equity to assets are its liabilities. You can substantially deductible). Rather than bury the $100,000 We give ourselves the opportunity to put it to possible, leaving the majority ofan their cash in the homeowner experiences uninsured reposition it in a liquid, safe,going side to account, net worthon byit.optimizing in the backyard, we are put it toa workenhance and earnyour something Assumingthe a other investments where it’s liquid, safe, and loss (e.g. an earthquake), disability, or a mortgage payment is created. The mortgage assets that you already have. By being your work, or “employ” it. If I were an employer, 28 percent tax bracket, the net employment earning a rate of return. One of the biggest foreclosure own banker you can make an extra $1 Million why would I be willing hire an assistant payment is considered the to Employment Cost. cost for is not 5%, but 3.6%, or $3,600 per year misconceptions homeowners have is that their retirement. for $35,000 per year? The expectation is I What many people don’t understand is when home is the best investment they ever made. after taxes (mortgage interest is 100% tax am going to be able to grow my business If you purchased a home in 1990 for $250,000 we leave equity trapped in our home, we incur deductible). It’s not too difficult to find tax and earn a profit on it. As a business owner, to create an extra and sold it in June of 2003 for $600,000, that the same cost, but we call it a lost Opportunity free How or tax deferred investments earning I believe that by investing in an assistant I Let’s be clear, buying a home can be a Cost. represents a gain of 140%. During the same dollars fortaxretirement will earn a return that’s greater than the costmoremillion than 3.6%. Using the benefits of a period, the Dow Jones grew fromthe 2590 to 9188, great investment. However, wealthy of employing that assistant. If we choose to you can create your own arbitrage that’s parked in your home doing mortgage, By repositioning $200,000 into an equity abuy gainthe of 255%. realityashere is that homeThewith little of financing their The money leave the $100,000 of equity in our home, by management borrowing ataccount one rate earning with aand financial advisor could be put to work earning you your was the investment decision own home money as best possible, leaving the nothing we incur almost the same cost. The only you can achieve a net gain of $1 million investment returns at a slightly higher rate. that you ever made. When you purchased the something. majority of their cash in other investments difference is, instead of referring to that cost over thirty years.and Assume separate the It’s what the banks credityou unions do all $250,000 house in 1990, you only put $50,000 employment cost, it is referred to as an where it’s liquid, safe, and earning a rate of Let’sassay $200,000 of home equity using a mortgage you had $100,000 of equity in down. The $50,000 cash investment produced a borrow our money at 2% and opportunity cost. By leaving the equity in thethe time.aThey return. One of the biggest misconceptions 5% interest rate. If the $200,000 profit of $350,000. That is a total return of 600%,your home that could be separated. Current thenwith loan it back to us at 5%. It’s what makes home, we give up the “opportunity” to earn a grows homeowners have is that home is mortgage at a conservative rate of 6.75% per far outpacing the measly 255%their earned by the interest is 5%, so the cost of that millionaires, millionaires! Learn to be your 5 percent return on the money. year, it will be worth $1,419,275 in 30 years. the best investment they ever made. If you stock market. money would be $5,000 per year (100% tax own banker. By using the principles that After deducting the $216,000 in interest purchased a home in 1990 for $250,000 deductible). Ratherthe thanequity bury the $100,000 By separating we give it newinlife. banks and credit use, youmortgage, can amassyou payments andunions the $200,000 and sold it inofJune 2003 for $600,000, the backyard, The cost notofborrowing we are going put it to work, or it toa fortune. We give ourselves the to opportunity to put A $1,003,275 bank’s greatest assetsaccount. are itsA still have left in your that represents acost gainvs. of 140%. During cost) the “employ” work it. and on why it. Assuming If Iearn weresomething an employer, would I a liabilities. (employment opportunity net gain over one million enhance dollars. your Youofcan substantially same period, the Dow Jones grew from be willing 28 percent employment to hiretax anbracket, assistantthe fornet $35,000 per net worth by optimizing the assets that you When homeowners separate equity to reposition cost is not 5%, but 3.6%, or $3,600 year 2590 to 9188, a gain of 255%. The reality year? The expectation is I am going to beper able Thishave. example simplyyour shows timeyou already By being owna one banker it in a liquid, safe, side account, a mortgage after taxes (mortgage interest is 100% tax here is that financing your home was the to grow repositioning of equity. Imagine how the my business and earn a profit on it. As an extra $1 Million for retirement. payment is created. The mortgage payment is deductible). It’s not too difficult to find tax can make best investment decision that you ever a business numbers grow for individuals that harvest owner, I believe that by investing in considered the Employment Cost. What many free or tax deferred investments earning and reposition their home equity every 5 made. When you purchased the $250,000 an assistant I will earn a return that’s greater people don’t understand is when we leave more than 3.6%. Using the tax benefits years as their home continues to appreciate! house trapped in 1990,inyou putwe$50,000 down. equity ouronly home, incur the same thanofthe cost of employing that assistant. a mortgage, you can create your ownIf This is how the wealthy manage their home The $50,000 investment produced cost, but we callcash it a lost Opportunity Cost. a we choose to leave the $100,000 equity arbitrage by borrowing at oneofrate and in equity to continually increase their net worth. profit of $350,000. That is a total return of our home, earningweinvestment returns at a slightly incur almost the same cost. The Conversely, if the same $200,000 $200,000 into an were equityleft The money that’s parked in your255% homeearned 600%, far outpacing the measly rate.is, It’sinstead what the andtocredit only higher difference of banks referring that By repositioning to sit idle in the home for 30 years, it would doing could be put to work earning you account with a financial advisor by the nothing stock market. unions do all thecost, time.it They borrow ouran management cost as employment is referred to as not have earned a dime. something. money at 2% and then loan it back to us at you can achieve a net gain of $1 million
The power of leverage
How to create an extra million dollars for retirement
opportunity cost. By leaving the equity in the
“Homes areare designed house “Homes are designed totohouse “Homes designed to house families,not store cash.” families,not store cash.” families,not store cash.” “Investments areare designed “Investments are designed “Investments designed tostore store cash.” to cash.” to store cash.”
