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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.
127 5th. Street Loveland, CO verbotenbrewing.com 970.775.7371
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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!
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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!
Building Your Dream... For over 30 years Custom On-Site Builders has provided the highest level of craftsmanship and homeowner satisfaction to Northern Colorado. We have built our reputation one outstanding home at a time, working with well established local subcontractors and suppliers. Our innovative designs and hands-on attention to detail ensures your home will be an expression of timeless beauty throughout the years. Whether you choose to build on our lot or yours, each home is designed, engineered and built by our team of professionals, using the best building materials Northern Colorado has to offer. We work closely with each homebuyer to build personalized spaces that reflect their vision and our commitment to excellence.
Custom On-Site Builders is devoted to building your dream.
970-776-9614 210 E 12th St. Loveland, CO
Water Valley IN WINDSOR
Your stunning new CalAtlantic home embodies the spirit of Northern Colorado. Water Valley provides the perfect escape into the Northern Colorado outdoors.
CalAtlanticHomes.com
Amenity-Filled Living a Scenic, Tranquil Location Amenity-Filled in a Scenic, Tranquil Location Amenity-Filled Living Living in in Amenity-Filled Living in a a Scenic, Scenic, Tranquil Tranquil Location Location
Water Valley Valley is is aa 1,500-acre 1,500-acre community community surrounded Water surrounded by by five five manmade manmade lakes lakes and and Water Valley Valley is is aa 1,500-acre 1,500-acre community community surrounded by manmade and Water surrounded by five fivesingle-family manmade lakes lakes andwith Pelican Lakes Golf Course. Water Valley features spacious homes Pelican Lakes Golf Course. Water Valley features spacious single-family homes with Pelican Lakes Lakes Golf Golf Course. Course. Water Water Valley features spacious single-family homes with Pelican Valley features spacious single-family homes with multiple floor plans starting from the upper $300s. This community offers spectacular multiple floor plans starting from the upper $300s. This community offers spectacular multiple floor floor plans plans starting starting from from the upper $300s. This community offers spectacular multiple the upper $300s. This community offers spectacular water views views in in aa peaceful peaceful and and relaxing relaxing location water location with with an an abundance abundance of of amenities. amenities. water views views in in aa peaceful peaceful and and relaxing relaxing location water location with with an an abundance abundance of of amenities. amenities. Five large large lakes lakes with with beaches beaches for ••• Five for picnics, picnics, enclosed enclosed campfires, campfires, volleyball, volleyball, lounging, lounging, Five large large lakes lakes with with beaches beaches for • Five for picnics, picnics, enclosed enclosed campfires, campfires, volleyball, volleyball, lounging, lounging, long walks and more long walks and more long walks walks and and more more long Homesites backing backing to to Pelican Pelican Lakes ••• Homesites Lakes Golf Golf Course Course Homesites backing backing to to Pelican Pelican Lakes • Homesites Lakes Golf Golf Course Course • 7.5 Miles of recreational trails for jogging, •• 7.5 Miles of recreational trails for jogging, jogging, biking, biking, walking, walking, birdwatching, birdwatching, tot-lots tot-lots 7.5 Miles of recreational trails for biking, walking, birdwatching, • 7.5 Miles of recreational trails for jogging, biking, walking, birdwatching, tot-lots tot-lots and more and and more more and more Four miles miles to to Interstate Interstate 25 25 with with direct ••• Four direct access access to to Downtown Downtown Denver Denver and and Fort Fort Collins Collins Four miles miles to to Interstate Interstate 25 25 with with direct • Four direct access access to to Downtown Downtown Denver Denver and and Fort Fort Collins Collins
Homes from from the the upper upper $300s Homes $300s
Homes fromHomes the upper $300s Quick Move-in Available Now Quick Move-in Homes Available Now Quick Move-in Homes Available Now Community conveniently conveniently located Community located Community conveniently located just south south of Windsor. Windsor. just of just south of Windsor.
CalAtlanticHomes.com CalAtlanticHomes.com CalAtlanticHomes.com
Sales Center: 1925 Los Cabos Drive, 1925 Los Los Cabos Cabos Drive, Drive, Sales Center: 1925 Sales Center: 1925 Los Cabos Drive, Windsor, CO 80550 Windsor, CO 80550 80550 Windsor, CO 80550 For more information on Water Valley, information on on Water Water Valley, Valley, For more information register online or call 970-460-7129. For more information on Water Valley, or call call 970-460-7129. 970-460-7129. register online or register online or call 970-460-7129.
No view is promised. Views may also be altered by subsequent development, construction and landscaping No view is may also be altered development, construction and landscaping landscaping No view Plans is promised. subsequent development, construction and growth. to buildViews out this neighborhood as by proposed are subject to change without notice. The date of No view Plans is promised. Views may also be altered subsequent development, construction and landscaping growth. to build outsubstantially this neighborhood to change change without notice. The date date of growth. Plans as by proposed are subject to without notice. The actual completion could differ from the estimated date. Persons in photos do not reflect racialof growth. Plans to build out this neighborhood as proposed are subject to change without notice. The date of actual completion could is substantially differ from Persons in photos photos do familial not reflect reflect racial actual completion the estimated date. Persons in do not racial preference and housing open to all without regard to race, color, religion, sex, handicap, status or actual completion could issubstantially differ from the estimated date. Persons in photos do familial not reflect racial preference and Prices, housing open all without religion, sex, handicap, status or preference regard to the race, color, religion, sex, handicap, status or national origin. plans andto terms are effective on date of publication and subject familial to change without preference and Prices, housing is open all without regardon tothe race, color, religion, sex, handicap, familial status or national origin. plans andto terms are effective publication and subject to to change change without national origin. date of publication and subject without notice. CADEN134 national origin. Prices, plans and terms are effective on the date of publication and subject to change without notice. notice. CADEN134 CADEN134 notice. CADEN134
WOMEN OF INFLUENCE
Power Partners
Let the first thing you say brighten someone’s day. Conventional, FHA, VA, and USDA loans. We also have Physicians Loans, Protector and Provider discounts, and a Rate Match product. When you think of the word “Successful”, who’s the first person who comes to mind and why? My Husband, he has always been a very hard working man dedicated to helping others and teaching himself new things every day. He is not afraid of anything. He is committed to his career and family, is an amazing listener and communicator, and never takes sides in any situation. He truly supports everyone he meets and I am blessed to learn from him every day. Do you have any mentors? My mentor would be Al Tinney who is Vice President of Mortgage Lending at Waterford Bank, N.A. I am so thankful to have someone who has taken the time to teach, listen, and support me over the years. He reminds me that working hard and caring for people pays off. I credit my career success to Al Tinney. What are some of your goals for 2019? Too many to list, but here are a few! • Every year I set a goal to increase my sales by 10%. Tell us what got you in to this crazy business? I began my love for real estate when I was 10. I used • Continue increasing my sphere of colleagues and friends, who are positive and hardworking. to collect home magazines and highlight all the big beautiful homes that I was going to own when I grew • Help more families buy a home. • Volunteer my time to help others. up. My mom used to joke and say “sweetie, you • Go on 1 amazing family vacation we never forget. can’t own all the big beautiful homes”. I remember • Spend quality time with my family back in Ohio. telling her she might be right, I personally can’t own them all, but I could help all my friends move into their own beautiful homes. Little did I know at age 10 that I would help so many people buy homes to live in, big and small. Now, 20 years later I have helped over 4,000 families with their mortgage needs.
Stephany Overmyer
What are you passionate about? My family is my passion. My 5 year old son keeps me focused and motivated. He reminds me to work hard and learn something new each day. My Husband of 9 years keeps me grounded and organized. His work ethic is unlike anyone I have ever known. They both inspire me to be the best I can be.
MORTGAGE LOAN OFFICER | NMLS#: 575776 WATERFORD BANK, NA
C: 419.376.0318 E: Stephany.Overmyer@waterfordbankna.com W: WaterfordBankNA.com
Do you have a mission statement? Delivering financial services beyond expectations with an experienced staff that understands its customers and anticipates their needs. What areas do you specialize in? Waterford Bank, NA is licensed in every state and specializes in many areas of lending. We offer
All Loans Subject to Credit Approval.
Work until you no longer have to introduce yourself. What are your morning rituals? What does the first 60 minutes of your day look like? Mornings are for prospecting. I do 30 touches before 10 a.m. What topic would you speak about if you were asked to give a talk on something outside of real estate? Networking If you could have a gigantic billboard with anything on it, what would it say? Dreams do come true! Tell us something about yourself that most people don’t know? I love to be alone. I desperately need down time to fill my well and get back to it. Pajamas are my favorite thing.
Tell us what got you in to this crazy business? My brother in Law bought an insurance agency 7 years ago and asked me to come to work for him. Never in a million years did I think I’d end up in insurance, but I did and I love it. We found a niche with realtors and loan officers and their clients and that has been the bulk of our business. What are you passionate about? Learning and Educating. What areas do you specialize in? Insurance support and education for Realtors and loan officers and their clients. Tell us about your family. I am the oldest girl of 4 girls. We all ended up back in Denver raising our children and there are now 23 of us. I have been married for 23 years and have an 18 year old daughter and a 16 year old son. Louie is our Golden Retriever, and my husband and kids know, he is really the love of my life. My favorite thing is the 5 of us. What is something you believe that other people think is insane? I believe you can do anything you put your mind to. The people I hang out with, don’t think this is insane.
How has a failure, or apparent failure, set you up for later success? My CE credited class, “Realtors Guide to Insurance” was developed from an “apparent failure,” and it has been a huge success for me. Last parting words? I have been gifted with a career that allows me to educate and support, with ownership and control of my work and time. I am very grateful.
