Wealth Building and Mortgage Planning: Two Great Flavors That Taste Great Together

What if I told you that almost everything you’ve been told about what to do with your home has been absolutely wrong and that one of the worst ways to build wealth is through your home? What if I went on to show you that anyone who perpetuates this myth is probably not your best source of accurate financial information?

Most of you right now are looking at the copyright a few times to see if this article is REALLY being written by a mortgage person. Some of you have taken this as final, unequivocal proof that all mortgage people really do sit around a big table with cups of tea and hats with fractions in them! No, you’re not in Wonderland, but if you read on, many of you may have been for a long time.

One of the buzzwords or slogans floating around in financial circles is “wealth building.” This has grown in importance due to the ability of the planner or agent to broaden their focus on overall wealth with their clients rather than just the return on a particular investment. While a holistic approach is great, what wealth building strategies often lack is a defined strategy for achieving good wealth building. These plans often fail or underperform because they do not adequately represent one of the most important parts of the wealth picture and that is the house.

WHAT DID HE SAY?

Now that’s not a typo and I didn’t contradict myself from the first paragraph. You see, most people think of their home as something completely separate from the rest of their financial planning. It’s this sacred cow that’s out in the green grass eating while everything else in her financial life is trying to figure out how to thrive without the food she needs. The sooner people realize that EVERYTHING they do is an investment decision, the better off they will be. The implication of your decision is not simply what you get with your action, but the opportunity you give up.

So, back to wealth building and mortgage planning. Borrowing some thoughts from a great financial partner of mine, Brent Gilmore, we can summarize what we normally look for in terms of characteristics of a good investment as:

• something that earns us a good return based on our risk
• it is liquid if we need it
• you are not subject to further restriction to access it once we have it
• there is no risk of loss.

The reality is that your home is by no means the definition of a good investment. The reasons are pretty clear if we break them down. What would happen if I told you that the MAXIMUM return you can get on buying your house is 0%?

This is where we come down the rabbit hole.

First we need to explain the difference between ROI and ROI. Return on investment is simply getting back the money you invested. The return on investment is the difference between the final value of your investment and the amount you invested.

Whether you pay cash for your home or pay nothing at all, your home mortgage will be worth exactly the same in 1 year, 5 years, 10 years, or 30 years. It is true that if the values ​​continue to rise, you will get a positive return on investment, but that is independent of the return on your investment. Even that fact has some doubt clouding it, but that’s another article.

PAGE LITTLE CHICKEN

Now let’s take a step back from all the sky is falling stuff and clear up a few things. Your home may continue to appreciate in value, especially in a strong local economy like Columbus’s. But appreciation, as I showed you earlier, has absolutely nothing to do with return on principal. Remember that if you bought a $300,000 house today, paid cash for it, and turned around in 1 year and sold it for $350,000, you would have experienced the same appreciation as if you had put down $0 to buy the house. Your $300,000 was invested in an asset that returned 0% over its use.

The key to this is that when you pay off your mortgage you “choose” to invest the money in your home rather than other options that could pay you back more. Consider the consequences of not being able to pay that mortgage one day:

• Will the bank return the money you paid on the mortgage and all the equity when your home is sold in foreclosure?
• Will they lend you more to help you recover on as good or better terms than you have now?
• And will they do it without asking you to prove your ability to pay the new loan when you couldn’t pay the old one?

It sounds silly, but this is what happens all the time.

Now wait, you say, I have a document that shows me that if I pay twice a month, I’ll pay off my mortgage 8 years sooner and save $84,000 in interest! You’re right, you will. BUT, is it a good choice if that money you borrowed at 4% (after accounting for interest tax savings) could pay you back more, guaranteed, elsewhere? Also consider other factors:

• Are you making those payments and have “bad” debts like credit cards at 15%?
• Finding it hard to put enough into your 401k to even get the match your employer offers?
• Are you funding the Roth IRA or kids 529 college savings plan?

We’re not even talking about the implications of eliminating or reducing your tax deduction and increasing your overall tax burden.