from the NASD: “Brokers are prohibited 5%. It’svacation what millionaires, millionaires! Let’s you had $100,000 ofnot equity in prohibited fromsay the NASD: “Brokers are not prohibited ofover itBetting would you want? Hopefully none. Yet,home this home, we give upmakes the “opportunity” toinclude earn a Betting the 401 condo The power of leverage the ranch; risking home 401 vacation condo from the NASD: “Brokers are not investment toto make the payments. thirty years. Assume separate the client recommendations. ThisThis would The cost of not borrowing investment make themortgage mortgage payments. over thirty years. Assume you separate thehome client recommendations. would include Betting the ranch; risking 401 vacation condo investment to make the mortgage payments. over thirty years. Assume you separate the client recommendations. This would from making such a recommendation per Learn to be your own banker. By using the incl your that could be separated. Current fromhome making such a recommendation per is home equity. It has no rate of return, so it 5 percent return on the money. from making such a recommendationadequately per $200,000 home equity using a mortgage explaining thethe risks of such an an equity to buy securities Let’s be clear, buying a home canusing be a great $200,000 ofofto home mortgage adequately explaining risks of such equity buy Many successful people the Northwest (employment cost vs.isinvestment opportunity cost) Many successful people in the Northwest $200,000 of home equity a mortgage adequately explaining the risks se, so long as the reasonably equity to buy securities principles that banks andin credit unions use,such mortgage interest 5%,Money. so theiscost of that se,equity sose, long as the investment is reasonably Many successful people in the of Northw Home is Serious We don’t Home equity is Serious Money. We don’t so long as the investment is reasonably cannot go up in value, but it could go down investment. However, wealthy buy the Homewould equity is Serious Money. We don’t with a5% 5%ainterest interest rate.the grows investment, which are significant, to to thethe dream ofamass retiring buying a it second with awith rate. Ifrate. the grows which are significant, dream of retiring and anew second suitable for inin general, and it tax is you can a and fortune. A bank’s greatest money be $5,000 per year (100% 5% If$200,000 thealert, $200,000 which are significant, to Recently theinterest NASD issued an “… separating the equity webuying give suitable forinvestment investment general, and itand isBy itinvestment, dream of retiring and buying alife. second Recently the NASD issued an alert, “… or“…grows gamble home equity. Liquidity and safety suitable for investment in general, is investment, gamble home equity. Liquidity and safety Recently the NASD issued an as alert, in value if the real estate market declines home with as little of their own money When homeowners separate equity to at a conservative rate of 6.75% per year, it investor.” The NASD simply wants to ensure home in Arizona or Hawaii. With one gamble home equity. Liquidity and safety at because abecause conservative rate of 6.75% per year, it investor.” The NASD simply wants to ensure home in Arizona or Hawaii. With one suitable for the specific customer. In order to assets are its liabilities. You can substantially deductible). Rather than bury the $100,000 we are are concerned concerned that investors suitable for the customer. In order to give at because a leaving conservative of 6.75% per year,are it the The NASDorsimply wants home in Arizona Hawaii. With oneen We ourselves the opportunity to put it toto we that investors forspecific the specific customer. toinvestor.” key when separating we arerate concerned that investors possible, the majority of30 their cashAfter in the homeowner experiences an uninsured are the key philosophies when separating million dollars or more saved inadvice. their reposition itsuitable inphilosophies akey liquid, safe, side to account, a In order will be worth $1,419,275 in years. consumers are receiving prudent are the philosophies when separating million dollars or more saved in their determine suitability, a broker should enhance your net worth by optimizing the in the backyard, we are going put it to who must rely on investment returns to will be worth $1,419,275 in 30 years. After consumers are receiving prudent advice. determine suitability, a broker should million dollars or more saved in their who must rely on investment returns to toAfter will beanmust worth $1,419,275 insafe, 30returns years. consumers are receiving prudent advice. and earnthey something onretire it. Assuming a determine suitability, aisbroker shouldworkIRA/401Ks, home equity. Rate return aemployer, distant who rely onit’s other investments where liquid, and decide to and buybuy loss (e.g. earthquake), disability, orenda mortgage home equity. Rate aobjectives, payment is ofcreated. consider the client’s objectives, deducting themortgage $216,000 ininvestment interest payments assets that you already have. Byto being your work, or “employ” it.ofIfinvestment Ireturn were anismortgage IRA/401Ks, they decide to retire and home equity. Rate of The return isdistant aobjectives, distant make their mortgage payments could IRA/401Ks, they decide retire and bu consider the client’s investment deducting the $216,000 in interest payments make their payments could end 28 percent tax bracket, the net employment consider the client’s investment deducting the $216,000 in interest payments make mortgage could end earning a rate their of return. One ofpayments the biggest third benefit. itthe isisto not necessary oror the vacation home where they willwill spend foreclosure third benefit. Also, itstatus, not necessary financial status, tax and any other own banker you can