Lisa Kerin-Welch BUSINESS DEVELOPMENT DIRECTOR COMMUNITY & FAMILY INSURANCE
O: 303.495.3990 E: Lisa@cfainsures.com W: QuoteTheHome.com
Whatever your hand finds to do, do it with all your might. Ecc 9:10 about band, theater and tennis. Cali, our five year old Vizsla dog completes our crazy little family. Who has been the most influential person in your career? My business partners. You hear horror partnership stories from so many people. We have worked well together since day one. We each play to our strengths and have been able to create something quite amazing. What are some of your goals for 2019? At Pineapple, we have experienced incredible growth and of course we want that to continue. We always strive to improve our product for our clients, provide an incredible place for our employees to work and become great leaders in our industry. At Good Karma, we have made a lot of changes in the last couple of years. We are getting ready to release our new website with expanded services including drone and twilight photography. We’ve put an incredible editing team in place so our photos are better than ever! Now it is time to get out there and expand our business. Tell us what got you in to this crazy business? My background is in IT so I did the corporate thing for many years. It taught me a lot, but when we adopted our daughter, I wanted more flexibility. I took a week long home staging class and dove in! That was 14 years ago. Real Estate photography was never on my radar, but when the opportunity presented itself to partner with one of the best Real Estate Photography companies in Denver, I jumped at the chance. What are you passionate about? Many things – my family, my businesses, selfdevelopment, running and most recently tennis. Oh and I LOVE baseball! What areas do you specialize in? Pineapple Interiors specializes in vacant home staging and consultations for occupied homes. Good Karma Photo is all about stunning real estate photography and our Custom Motion virtual tours. Tell us about your family. My husband Patrick is a firefighter at South Metro Fire Rescue. We have been together since high school and married for almost 26 years. When he is not saving babies and puppies, you can find him doing drone photography for Good Karma. We have a beautiful 13 ½ year old daughter who is all
What is a book you’ve given most as a gift? There are SO many great ones but I think everyone should read The Richest Man in Babylon. It will be required reading for my daughter. Other great ones include Maximum Achievement and You are a Badass.
Tammie O’Brien OWNER
PINEAPPLE INTERIORS
P: 303.771.0761 E: Tammie@pineappleinteriors.net W: PineappleInteriors.net GOOD KARMA PHOTO
P: 303.495.5421 E: Tammie@goodkarmaphoto.com W: GoodKarmaPhoto.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 rate premium for a 30-year fixed rate premium 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, those work with the ability to pay off their mortgage but refuse to do so, In order to discover how our parents order to discover how 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 crashed October 29,money, 1929much millions of to continually increase their wealth. This is investors loston huge 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 New York York Times Best demand to buy these homes, so prices planners in the country a New payments every month. However, there Times Best Selling author, summarizes in The continued to drop. To cover the margin Selling author, summarizes 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 of thisneeded the American Mantra the cash they to payoff loans, lost own their homes. Out of this wastheir born: Always your home outright. the American Mantra was born: Always Never carry a mortgage.
own your home outright. Never carry a Themortgage. reasoning behind America’s new mantra reasoning behind ifAmerica’s new fell wasThe 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 you couldn’t put food oncouldn’t the table it away from you. Maybe you putor payfood youronbills, but your was but secure. the table or payhome your bills, your secure. Since Great Since thehome Greatwas Depression lawsthe have been Depression laws have been introduced introduced that 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 short on and cashneed and you need to pay your cash to you 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 thebanks, systemasifwethere run on a runinto on the saw is in a 1987 Y2K. the in FDIC wasand created the and banks, asAlso, we saw 1987 Y2K. to Also, banks. Still, it’s wonder the fear the insure FDIC was created tonoinsure 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 American and and they60’s quickly their 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, this fearoff of their burning tobecause 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 people hate the their because they know over lifemortgage of a 30 year loan, theythey know lifeinofinterest a 30 than year the loan, will over spendthe more cost them in the place.than To save theyhouse will spend more in first interest the money it becomes very tempting to make house cost them in the first place. To 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 same as makingassets. money.ByOr, not the same as 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 the important role a mortgage plays in our did not invest. While paying off the mortgage savings effort. Every dollaruswe the saves us interest, it denies thegive 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 into their overall Ric Edelman has educated hisfinancial clients plan. Inforhisyears book, New Rules of Money, Ric on The the benefits of integrating their mortgage into their overall financial tells the story of two brothers, each of whom plan. In ahismortgage book, The New Rules secures to buy a of$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 the bulletEach and brother secures a fifteenbuy a $200,000 home. earnsmortgage $70,000 aatyear and APR has $40,000 year 6.38% and shells out in savings. The first brother, Brother A, down all $40,000 of his savings 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 state income tax rate of 32%, he is left shells out all $40,000 of his savings as a 20%an down payment, leaving zero cost with average monthly nethim after-tax dollars to invest. This leaves him with a of $1,227. Also, in an effort 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 lender every month. loan at 7.42% APR. ahis30-year, interest-only 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, moneymaking account. His choosing instead to carry a side big, long-term monthly is $1,175, 100% of which mortgage.payment He secures a 30-year, interestis tax deductible over the first 15 years, and only loan at 7.42% APR. He outlays a 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’s from his lower over$428 the life ofsaved the loan, leaving him mortgage a payment. investment earns an monthly netHis after-tax cost ofaccount $799. Every month he adds $100 to his investments 8% rate of return. (the same $100 Brother A sent to his
Which brother madehe’s thesaved rightfrom decision? lender), plus the $428 his loweranswer mortgage Hisby investment The canpayment. be found 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 in tax savings and and Brother A has received $14,216his in savings tax savings, however he made zero dollars in investment account has grown to $83,513. savings and investments. Brother B, on the Now, what if both brothers suddenly lose other hand, has received $22,557 in tax their jobs? The story here turns rather bleak savings and his savings and investment for Brother A. Without any money in savings, 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 in his The storyhe here rather bleak for Brotherhe A. can’t Without money in savings, home, getany a loan because he doesn’t he hasa no to get have job.way With no through job andthe no crisis. 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
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
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!
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
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 in tax savings, he has $30,421 in a loan and can easily make his monthly payments, even if he savings and investments (once his home is unemployed for years. He hasthe noequivalent was paid off he started saving 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. A has now mortgage balance ofBrother $190,000 and still have received $25,080 in tax savings, he has $92,019 left over in savings, free and clear. $30,421 in savings and investments (once his homelet’s was assume paid off he started saving Finally, that rather than pay the his equivalent of his payment off mortgage at mortgage 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 has $282,019 in savings and investments. he still owns his home outright. Brother B, If he chooses to, he has can received pay off the on the other hand, a whopping remaining mortgage balance of $190,000 $107,826 in tax savings, has 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 realize Brother B’s path enables owns his home outright. Brother B, 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 savings into a safe side investment account benefits of liquidity and safety the entire way. can earn 5% on your money. Interest rates the question of 15-year versus 30-year on your mortgage. Similarly, many finance investments, and also owns his home a conservative rate ofloan return, youyou will are relative. In the 1980’s, moneythe was30-year costingloan mortgages. They concluded professors think a 15-year saves outright. He can start over fresh and enjoy earning 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 15 yearsAndrew with $25,000 to spare!). their money. Due to the tax deductibility of However, Doug 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 in Missed about path asto Brother A, as it’s the only path they Chapter mortgage 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 monthly payment difference to them, a paradigm shifting epiphany often Americans the 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 (if they choose to), while significantly from Utah, was the first 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 reducing the interest you through a different lens, the same 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 investment account earning a conservative educational seminar for the public based rate of you willFortune have enough to pay largely onreturn, the Missed concepts. In your home off in 13½ years (or in 15 years the seminar, we break down the 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 it at a lower rate and still make a and investment opportunities, mostsignificant 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 equity your home called ‘having 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 your aeggs 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 home equity, not consume it. We are the first academic study undertakenoneon Howhome manyisofeasy, us feel go toespecially the bank butwhen most we people, the few financial planning firms who theof 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 debt in order to are sick, unemployed mortgages. They concluded the 30-year loan money before they’ll loanorit have to us?insufficient 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 circumstances can be either impossible an Ininterest-only loan be better than an the loan. You can imagine how a conversationor 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, have an additional your loan application to the thisareThere are three actually three primary mortgage payment, or haveor an additional There actually primary reasons:reasons: n application up to the up board thisboard
