10 tips for using your mortgage as a financial tool.

dsickler

10 tips for using your mortgage as a financial tool

Here is a list of 10 tips to building and maintaining wealth, as well as the 10 most common myths about home equity, and the reality of each myth. I got the information from a book that I think holds very powerful financial advice. I’m not sure if it’s ok to list the name of the book to avoid the concern of advertising. But if you really want to know, just send me a message and I will let you know which book and author this is from. Also please let me know if this is not the correct forum to post this so that I can put it in the correct forum if necessary.

“1. Avoid the $25,000 mistake that ensnares millions of Americans.

Myth: The best way to pay off a home early is to pay extra principal on your mortgages.
Reality: No method of applying extra principal payments to your mortgages is the wisest or most cost-effective way of paying off your house.
Strategy: Establish a liquid side fund to accumulate the funds required to pay off your mortgage, maintain flexibility, achieve substantial tax savings and accumulate excess cash.

2. Avoid expensive risks. Position yourself to act instead of reacting to market conditions you have no control over.

Myth: Home equity is liquid.
Reality: When you need it most, you may not have it. Home equity is usually not-liquid.
Strategy: Separate as much equity from your property as is feasible, positioning it in financial instruments that will maintain liquidity in the event of emergencies and conservative investment opportunities.

3. Separate home and equity to increase safety. Real properties with high equity and low mortgages get foreclosed on the soonest.

Myth: Home equity is a safe investment.
Reality: A home mortgaged to the hilt or totally free and clear provides the greatest safety for the homeowner.
Strategy: Separate as much equity from your home as feasible to achieve greater safety of principle and reduce the risk of foreclosure.

4. The return on equity is always zero—no matter where your property is located.

Myth: Home equity has a rate of return.
Reality: Equity grows as a function of real estate appreciation and a mortgage reduction; however, equity has no rate of return.
Strategy: Separate as much equity from your house as feasible in order to allow idle dollars to earn a rate of return.

5. Make Uncle Sam your best partner. Mortgage interest is your friend, not your foe.

Myth: Mortgage interest is an expense that should be eliminated as soon as possible.
Reality: Eliminating mortgage interest expense through traditional methods eliminates one of your best partners in accumulating wealth and financial security.
Strategy: Use the difference between preferred and non-preferred interest expense to make interest work for you instead of against you.

6. Use debt for positive leverage.

Myth: Any and all debt is undesirable.
Reality: Some debt, when managed wisely, can be desirable.
Strategy: Use debt wisely as a positive lever for equity management purposes, conserving and compounding equity rather than consuming it.

7. Understand the cost of not borrowing—compare deductible versus non-deductible costs.

Myth: lower mortgages, resulting in lower payments, mean lower cost.
Reality: If you take opportunity costs into consideration, low mortgage-to-home-value ratios create tremendous hidden costs that increase the time needed to pay off a mortgage.
Strategy: Choose to incur deductible employment costs rather than non-deductible opportunity costs, since you have no choice but to incur one or the other.

8. Turbo charge your wealth growth rate by creating homemade wealth.

Myth: Borrowing funds at a particular interest rate, then investing them at the same or lower interest rate, holds no potential growth returns.
Reality: You can earn a tremendous profit—regardless of the relative interest rates—by positioning your money in a tax favored, interest-compounding investment that earns a rate of return greater than the real net cost of obtaining the money.
Strategy: Learn to apply the fundamental principle that highly profitable financial institutions use to accumulate and create wealth—arbitrage. Employ equity to earn a rate of return higher than the net cost of separating that equity. By doing so, you will create tremendous wealth and substantially enhance your net worth.

9. Strategically refinance your home as often as feasible to increase your net worth.

Myth: Equity in your home enhances your net worth.
Reality: Equity in your home does not enhance your net worth at all. Separated from your home, however, it has the ability to dramatically enhance your net worth over time.
Strategy: Set the stage to substantially increase your net worth. Refinance your home as often as feasible to separate equity and accelerate the process of accumulating the resources to cover all your debts.

10. Keep your mortgage balance high to sell your home more quickly and for a higher price.

Myth: The amount of equity you have in your home has no bearing on how marketable it is.
Reality: Your home may likely sell much more quickly and for a higher price if it has a high mortgage balance (low equity)—rather than a low mortgage or no mortgage balance (high equity)—especially in soft real estate markets.
Strategy: Always maintain as high a mortgage—with flexibility—on your home as feasible to keep it marketable at the highest possible price should you want to sell the property.”