make anthey extra $1spend Million why would IAlso, be willing hire an assistant the vacation home where payment isfinancial considered Employment Cost. up defaulting on their their home loans ifif their and the $200,000 mortgage, you still have third benefit. Also, it is not necessary or the vacation home where they will spe financial status, tax status, and any other up defaulting on home loans their and the $200,000 mortgage, you still have status, tax status, and any other costTax is not 5%, but 3.6%, or $3,600 perthey year misconceptions homeowners have that their defaulting on their homeis loans if their andupthe $200,000 mortgage, you still have toa to their winters. What surprise when recommended invest intoinmake highly volatile deductions information ato firm uses suitable fordeductions retirement. for $35,000 per year? The is volatile I Tax their winters. What a surprise when they the investments decline and they A are unable to recommended invest highly volatile What many people don’t understand ishighly when Tax deductions to $1,003,275 leftdecline in your account. net gain of their winters. What a surprise when information ato firm uses toexpectation make suitable recommended to invest in investments and they are unable to information a firm uses to make suitable $1,003,275 left in your account. A net gain of home is the best investment they ever made. investments decline and they are unable to after taxes (mortgage interest is 100% tax discover that to pay cash for a $350,000 $1,003,275 left in your account. A net gain of or aggressive investments. You can make client recommendations. This would include am going to be able to grow my business offset 401k withdrawals meet their monthly mortgage payments.” The discover that tothat paytocash for a $350,000 orThe aggressive investments. You would can make leave trapped in our home, we discover pay cash for a $350,0 client recommendations. This include over one million offset 401k withdrawals meet their monthly mortgage payments.” Thewe or equity aggressive investments. Youincur can make client recommendations. This would include offset 401k withdrawals IfThe you purchased adollars. home in 1990 for $250,000 meet their monthly mortgage payments.” power ofdollars. leverage over one million condo they need to withdraw nearly It’s not too difficult to nearly find tax over one million dollars. adequately explaining thea risks of such an deductible). and earn a profit on it. As business owner, thousands of dollars by simply borrowing at NASD is absolutely correct in advising againstthe condo they need to withdraw condo they need to withdraw nearly How tofrom create an extra adequately explaining the risks of such an at same cost, wedollars call a by lostsimply Opportunity thousands ofbut dollars byitsimply borrowing correct in advising against adequately explaining the risks of at such an andNASD soldNASD itisinabsolutely June of 2003 for $600,000, that thousands of is absolutely correct in advising against $500,000 theirinvestments 401K/IRA. What if Most successful retirees have the majority or tax deferred earning investment, areinsignificant, toborrowing the I free Iand believe thatwhich byatinvesting in an assistant separating equity if the client must relytime on 5% investing 5% safe conservative This example simply shows a one $500,000 from their 401K/IRA. What if maj Most successful retirees have the majority $500,000 from their 401K/IRA. What if investment, which are significant, to the Most successful retirees have the Let’s beseparating clear, buying a ifDuring home can beone a time separating equity ifsimply the client must rely on Cost. 5%will and investing at 5% in safe conservative This example simply shows athe one time investment, which are significant, to the instead represents a gain ofequity 140%. same million dollars for retirement the client must rely on they had purchased the condo 5% and investing at 5% in safe conservative This example shows a of their assets in their home equity and investor.” The NASD simply wants to ensure earn a return that’s greater than the cost more than 3.6%. Using the tax benefits of a the returns from their investment to make the instead they had purchased the condo fixed investments without ever going repositioning of equity. Imagine how the instead they had purchased the condo of15 their assets in their home equityby and investor.” The NASD simplysimply wants togoing ensure therepositioning returns from their investment to make thethe of their assets in their home equity period, the grew from 2590 to to 9188, investor.” Thewithout NASD wants to ensure great investment. the wealthy theDow returns from their investment make the fixed investments ever repositioning ofJones equity. Imagine how the years earlier, when itwithdrawing cost $175,000, fixed investments without ever ofHowever, equity. Imagine how consumers are receiving prudent advice. of employing that assistant. Ifhome we choose togoing mortgage payments. IRA/401Ks. Asyears theycreate start funds mortgage, you can your own arbitrage 15repositioning years earlier, when itwithdrawing cost $175,000, by The money that’s parked in your doing By $200,000 into an equity into securities. In general, individuals numbers grow for individuals that harvest 15 earlier, when it cost $175,000 consumers are receiving prudent advice. mortgage payments. IRA/401Ks. As they start funds a gain of 255%. The reality here is that financing consumers are receiving prudent advice. buyHome themortgage homegrow with as littlethat of don’t theirharvest IRA/401Ks. they start withdrawing fu using the equity As in their home? intoleave securities. In ofgeneral, individuals numbers grow for individuals harvest thesecurities. $100,000 equity in our home, into In general, individuals numbers for individuals that equity is payments. Serious