position. Why in the world would you financial times,your would yourhave rather have How of us we feelgo when we go to thecash position. in the world would you financial$25,000 times, would rather ny of us many feeland when totothe of trapped equity trapped inhome? your home? morning Ito explained them you’re going cash Why $25,000 of equity in your and I explained them you’re going wantthe to1.equity have the removed $25,000 of to help youyour make your bank need we almost needwe to don’t prove we don’twant to have 1.equity Liquidity removed from yourfrom your $25,000 of cash to cash help you make almost to prove Liquidity Almost every person who has ever lost their through some hard financial times, you’re every person who has ever an lostadditional their some financial times, you’re home? There arethree actually three primary Almost mortgage payment, oranhave needhard the money before they’ll loan it tohome? us? There 2. Safety are actually primary mortgage payment, or have additional money before they’ll loan it to us? 2. Safety to foreclosure wouldbeen have been better unemployed, your credit is not sothe good and home tohome foreclosure wouldtrapped have better oyed, credit is not sothe good and equity your home? Theyour bank wants know we have ability reasons: reasons: $25,000$25,000 of equityoftrapped in your in home? 3. Rate of return k wants to know wetohave ability 3. Rate of return off ifhad they hadperson their who equity separated from maybe they could lendcan you some cash to get Almost every has ever lost their repay thecan loan. You imagine off if they their equity from hey lend youimagine some cash to Almost every person who hasseparated ever lost their thetocould loan. You how a gethow1.aLiquidity1. Liquidity their home in a liquid, safe, conservative side through these rough times. Their response foreclosure would have been conversation might go withresponse your banker: “I These three elements are also commonly their home in atoliquid, safe, conservative side better these rough times. Their 2. Safety home tohome foreclosure would have been better tion might go with your banker: “I These three elements are also commonly 2. Safety fund betoseparated used make mortgage was... ‘Fatupchance!’ off if that they could their equity from brought your loan application up to the used asofof the of a prudent investment. 3. Rate return fund behad used maketoseparated mortgage t chance!’ off if that they could had their equity from up your loan application up to the used asofthe test atest prudent investment. 3. Rate return their home in a liquid, safe, conservative side board this morning and I explained to them payments during their time of need. When evaluating a potential investment, their home in a liquid, safe, conservative side s morning and people I explained torealize them is that payments during their time of need. What many don’t even evaluating When a potential investment, fund that could be used to make mortgage you’re going through some hard financial any people don’t is that even These three elements are experienced investors will also ask commonly the following fund that could be used to make mortgage oing somerealize hard financial These elements are also commonly The importance liquidity if through they’ve consistently been making double experienced investors will ask the following payments duringoftheir time ofbecame need. all too times, you’re unemployed, your credit is not three used as the test of a prudent investment. The importance liquidity eu’re consistently been making double payments duringoftheir time ofbecame need. all too unemployed, your credit is not three questions: used as the test of a prudent investment. so good and maybe they could clear when the stock market crashed in mortgage payments for five yearslend in ayou row, thequestions: three When evaluating a potential investment,clear when maybe they could lend you the stock ofmarket crashed in eand payments fortofive years in athese row, the When evaluating a potential investment, some cash get through rough times. The importance became all too October of 1987. Ifliquidity someone had advised bank still has no leniency. If suddenly they experienced1.investors will ask the following How liquid is it? sh to get through these rough times. The importance of liquidity became all too October of 1987. If someone had advised l has no leniency. If suddenly they experienced investors will ask the following Their response was... ‘Fat chance!’ clear when the stock market crashed in 1. How liquid is it? you to your stockscrashed and convert to cash, experience a financial setback, the bank will three questions: (Can I get my money back when I want it?) clear when ponse was... ‘Fat chance!’ thesell stock market in cash, you to sell your stocks and convert to ce not a financial setback, the bank will three questions: October of 1987. If someone had advised (Can I get my money back when I want it?) they wouldIf someone have beenhad a hero. Or, if you had care. They can go to the bank and plead, October of 1987. 2. How you to sellbeen yourastocks and to cash, What many people don’tand realize is that even 1. How liquid issafe it? is it? they would have hero.could Or,advised ifconvert you had They can go to theinbank plead, enough liquidity you have weathered “I never thought a million years this would 2.I get How safe is it?back you to sell your stocks and convert toOr, cash, ny ifpeople don’t realize is thatmaking even double 1. How liquid is it? they would have been a hero. if you had they’ve consistently been (Can my money when I want it?) (Is it guaranteed or insured?) enough the liquidity you have liquid weathered hought in to a million years this would storm. Thosecould other assets were happen me, but it for did.five I’veyears beeninpaying they would haveliquidity been awith hero. Or, ifhave youweathered had consistently been making double (Canmy I get my back when I want it?) (Is itmoney guaranteed or insured?) enough you could mortgage payments a row, storm.liquidity Those with other liquid assets were o me, but it for did. I’veyears beenfor paying my 3. Whatsafe rate ofisreturn it? can I expect?the to remain invested. They were rewarded mortgage in five advance how about if 2. How enoughable you could have weathered e payments in years, a row, the storm. Those with other liquid assets the bank still has no leniency. If suddenly 3. What rate of return can I expect? 2. How safe is it? able to remain invested. They were rewarded estill in advance for years, how about if (Is it guaranteed or insured?) the storm. Those with other liquid assets has no leniency. If suddenly as the market rebounded and recovered Ithey just coast on my mortgage payments for a were able to remain invested. They were experience a financial setback, the bank Home equity fails all three tests of a prudent (Is it guaranteed or insured?) aswere theable market rebounded and recovered ast on not my mortgage payments forbank a and towithin remain They were erience a care. financial setback, bank fully 90invested. days. However, those and without few months?” They get thethe same answer everyequity as the market rebounded will They can go to the Home fails all three tests of a prudent investment. Let’s examine each can of these core rewarded 3. What rate of return fully within 90 days. However, those without ths?” They get the same answer every rewarded as the market rebounded and are. They can go to the bank and recovered fully within 90 days. However, plead, “I never thought in a million years this liquidity were forced to sell while the market time... ‘Fat chance!’ Banks just don’t work investment. Let’s examine each oftothese 3.that What rate of return elements in more detailcan bettercore understand I expect? recovered fully within 90 However, never in a years this those without were forced to sell would happen to me, but itwork did. I’ve been liquidity were forced toliquidity selldays. while market at chance!’ Banks just don’t that was down, causing them tothe accept significant way.thought Regardless ofmillion how much you’ve paid your elements in more detail to better understand why home equity fails the tests of a prudent I expect? those without liquidity were forced to sell ppen toofme, but it did. I’ve been while the market was down, causing them paying my mortgage in advance for payments years, was down, causing them to accept significant ardless howdown much paidextra your losses. In Missed Fortune, Doug Andrew tells mortgage oryou’ve how many why homeinvestment, equityequity fails and, the all tests of atests prudent Home fails three of a prudent more importantly, why the while market was down, causing them y mortgage in advance for years, to accept significant losses. In Missed how about if I just coast on my mortgage losses. In Missed Fortune, Doug Andrew tells e down how many payments the story of a young couple who learned what you’veormade, next extra month’s payment investment, is still investment. Let’s examine of these to core equity fails allmore three tests ofby aeach prudent and, importantly, why home-owners benefit separating the Fortune, Doug Andrew tells the story of a for on a few the accept losses. In Missed ut ifpayments I just coast mymonths?” mortgageThey get Home the storyheofsignificant a young who learnedonwhat made, next month’s payment is still home-owners calls “Thecouple $150,000 Lesson Liquidity”. due in its entirety no matter what. elements in more detail to better understand investment. Let’s examine each of these core benefit by separating the equity from their home. young couple who learned what same answer every time... ‘Fat chance!’ Fortune, Doug Andrew tells the story of he a calls s for a few months?” They get the he calls In“The $150,000 Lesson onhe sswer entirety notime... matter what. why home equity fails theunderstand tests of a prudent 1978 this couple built aLiquidity”. beautiful home elements in their more detail to better “The $150,000 Lesson on Liquidity”. Banks just don’t‘Fat work that way. Regardless equity from home. young couple who learned what calls In every chance!’ investment, and, more importantly, why why home equity fails the tests of a prudent that would be featured in Better Homes and In 1978 this couple built a beautiful home 1978 thisLesson coupleon built a beautiful of how much you’ve paid yourfrom mortgage “The $150,000 Liquidity”. In home that st don’t work that way.equity Regardless Why separate home-owners benefit by separating the Separating equity to increase investment, and, more importantly, why Gardens. The home appreciated that be featured in Better Homes and would bebuilt featured in Better Homes and down or how payments you’ve 1978would this couple acouple’s beautiful home that uch you’ve paidmany your extra mortgage equity from their home. your home? home-owners benefit by separating the Gardens. The couple’s home appreciated made, next month’s payment is still due in its in The value, and, by 1982, it appreciated wasand appraised for Gardens. couple’s home liquidity would be featured in Better Homes how many extra payments you’ve equity from their home. in value, and, by 1982, it was appraised no matter what. just under $300,000. They had accumulated Gardens. The couple’s home appreciated ext entirety month’s payment is still due in its in value, and, by 1982, it was appraised for for In the book, Missed Fortune, Doug What is the biggest secret in real estate? just under $300,000. They had accumulated Separating equity to in value, by 1982, it was appraised for because no matter what. a and, significant amount of equity, not just under $300,000. They had accumulated Andrew Missed suggests book, Fortune,people Doug strongly a significant amount of equity, not because Your mortgage is ato loan your income, What is the biggest secret in against real estate? just under $300,000. They had accumulated Separating equity Why separate equity from increase liquidity they had been making extra payments a significant amount ofmaking equity,extra not payments because on on consider much equity not a loan against the value of your house. they amount had been suggests separating people asstrongly a significant of equity, not because Your mortgage is a loan against your income, Yourhadthebeen property, but because market conditions your eparate equity from increase liquidity making extra payments on What is the biggest secret in real estate?they as theyhome? possibly from their house, and Without the property, but because market conditions separating as can much equity anthe income, inofmany cases you cannot they had been making extra payments on not a loan against value your house. improved over that four-year period. mortgage is a loan against your income, not a the property, but because conditions improved over thatmarket four-year period. place itcan overfrom in atheir cash position. Why in theis the ome? In the book, Missed Fortune, Doug Andrew What biggest secret in real estate? Your possibly house, and the property, but because market conditions get aagainst loan. If value you suddenly experienced Without an income, in many cases you cannot loan the of your house. Without improved over that four-year period. world youstrongly want to have equity difficult suggests people consider mortgage is a loanfinancial against your income, not a rather improved that thought four-yearthey period. Thisover couple had the world by over in awould cash position. in thethe get would your ok, Missed Fortune, DougWhy Andrew an income, manytimes, cases you cannot get a aagainst loan. If value you insuddenly experienced This couple thought they had the world separating as much equity as they possibly removed from your home? loan the of your house. Without the tail. They had a home valued at $300,000 ould youstrongly want to have the equity difficult financial have $25,000 of cash to help you make your people consider loan. If you suddenly experienced difficult This couple thought they had the world by the tail. They had a home valuedby at times, would your get rather can from their house, and place it over an in aincome, in many cases you cannot a This couple thought they had the world gfrom as much equity as they possibly your home? the tail. They had a home valued at $300,000 have $25,000 of cash to help you make your loan. If you suddenly experienced difficult 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 to have have access access to the equity or value of of your your home home and not need it, than to to need need itit and and not be able to get get at at it.” it.”