David

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

All I'm going to say is that while these are very valid points and 'tricks' if you will, do your homework before employing any of these. Most people don't just pick up finances and understand how they work right off the bat (Hence our wonderful credit scores across the country.) It is extremely important that you learn how to keep track of your money and learn to see leverage as opposed to simply paying bills and getting coffee each morning.

These are very positive views, but can be extremely dangerous to someone that is not educated in how to make them work according to their specific situation.

dsickler · Posted: Fri Aug 12, 2005 5:46 am Post subject:

Well Said,

Thank you Haplo,

David

chow · Posted: Fri Aug 12, 2005 9:46 pm Post subject:

Tricks? Haplo, besides the 5k in free legal advice I gave you today to pass on, can you send me a hoola hoop with that raffle tix I'm sending you?

Hey, I'm a "hood" that is going to be bought out by an international airport, If they move me-I want to take my rate to the next location. It's 4.5% and I am retired. (this is a usual and customary request for anyone in my area-we ask that the buyer, buy our rate down)

I work this business 40 hours a week, out of my house, and make a few bucks. Why would I want my home financed to the hilt, when I plan on using it as storage while I go enjoy life? I would refi it into a Reverse mortgage in 30 yrs.... it's not like I have anyone to give it too!

dsickler · Posted: Fri Aug 12, 2005 9:56 pm Post subject:

Would you like to pass the equity over to your heirs with probate/capital gains, or would you like to pass it on to them tax free? They are better way to pass on your net worth, then trapped in your house.

David

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

I neither agree nor disagree with David's assessment, however I do agree that they can be useful tools for people educated in their use. Just like I said above. You wouldn't go using a band saw if you hadn't been shown or been educated in it's use. You wouldn't likely try to set a charge for detonation of an old warehouse if you didn't have training. It's no different with your financial life.

For Chow, she's doing what she knows to be of the most benefit for her. In the long run, taking David's advice could actually be extremely hurtful. For someone that has taken the time to learn about those principles, it has a great deal of potential.

Of course that's assuming that someone has the discipline and education to follow up with it ;)

You are both correct in your own right. It's all about which side of the coin you are looking at.

dsickler · Posted: Fri Aug 12, 2005 10:13 pm Post subject:

Haplo wrote: I neither agree nor disagree with David's assessment, however I do agree that they can be useful tools for people educated in their use. Just like I said above. You wouldn't go using a band saw if you hadn't been shown or been educated in it's use. You wouldn't likely try to set a charge for detonation of an old warehouse if you didn't have training. It's no different with your financial life.

For Chow, she's doing what she knows to be of the most benefit for her. In the long run, taking David's advice could actually be extremely hurtful. For someone that has taken the time to learn about those principles, it has a great deal of potential.

Of course that's assuming that someone has the discipline and education to follow up with it ;)

You are both correct in your own right. It's all about which side of the coin you are looking at.

Damn it haplo, why do you always need to be correct. lol.

I have nothing against chow's point of view, I deal with that same point of view almost everyday, so it's nothing new to me. Though sometimes I have a hard time understanding her sarcasm. :wink:

For every loan I do, I follow it with a financial plan, showing each client, how much their current retirement plans will last them which usually isn't much and also show them how much their shortfall will be at retirement. Usually when people see how short they will be, it puts them in the right state of mind to really start looking at their whole financial life and make some changes so that they do start saving and do retire financially secure. I try to direct my whole process around educating them so that they can make more educated decisions. instead of buying all that coffee.

David

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

Just one of those sick habits I developed as a youth.

m2c · Joined: 03 Aug 2005 Posts: 937

Slicker,

“al” and “le” in the same post. Haven’t seen that before. Usually the word is misused consistently but I guess you’re covering all bases.

Just comments:

#1 In these days of 100% financing, liquidity is a valid point but within a current time frame what you “earn” via curtailments will exceed what you can earn semiliquid investments OF EQUAL RISK. Paying on principal is a one-way street unless you put on a no-cost HELOC hedge.

#2 True, sort of. When the good times are rolling, slap on a HELOC for future recapture of you equity and then DON’T USE IT until this mythical emergency arises. Doesn’t cost anything till you write the check for the emergency.

#3 No sure where you come up with this. Usually it’s the folks who don’t make their mortgage payments that get foreclosed the soonest. More equity, more options. CA is a “walk away” state so lack of judgments may effect the argument but offsetting this is the 1099 income issue – larger the mortgage, the more likely the amount of taxable “forgiveness” income might be. “Short sales” are unheard of in most parts of the country.

#4 I thought you were a leverage type of guy. On rereading, I think you’re talking current return though.