Money. We from their IRA/401Ks, they are hit with a using the equity in their home? borrowing atthe one rate earning management account with aand financial advisor using equity in their home? could be put to work you by from should not invest home equityearning for “current and reposition home equity every 5 nothing Home equity istheir Serious Money. We don’t your home wasequity the best investment decision their IRA/401Ks, they are hit with a Home is Serious Money. We don’t own money as possible, leaving the from their tax IRA/401Ks, they the arekids hit wit incur almost the same cost. The only not invest home equity for “current andgamble reposition home equity every 5 should hometheir equity. Liquidity and safetyevery are should not the invest home equity for “current and reposition their home equity 5 we significant Moreover, Tax deductions to offset you canannual achieveata bill. net gain ofhigher $1 million investment returns a slightly rate. that you ever made. When youLiquidity purchased gamble home equity. Liquidity and safety aresomething. income” unless investment isoffset fixed years askey their home continues toinvestments appreciate! Today their net worth would be $175,000 gamble home equity. andthe safety are significant annual tax bill. Moreover, the kids Tax deductions to offset majority of their cash in other difference is, instead of referring to that cost significant annual tax bill. Moreover, the Tax deductions to the philosophies when income” unlessunless the investment is fixed years askeytheir home continues to put appreciate! Today their net worth would be $175,000 income” the investment is It’s fixed askey their home continues to$50,000 appreciate! over thirty years. Assume you the have moved out, the mortgage isseparate paid, Today their net worth would beand $175,0 what the banks and credit unions do all $250,000 house in 1990, you only theyears philosophies when 401k withdrawals and guaranteed. Individuals interested in This is how the wealthy manage their home higher, due to the condo’s appreciation, the philosophies when as employment cost, it is referred to as an have moved out, the mortgage is paid, and separating home equity. Rate oftheir return where it’s safe, and earning a rate of home have moved out, thecondo’s mortgage is paid, withdrawals and 401k guaranteed. Individuals This isThis howisliquid, the wealthy manage home higher, due to the condo’s appreciation, $200,000 of home equity using mortgage 401k say you hadwithdrawals $100,000 ofinterested equity in in taxinand and guaranteed. Individuals interested how the wealthy manage their higher, due to the appreciatio deductible contributions to 401Ks have down. The $50,000 cash investment produced aLet’s time. They borrow our money ata2% and separating home equity. Rate of return they would have the mortgage separating home equity. ofworth. return variable investments should askthe themselves, equity to continually increase their opportunity cost. retirees By leaving equity in thethetax is a distant third benefit. Also, itRate isnet not Most successful have the majority deductible contributions to 401Ks have h return. One of the biggest misconceptions tax deductible contributions to 401Ks and would have the mortgage with aWhen 5% interest rate. Ifhave the $200,000 variable investments should ask themselves, equity tois$350,000. continually increase their net worth. and they would themortgage mortgage your home thatinvestments could retirees be separated. Current profit ofdistant That isbenefit. aincrease total return 600%, variable should ask themselves, to continually net worth. stopped. they could use the isnecessary aequity third benefit. Also, it invest istheir not interest deduction to off-set their then loan itthey back to us at help 5%. It’s what makes Most successful have the majority a distant third Also, itof isin not Most successful retirees have the majority “How will I make my mortgage payment if Conversely, if the same $200,000 were left to home, we give up the “opportunity” to earn a or recommended to of their assets in their home equity and stopped. When they could useof the mortgage homeowners have is same that their home istoleftmortgage grows at adeduction conservative rate 6.75% permortg interest toInhelp off-set their stopped. When they could use the interest deduction to help their far outpacing 255% earned interest ismake 5%, sohome the cost ofequity that “How will make my mortgage payment ifand Conversely, if the the same $200,000 were left necessary or recommended toitinvest inthe withdrawals. addition to the “How Idecline? my mortgage payment ifIRA/401K Conversely, ifmeasly the $200,000 were to 5investments interest deduction the most, they have ofpercent their assets in their equity and necessary or recommended toby invest inmy millionaires, millionaires! Learn todon’t beoff-set your ofIwill their assets in their home return on the money. highly volatile or aggressive investments. Do I have reserve sit idle in the home for 30 years, would not IRA/401Ks. As they start withdrawing funds year, it will be worth $1,419,275 in 30 years. IRA/401K withdrawals. In addition to the the best investment they ever made. If you interest deduction the most, they don’t have IRA/401K withdrawals. In addition interest deduction the most, they don’t stock market. financial would someone havethat to thh would be $5,000 perDo year (100% tax highly volatile aggressive investments. my from investments decline? have reserve sithave idle in themake foror30aggressive it would not money IRA/401Ks. As they start withdrawing highly volatile investments. my I have reserve sit idle inahome theorthousands home foryears, 30dollars years, it would not it. As part ofadvantages, longusing term they planning, IRA/401Ks. Asdecline? they start withdrawing funds own banker. By the