during which time the was forced withfirst first and second mortgages owingowing only during And, most importantly, he better to access totothe or $300,000 with first andsecond second mortgages owing who got got stucktime withthe the lender deficiency of which lender wasbalance forced to to with and second mortgages owing only highs. And, most importantly, he learned learned better tohave have access theequity equity orvalue valueofo $300,000 with first and mortgages who stuck with the deficiency balance of highs. your home and not need it, than to need ititand only $150,000. They had “made” $150,000 in four $30,000 on their credit report? The original pay the first first mortgage also accrued an $150,000. They had “made” $150,000 ininfour four to allow aasignificant ofofneed equity your not needamount it, than to an only$150,000. $150,000.They Theyhad had“made” “made”$150,000 $150,000in four pay $30,000 on mortgage their creditand report? original the and alsoThe accrued an never never tohome allowand significant amount equity not be able to get atatit.it.Keeping home equity short years. owners, of of$30,000 course! of interest and penalties. to accumulate additional short years. in his property. not be able to get Keeping home equity short years. owners, course! additional $30,000 of interest and penalties. to accumulate in his property. short years. safe safe isisreally reallyaamatter matterofofpositioning positioningyourself yourselftot By the the time time the the home home finally sold, By finally sold, less less the the Home act instead of react to market conditions over They had the misconception that the This couple not only had a foreclosure They had the misconception that the equity in equity is not the same as cash in act instead of not reactthe to same marketasconditions over They hadhad thethe misconception that thethe equity in $30,000 This couple only had a foreclosureguess Home They misconception that equity is cash inthe the in not accrued indebtedness, $30,000 in accrued indebtedness, guess which you have no control. equity in their home had a rate of return when, in appear on their credit report for seven years, their home had a rate of return when, in fact, it bank; only cash in the bank is the same as which you have no control. equity in their home had a rate of return when, in appear on their credit report for seven years, their home had a rate of return when, in fact, it who cash in the bank is the same as who got stuck with the deficiency balance of stuck with the deficiency balance of bank;inonly fact,was was justnumber number sheet ofpaper. paper. thegot report also showed a balance justjust onaon aon sheet paper. the bank. act, ititwas aanumber aasheet of the report also showed a deficiency deficiency balance cash was just aanumber on sheet ofofpaper. cash in the bank.Being Beinghouse houserich richand andcash cash $30,000 on their credit report? The original owing $30,000 on a home they The had original lost $30,000 on their credit report? Separating equity to poor is a dangerous position to be in. It owing $30,000 on a home they had lost Separating equity poor is a dangerous positiontoto be in. Itisis owners, of course! course! nearly of one year Then, a series of unexpected events reduced Then, series unexpected events reduced owners, nearly one year Then, a series of unexpected events reduced Then, aaseries ofofunexpected events reduced better to have access to equity ororvalue increase safety of principal to have access tothe the equity valueofof earlier. In a time of financial setback they lost better their income to almost nothingnothing for nine months. increase safety of principal their income to almost for nine earlier. In a time of financial setback they lost heir income to almost nothing for nine months. This couple not onlyvaluable had a foreclosure appear your home and not need it, than to need it and theircouldn’t income to almost nothing for nine This one of their most assets dueappear to a They borrow money to keep their couple not only had a foreclosure your home andTimes, not need it,article than topublished need it and The Seattle in an months. They couldn’t borrow money to keep on one of their most valuable assets due to a They couldn’t borrow money to keep their Seattle Times, inKeeping an article published their credit report for seven years, the notinThe beMarch able to get at it. home equity months.payments They couldn’t borrow money to keep onlack of liquidity. If they had separated their mortgage current because without “Remember that their credit report for seven years, the notinbeMarch able2004, to getreported, at it. Keeping home equity their mortgage payments current because report lack of liquidity. If they had separated their mortgage payments current because without 2004, reported, “Remember that also showed aequity deficiency balance owing safehousing is reallyprices a matter of positioning yourself mortgage because report $150,000 in home and repositioned antheir income they did payments not have thecurrent ability to can and do level off. also showed deficiency owing safehousing is reallyprices a matter of positioning yourself $150,000 in homeaequity and balance repositioned an income they did notthey have the ability to without an income did not have the ability can and do levelconditions off. on a side homeaccount, they had lostwould nearlyhave one to They act instead of react to market it into a safe they repay. Within six months they hadhave soldthe twoability $30,000 without ansix income theythey didhad not Southern sometimes decline – witness $30,000 on a side homeaccount, they had lostwould nearlyhave one to They act instead of react to market conditions it into a safe they epay. Within months sold two to repay. Within six months they had sold two Southern sometimes decline – witness easily been able to make their mortgage other properties to bring their mortgage out of year earlier. In a time of financial setback they over which you have no control. California just a little more than a decade to repay. Within six months they had sold two year easily beenInable to make their mortgage other properties to bring their their mortgage out of earlier. a time of financial setback they over which you have no control. California just a little more than a decade other properties to bring mortgage out payments and prevented this series delinquency. They soon realized that in order to ago, when prices took a 20 percent to 30 lost one of their most valuable assetsof due to other properties to bring theirthat mortgage out payments and prevented this series delinquency. They soon realized in order toin lost ago, when prices took a 20 percent to 30 one of their most valuable assetsofdue to of delinquency. They soon they realized that events. protect their $150,000 of equity would have percent corrective jolt downward.” Real estate a lack of liquidity. If they had separated their oforder delinquency. They soon Law realized that in events. protect their $150,000 of $150,000 equity they would have percent corrective joltto downward.” Real estate Separating equity increase lackthis of point liquidity. they had their At in theIf story, Dougseparated admits the to sell their home. As Murphy’s to protect their ofwould equityhave they a$150,000 equity is no safer than any other investment in in home equityDoug and admits repositioned At this point the story, the oit,sell their home. As Murphy’s Law would have order to protect their $150,000 of equity they equity is no safer than any other investment young couple was really andrepositioned his wife, the in home equityheand would have to sell their home. As Murphy’s $150,000 whoseof value is determined by an external principal ityoung into acouple safe side account, have safety was really hethey andwould his wife, t,previously the would have to sell their home. As Murphy’s whose value is determined by anhave external Sharee. Despite objections from his editor, strong real estate market turned soft. market over which we personally no Law would have it, the previously strong real iteasily into abeen safe sideobjections account, they would have able to make their mortgage Sharee. Despite from his editor, previously strong real estate market turned soft. market over which we personally have nolife,” Law would have it, the previously strong real Doug insisted the story remain in the book The Seattle Times, in an article published control. In fact, due to the hidden “risks of estate market turned soft. easily been able to make their mortgage Doug insisted the story remain in the book payments and prevented this series of events. The Seattle Times, in an article published control. In fact, due to the hidden “risks of life because he wanted his readers to know he Although they reduced their asking price several estate market turned soft. estate equity is not nearly as safe as many in real March 2004, reported, “Remember that payments and prevented thisimportance series events. because he wanted histhe readers to of know he in other Although they$295,000 reduced their asking price several real estate equity is not nearly as safe as man March 2004, reported, “Remember that understands first hand of times – from down to $195,000 – they Although they reduced their asking price At this point in the story, Doug admits the housing conservative prices can andinvestments do level off.and assets. understands first hand the importance of imes –not from $295,000 down their to $195,000 –the they other conservative investments assets. positioning assets in financial instruments could find a buyer. Sadly, they gave up Although they reduced asking price housing prices can and do level off.and A home that is either mortgaged to the hilt several times – from $295,000 down to At this point inwas theinreally story, Doug the couple andadmits positioning assets financial instruments could not find a buyer. Sadly, they gave up the to young that maintain liquidity in theheevent ofhis an wife, They home in foreclosure to the mortgage lender. A home that isdecline either mortgaged to the hilt sometimes – witness Southern several times – from $295,000 down or owned totally free and clear provides the $195,000 – they to could not find a buyer. Sadly, young couple was really hefrom and wife, They Sharee. Despite objections his editor, that maintain liquidity in the event ofhis an home in foreclosure the mortgage lender. emergency. If Doug and Sharee had access Sometimes sad stories only get sadder. The two sometimes decline – witness Southern or owned totally free and clear provides greatest safety for the homeowner. California just a little more than a decade ago,the $195,000 –up theythecould notinfind a buyer. Sadly, they gave home foreclosure totwo the Sharee. Despite objections frominhad his editor, emergency. If the Doug and Sharee Sometimes stories only get sadder. Doug insisted story remain theaccess book to their home’s equity, they could have used when mortgagessad on the property were in the The amounts greatest safety the homeowner. California just a little thantoa decade ago, prices took afor 20more percent 30 percent they gave up the home in foreclosure to the Doug mortgage lender. Sometimes sad stories insisted the story remain in the book to their home’s equity, they could