TO PAY OR NOT TO PAY, THAT IS THE QUESTION

Let’s look at the positive results of paying off your mortgage versus keeping it.

You no longer have to make a mortgage payment to the bank every month.

You may have to pay less when you retire.

And that’s it. Now, notice that I didn’t say anything about the myth that you finally “own” your home. In truth, it never does, always has to pay taxes on it, and is always at risk of loss through various means including, but not limited to:

• Taxes
• creditors
• Loss due to casualty

In almost any analysis where someone is using money they would otherwise use to pay down their mortgage principal for other means of wealth creation, the other ‘means’ come out ahead every time. The requirement here is to disregard our human instinct to consume and use this money effectively.

Keep in mind that this is the key to creating wealth. If you can’t conquer that human instinct, nothing else matters. What this allows you to do is take dollars you’re already spending and pump them into the system to your advantage.

The simple truth is that paying your mortgage is purely an emotional decision that we’ve been taught to believe is what we’re supposed to make, but if you understand the implications of the decision and can act on it, that choice is often the wrong one.

PAY NO ATTENTION TO THE MAN BEHIND THE CURTAIN

Now you say, this is just a clever trick from other mortgages trying to make money off of me. Well, typically consumers refinance every 3 years and many times that’s because they need money. But customers who have invested that money in other elements of their financial plan are much less likely to refinance out of necessity.

People borrow for car expenses, home improvements, college expenses, travel, or to pay off credit card debt they said they would never rack up again. People who plan for these expenses and find preferential or tax-free ways to finance them with money tied up in their home have little need to make decisions based on these “needs.”

WORTH GREAT. NOW WHAT

There are all kinds of different mortgage products and programs that can make a consumer’s head spin. The important thing to note is that most of them are wrong on almost every level. If you’re looking to build wealth, a home is a big part of that plan if used correctly. That does NOT mean you go out and get an interest-only ARM so you can buy a $400,000 house when you could otherwise only afford a $200,000 house.

Many families want to invest in college savings. They want to have more than $50,000 in life insurance from their employer. They want to protect themselves against disability or job loss. They want so many things but they don’t know how to find them in the pool of money they currently have available. Does it mean they give up? That is often the case, but it doesn’t have to be.

It means you look for opportunities in the capital that isn’t doing anything for you right now and use them along with reallocating dollars you’re already spending. The mortgage vehicle you use is independent of this choice and only your situation will determine which is best for you. For most, this is all it takes to see a difference of a million dollars or more at retirement. For others who are closer to an age when they will stop generating income, changing current spending habits is necessary along with these measures.

These ideas that I have mentioned very briefly are ones that should be explored individually and on an ongoing basis with a team of financial professionals who understand how to help make this work for you. This is not one of those “plans” with steps you can follow out of a book on your own and in 20 years a goose that lays golden eggs will lay you some beautiful eggs. Coordinating 401(k), Roth IRAs, investments, permanent life insurance, wills and trusts is something that needs a lot more discussion than is prudent here and, frankly, with people who are much more qualified to tell you that than I am.

It’s time to think about your mortgage and your home as more than just the place where you and your family make great memories. If you allow it to work as part of a fully responsible financial philosophy, it can be an incredible wealth builder. With so many options in all areas of finance, it’s imperative that you find a group of professionals who share the same beliefs and values. Easier said than done, I know. I know because that is exactly what we have been doing for over a year in Columbus exclusively for our clients.

Admittedly, this isn’t for everyone and some of you may have already stopped reading because you think I’m obviously crazy. That’s okay, because changing that human instinct to hurry up and pay off a mortgage is hard. But for those of you whose eyes have been opened, hopefully I’ve given you enough food to think that you’re starting to rethink how your mortgage is working for you.

For more information on home financing and personal financial information, visit: http://www.RightWayunlimited.com. Articles, calculators, newsletters, glossaries and more for your personal financial information needs.

by Jeff Blovits, Franklin Bank SSB

p. 898-5656

http://www.Rightwayunlimited.com – Personal financial information resource for consumers.