principles You can of by simply IRA/401Ks, they are hit with afunds funds or their ainvestments secure income?” InI Do April 2004, earned dime. After deducting the $216,000 in interest financial advantages, they would havesome purchased a home in 1990 for $250,000 financial advantages, they would have it. As part of long term planning, someone it.preparing As part offorlong term the lifestyle benefits ofplanning, owning You can make thousands of dollars by deductible). than bury the $100,000 inalife. from IRA/401Ks, they are hititare with You can make of 5% dollars by simply funds or their aRather secure income?” In April 2004, have earned aatdime. from their IRA/401Ks, they hit with a enjoyed By separating equity we give new who isand retirement may want funds or a the secure income?” Into April 2004, have earned a dime. borrowing 5% andthousands investing at in simply safe banks credit unions use, you can amass significant annual tax bill. Moreover, the kids the following question was posed the payments and the $200,000 mortgage, you enjoyed the lifestyle benefits of owning enjoyed theforlifestyle benefits of may ownin andborrowing sold it inof of 2003 for at $600,000, theirwho condo 15retirement years sooner who isvacation may want atJune 5% investing 5%atin5% safe isbank’s preparing forinto retirement significant annual taxmortgage bill. the kids borrowing atand 5% and investing in the safe The cost not borrowing wecan are going to put it toislanguage work, orand significant annual taxMoreover, bill. Moreover, the kids We give ourselves the opportunity toto put itto to conservative fixed investments without ever thebackyard, following question was posed the have a preparing going retirement have moved out, the paid, the following question was posed atothe fortune. Amortgage greatest assets are sooner itsA w still have $1,003,275 left inyears your account. NASD, “Where I find the exact their vacation condo 15 sooner their vacation condo 15 years than they planned. that represents a gain of 140%. During the conservative fixed investments without ever “employ” have aofmortgage going into retirement have moved out, the is paid, and investments without ever Betting thesecurities. ranch; work and earn something onexact it. 401Ks Assuming a liabilities. tooffset have asubstantially mortgage going retirem have moved out, the mortgage is and goingconservative into general, individuals it. Ifa “Where Ibroker were an employer, why would I paid, (employment costfixed vs.Inrisking opportunity cost) tax deductible contributions to have NASD, “Where can I can find the language toto help the annual IRA/401k taxyour bill NASD, Imortgage find the exact language net gain over one million dollars.into You can enhance than they planned. that prohibiting from recommending than they planned. Betting the ranch; risking going into securities. In general, individuals Betting the ranch; risking same period, the Dow Jones grew from tax deductible contributions to 401Ks have going into securities. In general, individuals 28 percent tax bracket, the net employment tax deductible contributions to 401Ks have shouldequity not invest home equity for “current be toworth help offset the overall annual IRA/401k tax bill stopped. they could the mortgage to by help offset thetheannual IRA/401k tax willing to hire anout assistant foruse $35,000 per and enhance their financial home to buyhome securities aWhen broker from recommending that net a broker from recommending that optimizing assets thatgoals. you When homeowners separate equity to“current reposition Iprohibiting take aprohibiting mortgage on my house and invest should not invest home equity for should not invest equity for “current stopped. When they could use the mortgage cost is not 5%, but 3.6%, or $3,600 per year 2590 to 9188, a gain of 255%. The reality stopped. When they could use the mortgage income” unless the investment is fixed Making uncle sam your interest deduction the most, they don’t have and enhance their overall financial goals. home equity to buy securities and enhance overall financial homesafe, equity to buya mortgage securities year? The expectation I out am going to be able example simplytheir shows a one time For This many, the interest deduction I take mortgage outison my house and invest Iatake adeduction mortgage on mymost, house andhave invest already have. Bymortgage being your own banker you go it inincome” a liquid, side account, money in securities?” The written answer the investment is fixed Making uncle sam your taxes (mortgage interest isthey 100% tax don’t income” unless the fixed the after Making uncle sam your the most, don’t and Individuals interested in interest deduction the they have it.interest As part of long term planning, someone here is guaranteed. that financing your home wasis the Recently theunless NASD issued aninvestment alert, “…because repositioning of equity. Imagine how the For many, the mortgage interest deduction best partner For many, the mortgage interest deduc to grow my business and earn a profit on it. As offsets taxes due $1 on Million retirement withdrawals, thedeductible). money in securities?” The written answer can make an extra for retirement. the money innot securities?” The written answer payment is created. The mortgage payment “Brokers are not prohibited and guaranteed. Individuals interested inis infrom It’s too difficult to find taxsomeone and guaranteed. Individuals interested it.the AsisNASD: part long term planning, someone variable investments should ask themselves, Recently the NASD issued an alert, “…because it. Asof part of long term planning, who preparing for retirement may want Recently the NASD issued an alert, “…because best investment decision that you ever we are concerned that investors who must rely best partner best partner numbers grow for individuals