have used mortgages onand the property were in the amounts it to weather the of $125,000 $25,000, respectively. The because he wanted his readers to know he corrective when prices took a 20 percent to 30 percent jolt downward.” Real estate equity mortgage lender. Sometimes sad one stories only mortgage getand sadder. The two mortgages on the because itfinancial to weather the ofsecond $125,000 $25,000, respectively. until theyreaders could get holder outbid the firstThe hestorm wanted his to back know he understands first hand the importance of iscorrective jolt Real estatewhose equity no safer thandownward.” any other investment get sadder. two mortgages on property were inThe thefeeling amounts financial storm until they could get second mortgage holder outbid the of first$125,000 one on their feet. Doug from hisback own of at only the ensuing auction, that, much likethe understands first hand the importance positioning assets inlearned financial instruments is no safer than any other whose value is determined by aninvestment external market property were in itthe amounts $125,000 experience the importance of maintaining original owners, was in athat, goodof position. and $25,000, respectively. The second positioning on their feet. Doug from his own atthe the ensuing auction, feeling much like assets inlearned financial instruments that maintain liquidity in the event of an over value is determined by an external market which we personally have no control. flexibility in order to ride outof market lows Knowing that the house had appraised experience importance he original owners, itrespectively. was in abeen good position. and $25,000, The mortgage holder outbid the first onesecond at for the that maintainIfthe liquidity inSharee themaintaining event of an In emergency. Doug and had And, access over which haveofnolife,” control. fact, due towethepersonally hidden “risks real and take advantage of market highs. $300,000, and the obligation owing was only flexibility in order to ride out market lows Knowing that auction, the house had been appraised mortgage holder outbid the onelike at for the ensuing feeling that,first much the emergency. If Doug and Sharee had access to their home’s equity, they could have used most importantly, he learned never to allow a $150,000, it thought it could turn around and In fact,equity due toisthe real estate nothidden nearly “risks as safeof aslife,” many and take advantage of market highs. And, $300,000, the obligation owing wasposition. only the originaland owners, it was in a good ensuing auction, feeling that, much like itmost to weather the financial until theyina other their home’s equity, they storm could have used significant amount oflearned equity tonever accumulate sell the property to cover the investment. It took to importantly, he to allow $150,000, it thought it could turn around and conservative investments and assets. estate equity is not nearly as safe as many Knowingowners, that theithouse been appraised original wasduring inhad a which good time position. get back their feet. learned itcould to property. weather theonfinancial storm until theyin Aother his nine long months sell, the the significant amount of equity toDoug accumulate sell the property toto cover investment. It took homeconservative that is eitherinvestments mortgaged and to theassets. hilt for was $300,000, the obligation owing Knowing that thetoand house had been appraised Home equity is not the same as cash in the lender forced pay the first mortgage and from his own experience the importance of or owned totally free and clear provides the could get back on their feet. Doug learned his property. nine long months to sell, during which time the A home that is either mortgaged to the hilt was only $150,000, itofcould turn maintaining for $300,000, and itthethought obligation owing bank; in the isas theto same also accrued an additional interest flexibility insame order ride out Home equity is not thebank cash in as the ender was forced to pay the$30,000 first mortgage and from hisonly owncash experience the importance of greatest safety for the or owned totally freehomeowner. and clear provides the around sell tofinally coversold, the market was only and $150,000, it property thought could turn cash in thecash bank. Being richof and cash and penalties. the the time the homeitof bank; only the advantage bank is the as also accrued anBy additional $30,000 interest lows andintake market maintaining flexibility inhouse order tosame ride out greatest safety for the homeowner. investment. took nine months to sell, poor in is the a dangerous position be in. It is less the $30,000 in accrued indebtedness, guess around andByItsell the property tofinally cover the market cash Being housetorich cash and penalties. the time thelong home sold, lows bank. and take advantage ofand market It in took nine long months toguess sell, poor is a dangerous position to be in. It is essinvestment. the $30,000 accrued indebtedness,
Separating equity to increase safety of principal
“Home equity is not equity the“Home same as cashisinnot the the same cashininthe the bank. Onlyascash bank. the bank Only is thecash sameinas bank cash is inthe the same bank.”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 Americans typically believe home equity is refinance or sell. When the people in Houston a very safe investment. In fact, according to pleaded, “Mr. Banker, I’ve been making extra a recent study, 67% of Americans have more mortgage payments for years. I’m well ahead of their net worth in home equity than in all of schedule. Will let you let me coast for a other investments combined. However, if 100 while?” The bank replied, “Fat Chance!” 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.
“Home equity is not the same as cash in the bank. Only cash in the bank is the same as cash in the bank.”
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 home appreciates, or our mortgage balance is going down, thatTherefore, the equity home has a the home’s appreciation. rateequity of return. notintrue. HomeItequity simplyThat’s sits idle the home. does rate of Home return.values Assume you hasnot NOearn rateany of return. fluctuate home worth $100,000 duehave to amarket conditions, not which due toyouthe own freebalance. and clear. If thethe home appreciates mortgage Since equity in the 5%, you own an asset worth $105,000 at home has no relation to the home’s value, the end of the year. it is in no way responsible for the home’s appreciation. Therefore, home equity simply Now, assume you had separated the sits$100,000 idle in theofhome. It does not earn any rate home equity and placed it in of areturn. Assume you haveaccount a home worth safe, conservative side earning $100,000 you own would free and 8%. Yourwhich side account beclear. worthIf the home appreciates ownyear. an asset $108,000 at the5%, endyou of the You worth still own theathome, which appreciated 5% and $105,000 the end of the year. is worth $105,000. By separating the equity
Now, assume a new you asset had which separated the you created was also $100,000 of home and Therefore, placed it in a able to earn a rateequity of return. safe, sidemore account 8%. youconservative earned $8,000 thanearning you would have money werebeleft to sit$108,000 idle Your sideif the account would worth theend home. fair, you have at inthe of To thebeyear. You do still owna the mortgage payment you didn’t have home, which appreciated 5% and is before. worth However, since interest rates are relative, $105,000. By separating the equity you if we are assuming a rate of return of 8%, created a new asset which was also able to we can also assume a strategic interestearn a rate of return. Therefore, you earned only mortgage would be available at 5%. $8,000 more mortgage than youinterest would ishave the Also, since 100%if tax
money were left to sit idle in the home. To be fair, you do have a mortgage deductible, the net cost of thepayment money isyou didn’t have This before. However, since interest only 3.6%. produces a 4.4% positive spread betweenif the costassuming of moneyaand rates are relative, we are rate of the earnings on that money. return of 8%, we can also assume a strategic interest-only mortgage would be available at The story gets much more compelling 5%. Also, since mortgage interest is 100% tax over time, although the mortgage debt deductible, the net cost of the money is only remains constant, through compound 3.6%. This produces a 4.4% positive spread interest, the side account continues to between the cost of money and the earnings grow at a faster pace each year. The onearnings that money. on $100,000 in year 1 are $8,000. Then in year 2, the 8% earnings
The story gets much more compelling over on $108,000 are $8,640. In year 3, the time, although the mortgage debt remains earnings on $116,640 at 8% are $9,331. constant, compound interest, Since thethrough mortgage debt remains the the side account continues to grow at aoffaster same, the spread between the cost the pace each year. Theand earnings on $100,000 mortgage money the inearnings year 1 are Then inequity year 2, the 8% on$8,000. the separated continues widen further in the In year 3, earnings on to $108,000 are $8,640. 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 debt remains the same, give up the opportunity to put it to thewespread between the cost of the mortgage work and allow it to grow and compound. money and the earnings on the separated equity continues to widen further in the Homeowners would actually be better off homeowner’s favor everybackyards year. If we burying money in their thanallow
home equity to remain idle in the home, we give updown the opportunity to put since it to work and paying their mortgages, money allow itintothe grow and compound. buried backyard is liquid (assuming you can find it), and its safe (assuming Homeowners would actually neither be better no one else finds it). However, is off burying amoney their backyards than paying earning rate ofinreturn. It’s actually losing down due theirtomortgages, sincepeople moneytoday buried in value inflation. Few the backyard liquid (assuming you can find bury money inisthe back yard or under their mattresses, because they have confidence it), and its safe (assuming no one else finds it). in the banking system. They also However, neither is earning a rateunderstand of return. idle money loses value while invested It’s actually losing value due to inflation. Few money grows and compounds. As Albert people today bury money in the back yard or Einstein said, “The most powerful force in under their mattresses, because they have the universe is compound interest.” After all, confidence in the banking system. They also homes were built to house families, not store understand idle money losesto value while cash. Investments were made store cash.
invested money grows and compounds. As Albert from Einstein said, “The mostsuppose powerfulyou force Taken a different angle, in theoffered universe compound interest.” After were an is investment that could never go in value, might down. How not all, up homes werebutbuilt to go house families, much of it would you want? Hopefully store cash. Investments were made tonone. store Yet, this is home equity. It has no rate of cash.