#5 Yes, but don’t forget to adjust for portion of standard deduction currently being “unused”

#6 “Wisely” is the operative word. I’m not sure this is always or even mostly the case.

#8 IRS has looked very unfavorable in the context of commercial borrowing and brokerage margining at deductible borrowing for investing in tax-free instruments. You can get away with it in home mortgage borrowing if it becomes to prevalent, the golden goose may be killed. Personally I’m an advocate of eliminating the home interest deduction completely. Too much misallocation and probably caused a fair proportion of rapid home appreciation. But, that’s another story …

#10 A reworking of the greater fool theory but it has worked in the past. In many parts of the country “time are a’changing”. Many times Realtors will refuse to take a listing since they know a sales price to clear debts and, of course, their commission, is unrealistic. Even though it’s against the American Way, sellers have had to “pay” cash to complete a sale.

Like Haplo, I’m not 180 degrees on any of your statements. Just cautious about possible misuse. Not a bad pitch. Too many buzz words for me but we all use them and they can be effective.

justin333 · Joined: 13 Aug 2005 Posts: 15 Location: connecticut

Man, this is getting me dizzy. So basically refinance and then invest the money for greater return?

Haplo · Joined: 20 Jan 2005 Posts: 2422 Location: Springfield, IL

I would do some reading on some financial leverage before I simply took money out of one investment and put it in another ;)

dsickler · Posted: Sat Aug 13, 2005 4:06 pm Post subject:

Since I got the ok, here is a list of some good reading material. Also if you are in the local area of Salinas or Los Angeles, I will begin holding client seminars to educate clients on the goods and bads of the different loan program and investment out there.

1. The above list of tips is from "Missed Fortune 101" by Douglas Andrew. An excellent book which in my opinion is the best of all the books. It talks alot about mortgages and investments. I will be posting more about this book later.

2. "Rich Dad, Poor Dad" by Robert Kiyosaki. A story about a guy that notices the difference from between the rich and the poor and how they think differently. Primarily, rich people teach their kids to be rich, and poor people teach their kids to be poor. What what are they teaching their kids? Well the poor teach their kids to:
1. Go to school. knowledge is power.
2. Get a Job and let someone else tell you how much your worth.
3. Buy a house.
4. Spend the rest of your life trying to pay it off.

Well The rich teach their kids to:
1. Go to school. Knowledge is only potential power, but you must organize it and put it into action for it to be power.
2. Own a business and earn what your worth.
3. Buy several properties.
4. And never finish paying them off.

3. "The New Rules of Money" by Ric Edelman. Your parents lived in a time when people bought one house, lived it in for 30 years, got one loan, and kept the loan for 30yrs. They had pensions to retire on. That was a different time. Now people buy several homes, they move from house to house an avergage of 3-5 times. They change jobs every 3-5 years. Pension don't exist anymore because the retirement planning has been passed on to be our responsibility not our employers. So why are we still following the advise from 30 years ago? Do you think money works the same way today that it did 30 years ago? Do you think money will work the same as today 30 years from now?

4. Video "Why you should carry a big long mortgage" By Ric Edelman. Excellent video that talks alot about mortgages and also talks about alot of myths about loans. For example: What is a mortgage loan on? Is it your house? NO. A mortgage loan is a loan on your income, not the house, but they hold the house as collateral.

I'm sure there are others, but I can't think of any right now. But this should be a good start for everyone.

David

lenderama · Joined: 08 Aug 2005 Posts: 22

This is good advice but one factor many forget to consider is the cost of the refinance leveraged against you expected ROI. If for instance, you do a cash out refinance for the same interest rate you have now, pull out 20K, and pay 3k in closing costs. Now your 20k investment has to earn enough profit to surpass the interest you are paying on the additional loan amount AND that 3000 bucks for the refi. that gets to be rather difficult if you are investing conservatively.

dsickler · Posted: Sun Aug 14, 2005 6:56 pm Post subject:

I will explains ways to do that in the near future, but for now, I will start by elaborating on each of the 10 tips very shortly. I'll probably start posing more info monday.

In reality, if you live in a state where your mortgage interest is tax deductible, then even investing at the same rate as your mortgage would still be profitable because of the tax deduction. And historically that has not been hard to do at all.

David

chow · Posted: Sun Aug 14, 2005 10:00 pm Post subject:

"Damn it haplo, why do you always need to be correct. lol. "

what do you think I feel like when he calls me a Mortgage NERD-In PERSON? :lol:

I think Halpo and I need a 1 week time out.....? :wink:

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