that harvest offsetsthe taxes due onof retirement withdrawals, afrom business owner, I believe that bynot investing in giving offsets taxes on retirement withdraw netlaw effect free withdrawals considered the Employment Cost. What many from the NASD: “Brokers are prohibited from the “Brokers areretirement not prohibited tax youdue cantax deduct up to one variable investments should ask themselves, free oriswho tax deferred investments earning making such a for recommendation per variable investments should ask “How will I make myinvestors mortgage payment if rely who preparing retirement may want isNASD: preparing forinto retirement may wantUnder to have a mortgage going we are that who must rely weconcerned are concerned that investors whothemselves, must and reposition their home equity every 5 made. When you purchased the $250,000 on investment returns to make their mortgage giving the net effect of tax free withdrawals Imaking will earn that’s greater giving the net effect of tax free people don’t ismy when we leave their retirement account. Under tax law you can deduct up towithdra one Under tax law you can deduct up to on million dollars of mortgage interest subject from making such aa return recommendation per from more than Using the tax benefits “How will Iunderstand make mytomortgage payment if an such a IRA/401k recommendation per my investments decline? Do I have reserve “How will I make mortgage payment if assistant tofrom have a 3.6%. mortgage going retirement to help the annual tax bill tooffset have ainvestment mortgage going into retirement se, so long as the isinto reasonably years as their home continues to appreciate! on investment returns make their mortgage on investment returns to make their mortgage house in 1990, you only put $50,000 down. How to create an extra payments could end up defaulting on their equity trapped in our home, we incur the same than the cost of employing that assistant. If from their retirement account. from their retirement account. million dollars of mortgage interest subject income restrictions. You can also interest deduct sub million dollars of mortgage ahelp mortgage, you can create own my investments decline? DoInI have reserve funds or investments a secure income?” April 2004, my decline? Do I have reserve tose, offset the annual IRA/401k tax enhance their overall financial se, ofand so long as the investment isyour reasonably to investment help offset the annual IRA/401k so long as the isgoals. reasonably suitable for ininvestment general, and it bill istax billto This is how the wealthy manage their home payments end up defaulting on their payments end up defaulting on The $50,000 cash investment produced a their home loans ifcould their investments decline cost, butfollowing wecould lost Opportunity Cost. an additional $100,000 from home equity million dollars for retirement to income restrictions. You can also deduct we choose to leave the $100,000 of equity in to income restrictions. You can also de arbitrage by borrowing at one rate and the was posed to2004, the 2004, funds or acall secure income?” In April funds or itquestion aasecure income?” In April For many, the mortgage deduction and enhance their overall financial goals. and enhance their overall financial suitable for investment in interest general, and itand isgoals. suitable forspecific investment in general, it isequity to continually increase their net worth. suitable for the customer. In order 401 vacation condo home loans if their investments decline home loans if their investments decline profit of $350,000. That is a total return of and they are unable to meet their monthly loan interest. To take advantage of these an additional $100,000 from home equity an additional $100,000 from home equ earning investment returns at a slightly our home, we incur almost the same cost. The NASD, canquestion I find theposed exact language the following question was to theto the suitable the“Where following was posed offsets taxes due onspecific retirement withdrawals, For many, the mortgage deduction For many, the mortgage interest deduction Conversely, if the samecondo $200,000 were left for the specific customer. In order suitable for the customer. In order to determine suitability, a interest broker should 401 vacation condo 401 vacation By repositioning $200,000 into an equity The money that’s parked in your home and they are unable to meet their monthly and they are unable to meet their monthly 600%, far outpacing the measly 255% earned mortgage payments.” The NASD is absolutely deductions, make sure to secure a large loan interest. To take advantage of these loan interest. To take advantage of the rate. It’staxes whaton the banks and prohibiting a“Where broker from recommending thatonly higher giving the net effect ofof tax withdrawals NASD, “Where can I can find Ithe language NASD, findexact the exact language difference is, instead referring tocredit that offsets taxes due retirement withdrawals, offsets due on retirement withdrawals, to sit idle in thepeople home for 30the years, it would Many successful Northwest to unions determine suitability, a free broker should to determine suitability, aobjectives, broker should consider the client’s investment doing nothing couldagainst be put to work earning you management account with ainfinancial advisor mortgage whenmake you buy. Under taxsecure law, by the stock market. do all the time. They borrow our mortgage The NASD is absolutely mortgage payments.” The NASD isrecommending absolutely deductions, make sure to a larg deductions, sure to secure a large correct in separating equity ifthatcost I take aadvising mortgage out on my house and invest from their retirement account prohibiting a broker from that . prohibiting a payments.” broker from recommending giving theeffect net iteffect offree