return, so it cannot go up in value, but it could go down in value if the real estate marketyou Taken from a different angle, suppose declines or the an were offered anhomeowner investment experiences that could never uninsured loss (e.g. an earthquake), disability, go up in value, but might go down. How much or a foreclosure
5%.we It’sgive whatupmakes millionaires, millionaires Let’s say you had $100,000 of equity in of it would you want? Hopefully none. Yet, this The home, themillionaires, “opportunity” to earn a The power leverage 5%. It’s what makes millionaires! Let’scost say you had $100,000 of equity in of not borrowing The power ofofleverage 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 percent onown the banker. money. By using the to return be your your home that could be separated. Current 5 Learn 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 Let’s be clear, buying a home can be a great cannot go up in value, but it could go down principles that banks and credit unions use, mortgage interest is 5%, so the cost of that investment. However, the wealthy buy the you can amass a fortune. A bank’s greatest money would be $5,000 per year (100% tax By separating investment. However, the wealthy buy the the equity we give it greatest new life. you can amass a fortune. A bank’s moneyhomeowners would be $5,000 per yearequity (100% tax in value if as thelittle realofestate market declines home with their own money as or When separate to assets are its liabilities. You can substantiall deductible). Rather than bury the $100,000 home with as little of their own money as We give are ourselves the opportunity to put it to assets its liabilities. You can substantially deductible). thansafe, buryside the $100,000 possible, leaving the majority ofan their cash in the homeowner experiences uninsured reposition it inRather a liquid, account, your net worth by optimizing the in the backyard, we are going to put it toa workenhance possible, leaving the majority of their cash in and earn it. Assuming enhance your something net worth byonoptimizing the a in the backyard, weisare goingThe to put it to other investments where it’s liquid, safe, and loss (e.g. an earthquake), disability, or a mortgage payment created. assets that you already have. By being your work, or “employ” it. If I were anmortgage employer, other investments where it’s liquid, safe, and 28assets percent netByemployment thattax youbracket, alreadythe have. being your work, or “employ” it. If I were an employer, earning a rate of return. One of the biggest foreclosure own banker you can make an extra $1 Millio why would I be willing hire an assistant payment is considered the to Employment Cost. earning a rate of return. One of the biggest cost not 5%, but 3.6%, or $3,600 year misconceptions homeowners have is that their ownis banker you can make an extra per $1 Million why would I be willing to hire an assistant for retirement. $35,000 perdon’t year?understand The expectation is I Whatformany people is when misconceptions homeowners thatmade. their home is the best investmenthave theyisever for retirement. foram $35,000 per year? The expectation is I after taxes (mortgage interest is 100% tax going totrapped be ableintoour grow my business home is the best investment ever leave equity home, we incur IfThe you purchased aleverage home inthey 1990 for made. $250,000 weam going to be able to grow my business power of It’s not too difficult to find tax and earn a profit on it. As a business owner, deductible). If you a home in 1990 $250,000 How to create an extra same cost, but we call it aa lost Opportunity andpurchased sold it in June of 2003 for for $600,000, that the and earn a profit on it. As business owner, or tax deferred an investments I believe that by investing in an assistant I free How to create extra earning and sold it in June of 2003 for $600,000, that Let’s be clear, home the cansame be a Cost. represents a gainbuying of 140%.a During dollars for retirement I believe that by investing in an assistant I costmoremillion will earn a return that’s greater than the than 3.6%. Usingfor theretirement tax benefits of a represents a gain 140%. During the same million dollars period, the DowofJones grew from 2590 to 9188, will earn a return that’s greater than the cost great investment. However, the wealthy of employing that assistant. If we choose to mortgage, you can create your own arbitrage money that’s parked in your home doing By repositioning $200,000 into an equity period, Jones grewas from 2590 9188, a gainthe of Dow 255%. Thewith reality here is that buy the home little oftofinancing their The to of employing that assistant. If weinchoose leave the $100,000 of equity our home, By repositioning $200,000 into an equity by borrowing at one rate and earning management account with a financial advis a gain of 255%. The reality here is that financing nothing could be put to work earning you your was the investment decision leave $100,000 of equity in ourThe home, own home money as best possible, leaving the we the incur almost the same cost. only management account with a financial advisor you can achieve a net gain of $1 million investment returns at a slightly higher rate. your home was the best investment decision that you ever made. When you purchased the something. wedifference incur almost the same The to only majority of their cash in other investments is, instead of cost. referring that cost youover canthirty achieve a net gain ofyou $1 million years. Assume separate the that$250,000 you ever house made. in When the It’s what the banks and credit unions do all 1990,you youpurchased only put $50,000 difference is, instead of referring to that cost as employment cost, it is referred to as an where it’s liquid, safe, and earning a rate of over thirty years. Assume you separate the $200,000 homeour equity usingata2% mortgage say you had $100,000 of equity in the time. $250,000 house in 1990, youinvestment only put $50,000 down. The $50,000 cash produced aLet’s They of borrow money and as opportunity employmentcost. cost,By it is referred as anin the $200,000 leaving thetoequity return. One of the biggest misconceptions of home equity using a mortgage with a 5% interest rate. If the $200,000 your home that could be separated. Current down. The $50,000 cash investment produced a profit of $350,000. That is a total return of 600%, opportunity cost. By leaving the equity in the then loan it back to us at 5%. It’s what makes home, we give up the “opportunity” to earn a with a 5%atinterest rate. If therate $200,000 homeowners have isis athat home is mortgage grows a conservative of 6.75% per profit of $350,000. That totaltheir return of by 600%, far outpacing the measly 255% earned the 5%, somoney. the cost toofearn thata millionaires, millionaires!rate Learn to beper your home, weinterest give upisthe “opportunity” 5 percent return on the grows at a conservative of 6.75% year, it will be worth $1,419,275 in 30 years. the best investment ever made. farstock outpacing the measlythey 255% earned by Iftheyou money would be $5,000 per year (100% tax market. 5 percent return on the money. own banker. using the principles that After deducting the $216,000 year, it will beBy worth $1,419,275 inin30interest years. purchased stock market. a home in 1990 for $250,000 deductible). Rather than bury the $100,000 in By separating the equity we give it new life. banks and credit unions use, you can amass payments andthe the$216,000 $200,000 After deducting in mortgage, interest you and sold it inofJune 2003 for $600,000, theBybackyard, The cost notofborrowing wethe areequity going to put it to work, or it toa payments We give ourselves thewe opportunity to life. put separating give it new fortune. Aand bank’s greatest assetsaccount. areyou itsA still have $1,003,275 left in mortgage, your the $200,000 thatcost represents acost gain of 140%. During cost) the “employ” and on why it. Assuming The of not borrowing Wework giveit. ourselves theemployer, opportunity towould put it Itoa liabilities. If Iearn weresomething an (employment vs. opportunity net gain of over one million dollars. You can substantially enhance your still have $1,003,275 left in your account. A same period, cost the vs. Dowopportunity Jones grew cost) from bework 28 and percent the employment something Assuming a net (employment willing toearn hiretax anbracket, assistanton forit.net $35,000 per networth gain of one million byover optimizing the dollars. assets that you When homeowners separate equity to reposition isexpectation not butis3.6%, per year 2590 to 9188, a gain of 255%. The reality year? 28cost percent tax5%, bracket, the or net$3,600 employment The I am going to be able This example simply shows timeyou already have. By being your owna one banker When equity to reposition it in homeowners liquid, safe, separate side account, a mortgage after taxes interest is 100% tax herea is that financing your home was the tocost ismy not 5%,(mortgage but 3.6%, or $3,600 per year repositioning of equity. Imagine how grow business and earn a profit on it. As This example simply shows aforone time the an extra $1 Million retirement. issafe, created. The mortgage payment is it inpayment a liquid, side decision account, athat mortgage deductible). It’s not interest too difficult to find tax can make after taxes (mortgage is 100% tax best investment you ever a business numbers grow for individuals that owner, I believe that by investing in repositioning of equity. Imagine how harvest the considered the Employment Cost. What many payment is created. The mortgage payment is free or taxIt’s deferred investments earning deductible). not too difficult to find tax and reposition their home equity every 5 made. When you purchased the $250,000 numbers grow for individuals that harvest an assistant I will earn a return that’s greater people don’t understand isCost. whenWhat we leave more than 3.6%. Using the tax benefits considered the Employment many free or tax deferred investments earning years as their home continues to appreciate house in 1990, you only put $50,000 down. How to create an extra and reposition their home equity every 5 equitydon’t trapped in our home, wewe incur the same thanofthe cost of employing that assistant. mortgage, you can your ownIf people understand is when leave moreathan 3.6%. Using the create tax benefits Thisasistheir how home the wealthy manage their home The $50,000 cash investment produced a years continues to appreciate! cost, but we call it a lost Opportunity Cost. dollars for retirement weofchoose to leave the $100,000 ofrate equity by you borrowing at one and in million equity trapped in our home, we incur the same aarbitrage mortgage, can create your own equity to continually increase their wort This is how the wealthy manage their net home profit is a totalCost. return of our home, earning investment returns at a slightly we incur almost the same cost. The cost, but of we$350,000. call it a lostThat Opportunity arbitrage by borrowing at one rate and Conversely, if the same $200,000 left repositioning $200,000 into equity to continually increase theiran netwere worth. The money that’s parked in your255% homeearned 600%, far outpacing the measly higher rate.is, It’sinstead what the andtocredit only difference of banks referring that Byequity earning investment returns at a slightly to sit idle in the home for 30 years, it would Conversely, ifaccount the same $200,000 were left doing could be put to work earning you with a financial advisor bymoney the nothing stock market. unions do all thecost, time.it They borrow ouran management The that’s parked in your home cost as employment is referred to as not have earned a dime. higher rate. It’s what the banks and credit something. to sit idle in the home for 30 years, it would money at 2% and then loan it back to us at you can achieve a net gain of $1 million doing nothing could be put to work earning you opportunity cost. leaving equityourin the unions do all theBytime. Theythe borrow not have earned a dime. something. money at 2% and then loan it back to us at
“Homes are designed to “Homes areare designed to house house “Homes designed to house families,not store cash.” families,not store cash.” families,not store cash.” “Investments are designed “Investments areare designed “Investments designed to cash.” to store store cash.” to store cash.”
