In my practice, I often discuss sometimes counter intuitive ideas.  Often we are taught to pay off our home heading into retirement; I teach my clients to actually get a larger mortgage heading into retirement.  So to go from no mortgage to "bigger mortgage" is indeed counter intuitive. 

I like to teach my clients to do what  the financial institutions are doing not what they are telling you to do.  Often I am odds with Term insurance and qualified plans (401(k), IRA, Sep, etc) not for what they are but rather what they represent to most.  I.e. Term is designed by life insurance companies based on need to take your money & never pay out on a claim; Qualified plans tie up your money for decades under the control of the US govt in the most risky of investments usually mutual funds; and in 95% of all cases the tax savings on the front side of qualifed plans are paid back to Uncle Same in the first 3 years of retirements.  So, whose retirement are we funding?  Ours or Uncle Sams?

Most of the strategies promoted by the financial instituitions give us less control over our money.  Mortgage strategies such as bi-weekly payments, 15-yr mortgages, accelerating prepayments by sending in extra principal payments all give us less control of our own money.  Most of my clients are amazed when I show them how to pay off that 30 year mortgage in just over 13 years making the exact same payment as the 15 year. 

The velocity of money principle is the governing capitalist principle in our society.  If you kind of view a pinball machine where the ball represents money being moved in and out of investments, for both opportunity and emergency than you understand this principle.  Banks borrow at 1-3% taxable and make 5,6,7% as much as 25% on every dollar invested.  It is with this principle that homeowners can amass great wealth if they can be disciplined.  You want to have your equity investment set aside in a safe, tax advantaged side fund that can be accessed for opportunity (business investment, etc) or emergency (i.e. pay of all "bad debt" and have a 1 year reserve set up for you and your family). 

I also bring up the proper way to view the "equity investment" in a person's estate or home. 

• Is the investment safe? Is it insured or guaranteed?
• Is it liquid? Can I get it when I need it?
• What is the rate-of-return?

In applying these equity management principles, we soon find out that:

• Equity is not safe for two reasons: #1 If you owe a small mortgage and run into difficulties, your home can be foreclosed.  #2 your home equity is subject to market downturns in the market.
• Equity is not liquid due to the simple fact that you either have to get a mortgage or the sell the home to access the equity.  You have to prove to a bank why you are worthy of a home mortgage on their terms.  What if you ran into credit or financial difficulties, well you couldn't probably get a new mortgage.  & if you are forced to sell to access the equity it probably means your local market is struggling which means you might have to sell at a much reduced price. 
• What is the rate of return on the home equity investment?  Well . . .since it is not the equity that is driving the value of the home asset, then home equity has 0% rate of return. 

So when we evalutate all of the things, we begin to realize that this type of investment is not really a good one as it applies to these three tests; safety, liquidity, rate of return.

Yet most people have 67% more of their total investments in equity. Most people invest in term life insurance and qualified plans and most people prepay their mortgage; all of which give them less control over their financial futures. 

Successful equity management also brings together tax, estate, financial planning in addition to mortgage planning.  To learn more simply give me a shout: mortgageplanner@247refi.com

Mike Smith

916-813-4003