taxwithdrawals free withdrawals giving the net of tax as employment cost, is referred to as an not have earned a dime. Many successful people in the Northw dream of retiring and buying a second Many successful people in the Northwest financial status, tax status, and any other consider the client’s investment objectives, consider the client’s investment objectives, something. mortgage interest is deductible only for you can achieve a net gain of $1 million money at 2% and then loan it back to us at mortgage when you buy. Under tax law mortgage when you buy. Under tax law, the money in securities?” The written answer the client must rely on the returns from their correct inaadvising separating if from their correct inI atake advising against separating equity if opportunity mortgage out my house and invest I take mortgage outagainst on myon house and equity invest from their retirement account retirement account . in. the home cost. By leaving themake equity indream Arizona or retiring Hawaii. With one million of and buying a sec dream of retiring and buying a second information a firm uses to suitable financial status, tax status, and any other financial status, tax status, and any other mortgage interest is deductible only fo mortgage interest is deductible only for the money inon securities?” The written money inmust securities?” The written answer the client rely the returns from their thethe client must rely theonreturns from their answer home in Arizona or Hawaii. With one mil home in Arizona or Hawaii. With one million information to make suitable information a firma firm uses uses to make suitable
dollars dollars or more or more saved saved in their in their IRA/401Ks, IRA/401Ks, theytheyvehicles. vehicles. TaxTax favored favored safesafe investments investments areareknowledge, knowledge, theythey planplan to keep to keep thethe mortgage mortgage decide decide to retire to retire andand buybuy thethe vacation vacation home homeideal. ideal.YouYoushould shouldconsult consultyouryourfinancial financialwellwell intointo retirement retirement so so theythey cancan keep keep thethe where where theythey willwill spend spend their their winters. winters. What What a aplanner plannerfor forthethebestbestinvestment investmentvehicles vehiclestax tax deduction deduction benefits benefits andand keep keep thethe money money surprise surprise when when theythey discover discover thatthat to pay to pay cashcashfor for youryour specific specific situation. situation. Many Many financial financialin in thethe investment investment account account where where it’s it’s more more for for a $350,000 a $350,000 condo condo theythey need need to withdraw to withdrawplanners planners prefer prefer thethe following following tax tax favored favoredliquid, liquid, more more safe, safe, andand willwill continue continue to grow to grow nearly nearly $500,000 $500,000 from from their their 401K/IRA. 401K/IRA. What Whatproducts products for for investing investing home home equity: equity: andand compound. compound. if instead if instead theythey hadhad purchased purchased thethe condo condo 15 15• Investment • Investment grade grade insurance insurance contracts contracts years years earlier, earlier, when when it cost it cost $175,000, $175,000, by using by using • Annuities • Annuities Case Case study: study: thethe equity equity in their in their home? home? • Real • Real estate estate investment investment trusts trusts cash cash flow flow management management Today Today their their netnet worth worth would would be be $175,000 $175,000• IRAS • IRAS It’s It’s notnot necessary necessary to have to have a large a large chunk chunk of of higher, higher,duedueto tothethecondo’s condo’sappreciation, appreciation, • 401ks • 401ks equity equity in your in your home home to benefit to benefit from from using using andand theythey would would have have thethe mortgage mortgage interest interest your your mortgage mortgage to to create create wealth. wealth. Many Many • Tax-free bonds bonds deduction deductionto tohelphelpoff-set off-settheir theirIRA/401K IRA/401K• Tax-free homeowners homeowners without without a large a large equity equity balance balance withdrawals. withdrawals.In Inaddition additionto tothethefinancial financial• 529 • 529 savings savings planplan have have benefited benefited by by simply simply moving moving to a to more a more advantages, advantages, theythey would would have have enjoyed enjoyed thethe strategic strategic mortgage mortgage which which allows allows them them to pay to pay lifestyle lifestyle benefits benefits of of owning owning their their vacation vacation Case Case study: study: lessless to their to their mortgage mortgage company company each each month, month, condo condo 15 15 years years sooner sooner than than theythey planned. planned. thereby thereby enabling enabling them them to to save save or or invest invest home home equity equity management management Making Making uncle uncle samsam youryour bestbest partner partner Under Under more more each each month. month. ForFor example, example, a couple a couple in in There’s a recent a recent casecase study study of aofcouple a couple living livingRedmond, tax tax lawlaw youyou cancan deduct deduct up up to to oneone million millionThere’s Redmond, Washington Washington followed followed traditional traditional a $550,000 home home in Bellevue, in Bellevue, WA.WA. They Theythinking dollars dollars of mortgage of mortgage interest interest subject subject to income to incomein ain$550,000 thinking when when theythey bought bought their their $400,000 $400,000 owed $360,000 $360,000 on on a 30-year a 30-year fixed fixed mortgage mortgagehome. restrictions. restrictions. YouYou cancan alsoalso deduct deduct an additional an additionalowed home. They They putput 20%20% down down andand obtained obtained a a at 5.875% withwith a monthly a monthly payment payment of $2,130. of $2,130.