from the NASD: “Brokers are not prohibited Betting the ranch; risking 401 vacation condo to make the mortgage over thirty years. Assume you separatehome the investment client recommendations. This would include from the “Brokers are payments. not from the NASD: “Brokers areprohibited notper prohibited Betting the ranch; risking home 401 vacation condo investment toNASD: make the mortgage payments. over thirty years. Assume you separate the client recommendations. This would include Betting the ranch; risking home 401 vacation condo from making such a recommendation investment to make the mortgage payments. over thirty years. Assume you separate the client recommendations. This would from making such a recommendation per $200,000 of home equity using a mortgage adequately explaining the risks of such anincl equity to buy securities from making such a recommendation per Many successful people in the Northwest se, so long as the investment is reasonably $200,000 of home equity using a mortgage adequately explaining the risks of such an equity to buy securities Homese,equity is asSerious Money. isWe don’t investment, ofrate. home equity usinggrows a mortgage adequately explaining risks such Many successful people inthe thein Northwest to buy securities successful people the Northw sose, long theasinvestment reasonably with a $200,000 5%equity interest If the $200,000 which are significant, toof the Home equity is Serious We soinvestment long theinMoney. investment isdon’t reasonably dreamMany of retiring and buying a second Home equity is Serious Money. We don’t suitable for general, and it is Recently the NASD issued an alert, “… with awith 5% ainterest rate.issued If theIf$200,000 grows gamble investment, which are buying significant, the dream of retiring and a second home Liquidity and safety 5% thealert, $200,000 investment, which are significant, to dream of retiring and buying ato second suitable forequity. investment in general, and itand is investor.” the interest NASD an “… it“…grows at because aRecently conservative rate ofrate. 6.75% per The NASD wants to home in Arizona orsimply Hawaii. With oneensure suitable for investment inand general, it is Recently the NASD issued anyear, alert, gamble home equity. Liquidity safety suitable for the specific customer. In order to we are concerned that investors gamble home equity. Liquidity and safety at because a conservative rate of 6.75% per year, it investor.” The NASD simply wants to ensure home in Arizona or Hawaii. With one are the key philosophies when separating at a conservative rate of 6.75% per year, it investor.” The NASD simply wants to en home in Arizona or Hawaii. With one suitable for the specific customer. In order to we are concerned that investors million or moreprudent saved inadvice. their suitable for theaspecific customer. In order to dollars willwho be must worth $1,419,275 in 30returns years. consumers are receiving because weinvestment are concerned that investors suitability, broker aredetermine the key philosophies whenshould separating rely on toAfter are the key philosophies when separating million dollars or more saved in their willwho be worth $1,419,275 in 30 years. After consumers are receiving prudent advice. home equity. Rate of return is a distant million dollars or more saved their determine suitability, a broker should rely on investment returns to willmust be mortgage worth $1,419,275 incould 30returns years. consumers are receiving prudent advice. IRA/401Ks, they decide to retire and in buy determine suitability, a broker should who must rely on consider theRate client’s deducting the $216,000 ininvestment interest payments make their payments end toAfter home equity. of investment return is objectives, aobjectives, distant IRA/401Ks, they decide tothey retire and buy home equity. Rate of return is a distant IRA/401Ks, they decide to retire and bu consider the client’s investment deducting the $216,000 in interest payments third benefit. Also, it is not necessary or make their mortgage payments could end the vacation home where will spend consider the client’sand investment objectives, deducting thetheir $216,000 in interest payments make their mortgage could end financial status, taxitstatus, any other defaulting on home payments loans if their andupthe $200,000 mortgage, you still have third benefit. Also, is not necessary or the vacation home where they will spend third benefit. Also, it is not necessary or Tax deductions to the vacation home where they will financial status, tax status, and any other upthe defaulting their home loans if their and $200,000 mortgage, you still recommended invest in highlysuitable volatile financial status, status, and any other their winters. What a surprise when they spe information atofirm usestax to make up defaulting on their loans iftotheir and the $200,000 mortgage, you still have investments and theyhome $1,003,275 leftdecline inon your account. Aare netunable gainhave of Tax deductions toacash their winters. surprise they the recommended to invest in highly volatile Tax deductions toaforsurprise their winters. when information a firmato uses to make suitable recommended invest into highly volatile discover that toWhat pay What a when $350,000 investments to orof investments. You can make information firm uses make suitable $1,003,275 leftdecline inleft your account. Aare netunable gain of client recommendations. This would include investments decline and they toaggressive offset 401k withdrawals meet their monthly mortgage payments.” The $1,003,275 inand yourthey account. Aare netunable gain over one million dollars. discover that to pay cash for a $350,000 orThe aggressive investments. You can make discover that to pay cash for a $350,00 client recommendations. would include condo they 401k need towithdrawals withdraw nearly offset 401k withdrawals meet their monthly mortgage payments.” Thethousands or aggressive investments. Yousuch can client recommendations. This would include adequately explaining the This risks of an make offset of dollars by simply borrowing at meet their monthly mortgage payments.” NASD is absolutely correct in advising against over one million dollars. over one million dollars. condo they need to withdraw nearly condo they need to withdraw nearly adequately explaining the risks of such an $500,000 from their 401K/IRA. What if thousands of dollars by simply borrowing at Most NASD is absolutely correct inmust against investment, which areinsignificant, toborrowing theof such adequately explaining the risks an successful retirees have the majority thousands ofatdollars by at equity if the client on NASD is absolutely correct inrely advising against 5% and investing 5% safesimply conservative Thisseparating example simply shows a advising one time $500,000 from their 401K/IRA. What if majo Most successful retirees have the majority they had purchased the condo $500,000 from their 401K/IRA. What investment, which are theto the Most successful retirees have the separating equity ifsimply the must on 5%investor.” and investing at without 5% safe conservative This example simply shows a to one time of instead their assets in their home equity and if The NASD simply wants ensure investment, which are significant, the returns from their investment make thetime separating equity ifclient the client must rely on 5% and investing atinsignificant, 5% in safetotoconservative This example shows arelyone fixed investments ever going repositioning of equity. Imagine how the instead they had purchased the condo 15 years earlier, when it cost $175,000, by of their assets in their home equity and instead they had purchased the condo investor.” The NASD simply wants to ensure the returns from their investment to make the consumers are receiving prudent advice. of their assetsstart in withdrawing their home funds equity investor.” NASD simply wants togoing ensure mortgage payments. IRA/401Ks. As they fixed investments without ever going repositioning offor equity. Imagine how the the returns from their investment to make the fixed investments without ever repositioning of equity. Imagine how the into securities. InThe general, individuals numbers grow individuals that harvest 15 years earlier, when it cost $175,000, by using the equity in their home? 15 years earlier, when it cost $175,000, consumers are receiving prudent advice. mortgage payments. IRA/401Ks. As they start withdrawing funds prudent advice. Home equity isfor Serious We don’t mortgage payments. IRA/401Ks. As inthey start from their IRA/401Ks, they arewithdrawing hit with a fu into into securities. In aregeneral, numbers grow individuals that harvest securities. Inreceiving general, individuals numbers grow for Money. individuals that 5harvest should notconsumers invest home equity forindividuals “current and reposition their home equity every using the equity their home? using the equity in their home? HomeHome equity is Serious Money. We don’t gamble home equity. Liquidity and safety are from their IRA/401Ks, they are hit with a equity ishome Serious Money. We don’t significant annual tax bill.would Moreover, the hit kidswit Tax deductions to offset fromtheir their IRA/401Ks, they are should not invest home equity foris“current and as reposition their equity every 5 income” unless the investment fixed years their home continues to appreciate! should not invest home equity for “current and reposition their home equity every 5 Today net worth be $175,000 gamble home equity. Liquidity and safety are the keygamble philosophies when Liquidity and safety areTax deductions to offset homecontinues equity. significant annual tax bill. Moreover, theand kids have moved out, the mortgage is paid, significant annual tax bill. Moreover, the Tax deductions to offset income” unless the investment is fixed years as their home totheir appreciate! 401k withdrawals Today their worth would be $175,000 and guaranteed. Individuals interested in This is years how the wealthy manage higher, due tonet the condo’s appreciation, income” unless the investment is fixed askey their home continues tohome appreciate! Today their net worth would be $175,0 the key when separating home equity. Rate of return thephilosophies philosophies when have moved out, the mortgage is paid, and tax deductible contributions to 401Ks have 401k withdrawals have moved out, the mortgage is paid, andMost guaranteed. Individuals in inand This wealthy manage homehome higher, due to the appreciation, they would have thecondo’s mortgage 401k withdrawals variable investments should ask interested themselves, equity tohow continually increase their net worth. and guaranteed. Individuals is the how the wealthy manage their higher, due tocondo’s the appreciatio home equity. Rate return isseparating aisThis distant third benefit. Also, itof istheir notof successful retirees have the interested majority separating home equity. Rate return tax deductible contributions to 401Ks have stopped. When they could use the mortgage interest deduction to help off-set their and they would have the mortgage tax deductible contributions to 401Ks variable investments should askequity themselves, equity toiscontinually increase their net worth. “How will I assets make mytheir mortgage payment if Conversely, the same $200,000 were to worth. and they would have the mortgage h necessary or recommended toAlso, in is aequity distant third benefit. Also, itinvest istheir not variable investments should ask and themselves, to continually increase ofMost their in home successful retirees have the majority aifdistant third benefit. itleft isnet not Most successful retirees have the majority stopped. When they could use the mortgage IRA/401K withdrawals. In addition to the deduction to help off-set their deduction thethey most, don’t stopped. When could use thehave mortg interest deduction tothey help off-set their “How will I assets make mytheir mortgage payment ifandinterest theor $200,000 were left highly volatile aggressive investments. Do I have reserve sitConversely, idle innecessary theifhome for 30 years, it would nottoleft necessary or recommended to invest in IRA/401Ks. Asdecline? they start withdrawing funds of“How their in home equity and I assets make my mortgage payment if interest Conversely, ifsame therecommended same $200,000 were to investments or to invest inmy of will their in their home equity financial advantages, they would have IRA/401K withdrawals. In addition to the interest deduction the most, they don’t have it. As part of long term planning, someone IRA/401K withdrawals. In addition to the can make thousands of30 dollars byit simply interest deduction the most, they don’t h IRA/401Ks, they are hit afunds highly volatile orhome aggressive investments. myfrom investments Dowithdrawing have reserve sitYou idle inhighly the home foror30aggressive it would not funds or their ainvestments secure income?” InI Do April 2004, have earned aindime. IRA/401Ks. Asdecline? they start volatile