$320,000 $100,000 $100,000 from from home home equity equity loanloan interest. interest. To Toat 5.875% $320,000 30-year 30-year fixed fixed raterate mortgage mortgage at at They hadhad $190,000 $190,000 built built up up in home in home equity. equity.6.00% taketake advantage advantage of of these these deductions, deductions, make makeThey 6.00% withwith a payment a payment of $1,919 of $1,919 perper month. month. A very A very common common “Brother “Brother A”-type A”-type traditional traditional suresure to secure to secure a large a large mortgage mortgage when when youyou ThisThis is how is how thethe vastvast majority majority of Americans of Americans scenario. After After understanding understanding thethe liquidity, liquidity,would buy.buy. Under Under tax tax law,law, mortgage mortgage interest interest is isscenario. would purchase purchase thisthis home. home. safety, raterate of of return, return, andand tax tax benefits benefits of of deductible deductible onlyonly for for $100,000 $100,000 overover acquisition acquisitionsafety, However, once once thisthis couple couple understood understood thethe properly properly managing managing their their home home equity, equity, this thisHowever, indebtedness indebtedness (the(the mortgage mortgage balance balance when when benefits of of integrating integrating their their mortgage mortgage intointo coupledecided decidedto toseparate separate$155,800 $155,800of ofbenefits home home is purchased). is purchased). Home Home improvements improvementscouple their their financial financial plan, plan, they they decided decided to to make make their equity equity to invest to invest in ainsafe a safe conservative conservative areare thethe onlyonly exception. exception. ForFor example, example, if you if youtheir a change. They They moved moved to to a more a more strategic strategic account. account. By By using using an an interest-only interest-only ARM ARMa change. sellsell youryour home home for for $400,000 $400,000 andand buybuy a new a newsideside interest-only mortgage. mortgage. They They keptkept thethe same same were were ableable to to increase increase their their mortgage mortgageinterest-only home home for for $400,000 $400,000 withwith thethe cashcash from from thethetheythey loan loan balance, balance, but but were were able able to reduce to reduce their their balance balance to separate to separate this this chunk chunk of equity of equity while while sale, sale, youyou willwill loselose thethe tax tax break break andand liquidity. liquidity. monthly payments payments to to $1,133 $1,133 perper month, month, decreasing their their monthly monthly mortgage mortgage payment paymentmonthly ButBut worse, worse, if you if you laterlater decide decide to take to take outout a adecreasing a savings a savings of of $786 $786 per per month month from from their their $1,656, $1,656, a monthly a monthly cashcash flowflow savings savings of of home home equity equity loan, loan, onlyonly thethe firstfirst $100,000 $100,000 willwillto to previous previous mortgage. mortgage. TheThe couple couple invests invests thethe $474 perper month. month. be tax be tax deductible. deductible. Instead, Instead, secure secure a $360,000 a $360,000$474 $786 $786 savings savings each each month, month, andand assuming assuming mortgage mortgage (90%) (90%) when when youyou buybuy thethe home home andand TheThecouple coupleconservatively conservativelyinvested investedthethea 6% a 6% rate rate of return, of return, they they will will have have enough enough thethe entire entire amount amount is deductible. is deductible. $155,800 $155,800lump lumpsumsumandandthethe$474 $474perpermoney money in their in their investment investment account account to pay to pay off off month month savings savings withwith their their financial financial planner. planner.their their mortgage mortgage in 19 in 19 years years (11(11 years years sooner sooner If we If we assume assume a conservative a conservative 6%6% raterate of ofthan Where Where to to safely safely invest invest thantheir theirprevious previous30 30yearyearschedule!). schedule!). return, return, their their investment investment account account will will grow grow to to Therefore, Therefore, by by simply simply redirecting redirecting a portion a portion of of home home equity equity $520,196 $520,196 in 15 in 15 years. years. In the In the 15th 15th year, year, theytheytheir their monthly monthly mortgage mortgage payment, payment, theythey were were Home Homeequity equityis isserious seriousmoney. money.WeWearearewillwill have have enough enough cashcash in in their their investment investmentableable to potentially to potentially shave shave 11 11 years years off off their their separating separating it from it from thethe home home to conserve to conserve it, it,account account to pay to pay off off their their mortgage mortgage completely completelymortgage. mortgage. In addition, In addition, theythey alsoalso received received thethe notnot to consume to consume it. Therefore it. Therefore it should it should notnot be beif they if they want want to to (15(15 years years earlier earlier than than withwithbenefits benefits of having of having their their cashcash in ainmore a more liquid, liquid, invested invested aggressively. aggressively. Rather, Rather, home home equity equity is istheir their original original 30 30 yearyear mortgage!). mortgage!). However, However,more more safesafe position position throughout throughout thethe process. process. bestbest invested invested in safe, in safe, conservative conservative investment investmentarmed armed withwith their their newnew equity equity management management
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