investments. my Iwith have reserve sit idle the foryears, years, would not IRA/401Ks. Asdecline? they start withdrawing funds enjoyed the lifestyle benefits of may owning financial advantages, they would have it. As part of long term planning, someone who is preparing for retirement want financial advantages, they would have borrowing at 5% and investing at 5% in safe significant annual tax bill. Moreover, the kids You can make thousands of dollars by simply it. As part of long term planning, some from IRA/401Ks, they posed are hitare awith funds or their a or secure income?” In April 2004, have have earned a dime. the following question was toApril the You can make thousands of dollars by simply from their IRA/401Ks, they hit a their funds a secure income?” Inwith 2004, earned a dime. condo 15 years sooner enjoyed the lifestyle benefits ofretirement owning conservative investments without enjoyed theforlifestyle benefits of may ownin to have apreparing mortgage going have moved out, the mortgage is paid, and who isvacation retirement may want w borrowing atfixed 5%atand at 5%atinever safe significant annual tax bill. Moreover, the kids who isplanned. preparing for into retirement borrowing 5%investing and investing 5% in NASD, safe “Where can I find the exact language the following question was posed to thetothethekids significant annual tax bill. Moreover, the following question was posed than they their vacation condo 15 years sooner Betting the ranch; risking going into securities. In general, individuals their vacation condo 15 years sooner tax deductible contributions to 401Ks have conservative fixed investments without ever to help offset the annual IRA/401k tax bill to have a mortgage going into retirement have moved out, the mortgage is paid, and conservative fixed investments without prohibiting ever to they haveplanned. a mortgage going into retirem have moved out, theexact mortgage is paid, andthan a broker recommending that NASD,NASD, “Where can from I can find language “Where I the find thethe exact language should not invest home equity for “current stopped. When they could use mortgage than they planned. Betting the ranch; risking going into securities. In general, individuals tax deductible contributions toand 401Ks have have and enhance their overall financial goals. homeBetting equity tosecurities. buy securities the ranch; to help offsetoffset the annual IRA/401k tax bill going into Inrisking general, individuals taxa deductible contributions to 401Ks I take aprohibiting mortgage out onthemy house invest to help thesam annual IRA/401k tax that prohibiting broker from recommending a broker from income” unless thehome investment isfor fixed Making uncle your interest deduction most,recommending theythe don’t havethat should not invest equity “current stopped. When they could use mortgage For many, the mortgage interest deduction should not invest home equity for “current stopped. When they could use the mortgage and enhance their overall financial goals. home equity to buy securities the money in securities?” The written answer and enhance their overall financial go home equity toanbuy securities I take atake mortgage outterm onthe my house and invest and guaranteed. Individuals interested in it. IAs part of long planning, someone adeduction mortgage out onthe mymost, house andhave invest Recently the NASD issued “…because income” unless the investment is fixed Making sam your most, they don’t best partner income” unless the alert, investment is fixed from interest Making sam your offsets taxes dueuncle on uncle retirement withdrawals, interest deduction they don’t have For many, the mortgage interest deduction the NASD: “Brokers are not prohibited For many, the mortgage interest deduc variable investments should ask themselves, the money in securities?” The written answer who is preparing for retirement may want the money in securities?” The written answer we are concerned that investors who must rely and guaranteed. Individuals interested in it. As part of long term planning, someone Recently the NASD issued an alert, “…because and guaranteed. Individuals interested in it. As part of long term planning, someone best partner Recently the NASD issued an alert, “…because giving the net effect of tax free withdrawals Under tax law you can deduct up to one offsets taxes due on retirement withdrawals, best partner from making such a for recommendation per will investments I make mytomortgage payment if towho have apreparing mortgage going into offsets taxes due on retirement withdraw from the iswho NASD: “Brokers are not prohibited variable should ask themselves, onwe“How investment returns make their from the “Brokers areretirement not prohibited retirement may want variable investments should ask themselves, areinvestments that investors whomortgage must rely rely isNASD: preparing for retirement may want from their retirement account. weconcerned are concerned that investors who must million dollars ofyou interest subject my decline? Do I have reserve giving the net effect of taxof free withdrawals to help offset the annual IRA/401k tax bill se, so long as the investment is reasonably tax law can up one giving the netmortgage effect freeto withdraw making such a recommendation per per Under “How will I make my mortgage payment Under tax law youdeduct cantax deduct up to on tofrom have a mortgage going into retirement payments could end up defaulting on payment theirif from making such a recommendation “How will I make my mortgage if to have a mortgage going into retirement onfunds investment returns to make their mortgage tomillion income restrictions. You can also deduct oninvestments investment returns to make mortgage or a secure income?” In Apriltheir 2004, and enhance their overall financial goals. from their retirement account. suitable for investment in general, and it is dollars of mortgage interest subject my decline? Do I have reserve from their retirement account. million dollars of mortgage interest sub tose, help the annual IRA/401k billtax bill se, so long as the investment is IRA/401k reasonably home loans if question their investments mycould investments decline? Do Idecline have reserve to offset help offset the annual so long as the investment istax reasonably an additional $100,000 from home equity payments end up defaulting the payments following was toon thetheir For many, thespecific mortgage interest deduction could end upposed defaulting on their tovacation income restrictions. You can deduct suitable for the customer. In order funds or a secure income?” In April 2004, to income restrictions. Youalso can also de and enhance their overall financial goals. 401 suitable for investment in general, and it is funds or can a secure income?” In April 2004, and enhance their overall financial goals. and theyloans are unable tofind meet their monthly loan interest. Tocondo take advantage of these suitable for investment in general, and it is NASD, “Where I the exact language home if their investments decline offsets taxes due on retirement withdrawals, loans if their investments decline an additional $100,000 from home equityequ thehome following question was posed to the to determine suitability, a broker should an additional $100,000 from home For many, the mortgage interest deduction the following question was posed to the suitable For many, thespecific mortgage interest deduction for specific customer. In order mortgage payments.” NASD is absolutely deductions, make sure to secure a large prohibiting brokerThe from recommending that suitable for effect the customer. In order 401 vacation condo giving the the net of tax free withdrawals and they area unable meet their monthly 401 vacation condo loan interest. 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dollars or more saved in their IRA/401Ks, they decide to retire and buy the vacation home where they will spend their winters. What a surprise when they discover that to pay cash for a $350,000 condo they need to withdraw nearly $500,000 from their 401K/IRA. What if instead they had purchased the condo 15 years earlier, when it cost $175,000, by using the equity in their home? Today their net worth would be $175,000 higher, due to the condo’s appreciation, and they would have the mortgage interest deduction to help off-set their IRA/401K withdrawals. In addition to the financial advantages, they would have enjoyed the lifestyle benefits of owning their vacation condo 15 years sooner than they planned. Making uncle sam your best partner Under tax law you can deduct up to one million dollars of mortgage interest subject to income restrictions. You can also deduct an additional $100,000 from home equity loan interest. To take advantage of these deductions, make sure to secure a large mortgage when you buy. Under tax law, mortgage interest is deductible only for $100,000 over acquisition indebtedness (the mortgage balance when home is purchased). Home improvements are the only exception. For example, if you sell your home for $400,000 and buy a new home for $400,000 with the cash from the sale, you will lose the tax break and liquidity. But worse, if you later decide to take out a home equity loan, only the first $100,000 will be tax deductible. Instead, secure a $360,000 mortgage (90%) when you buy the home and the entire amount is deductible.
vehicles. Tax favored safe investments are ideal. You should consult your financial planner for the best investment vehicles for your specific situation. Many financial planners prefer the following tax favored products for investing home equity: • Investment grade insurance contracts • Annuities • Real estate investment trusts • IRAS • 401ks • Tax-free bonds • 529 savings plan
Case study: home equity management There’s a recent case study of a couple living in a $550,000 home in Bellevue, WA. They owed $360,000 on a 30-year fixed mortgage at 5.875% with a monthly payment of $2,130. They had $190,000 built up in home equity. A very common “Brother A”-type traditional scenario. After understanding the liquidity, safety, rate of return, and tax benefits of properly managing their home equity, this couple decided to separate $155,800 of their equity to invest in a safe conservative side account. By using an interest-only ARM they were able to increase their mortgage balance to separate this chunk of equity while decreasing their monthly mortgage payment to $1,656, a monthly cash flow savings of $474 per month.
The couple conservatively invested the $155,800 lump sum and the $474 per month savings with their financial planner. If we assume a conservative 6% rate of Where to safely invest return, their investment account will grow to home equity $520,196 in 15 years. In the 15th year, they Home equity is serious money. We are will have enough cash in their investment separating it from the home to conserve it, account to pay off their mortgage completely not to consume it. Therefore it should not be if they want to (15 years earlier than with invested aggressively. Rather, home equity is their original 30 year mortgage!). However, best invested in safe, conservative investment armed with their new equity management
knowledge, they plan to keep the mortgage well into retirement so they can keep the tax deduction benefits and keep the money in the investment account where it’s more liquid, more safe, and will continue to grow and compound.
Case study: cash flow management It’s not necessary to have a large chunk of equity in your home to benefit from using your mortgage to create wealth. Many homeowners without a large equity balance have benefited by simply moving to a more strategic mortgage which allows them to pay less to their mortgage company each month, thereby enabling them to save or invest more each month. For example, a couple in Redmond, Washington followed traditional thinking when they bought their $400,000 home. They put 20% down and obtained a $320,000 30-year fixed rate mortgage at 6.00% with a payment of $1,919 per month. This is how the vast majority of Americans would purchase this home. However, once this couple understood the benefits of integrating their mortgage into their financial plan, they decided to make a change. They moved to a more strategic interest-only mortgage. They kept the same loan balance, but were able to reduce their monthly payments to $1,133 per month, a savings of $786 per month from their previous mortgage. The couple invests the $786 savings each month, and assuming a 6% rate of return, they will have enough money in their investment account to pay off their mortgage in 19 years (11 years sooner than their previous 30 year schedule!). Therefore, by simply redirecting a portion of their monthly mortgage payment, they were able to potentially shave 11 years off their mortgage. In addition, they also received the benefits of having their cash in a more liquid, more safe position throughout the process.
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