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2008: The Year of the Appropriate Mortgage - A Closer Look

By
Mortgage and Lending with Freedom Lending

2008:

The Year Of The Appropriate Mortgage:

A Closer Look

 

As I last wrote, 2008 is a new year with lots of new resolutions on the horizon.  Aside from the personal goals we have all set individually, our government and economic ambassadors have hefty goals to meet as well.

For one, they must salvage and continue to save our economy.  Some believe we are already in a recession, with a faltering stock market, a nervous Wall Street, anxious investors overseas, unhealthy unemployment figures, and the obvious housing market.

Be joyous though, friends.  There is good news on the horizon.  Our government is stepping in (probably with a nudge or two from our ever-so powerful overseas investors).  Short-term interest rates look to be cut again by the end of this month, if not earlier.  This is will be a very good attempt at stirring up the economy.  Consumption is down, while default on debts is up.  Most creditors and banks are reporting losses never fathomed.  So with the interest rate cut, those with the capacity and the ability to invest will presumably do so.  Those with money, high credit, and strong institutional assets will be the investor vultures we have all been reading articles on, buying undervalued properties at 40-70 cents on the dollar.

This leads me to my next point.  I have always emphasized the proper mortgage planning for every individual ever come into contact with.  I prescribe to a theory that a mortgage is not a debt; a mortgage is an asset.  If properly planned, created, and utilized, a mortgage can be one of the strongest financial vehicles.  It is one of the last solid American tax write-offs. But aside from that, it is an opportunity to create wealth, control equity, and utilize money that someone has lent in good faith.

2008 will be a great year and will be a year that the real estate/investor market will balance itself out.  Those who should never have been investing will slowly be washed out, while those who have been smart with finances will propel higher.  I have noticed one thing with most investors who are wealthy: they have a pattern of highly leveraged properties and mortgages.  Most investors I have studied and come into contact with do not ever really pay off a mortgage--atleast not as a first priority.  They simply utilize a mortgage and equity accumulation, while using equity repositioning tactics, to acquire and build new equity.

The history of our fears of a mortgage go back in time.   

In the 1920's, during the time leading up to and after the Great Depression, a common clause in loan agreements gave banks the right to demand full repayment of the loan balance at any given moment should they elect the option.  Since this was a bit outlandish and unrealistic, no one really thought twice about it.  However, when the actual collapse in the economy did occur, millions of investors lost tremendous amounts of money.  A stock that was valued at $15 two weeks earlier could now be bought for $1-if that.  These investors who were losing money left and right ran to the banks to pull out any money they had to cover their loses.  Only after a short run, the banks began to naturally run out of money.  As a result, these banks began to demand full repayment of loans from their ever-so loyal borrowers, who were making monthly payments religiously.  Subsequently, most homeowners lost their homes, most banks went belly-up, and an American ideology was born: always own your home outright.  Do away with that mortgage!

This new ideology was born and had some logic behind it.  The logic was that if the economy were to collapse, if stocks were to come crumbling down, if money were to hold no weight whatsoever, you can atleast own your home free and clear.  The bank would no longer be able to take your own home from under your family's feet.  Even if you could not put food on your plates or could not pay the water bill, you atleast had your home paid off free and clear.

No wonder mortgages have become a target of hate.  It made some sense.  However, times have changed.  The laws have changed and banks can no longer simply demand the loan to be paid in full at any given time.  The Fed now funnels money through our economy and gauges our economy's health.  Yet we can see how this outdated way of thinking made sense.

However, for most Americans in this day and age, paying off a mortgage is not realistic.  Most Americans will refinance every 18 months to 48 months (Fannie Mae: 4.2 years on average).  So being in a 30-year Principle and Interest mortgage is a bit contradictory.  While being able to use a lower fixed rate in most cases, why not use the lower payment granted by an Interest Only loan?  All the while if it is possible to save money by paying Interest Only, why not invest the difference in interest gaining accounts, such as an IRA account, SEP account, mutual funds, stocks, commodities, bonds, etc?

I hope 2008 will be the year that we all realize (through this recent downfall in real estate) that a mortgage is not simply a debt that should be paid every month.  It should be an asset used to invest and accumulate wealth.  A lot of Americans have or will unfortunately lose their homes in 2007-2008.  So I ask: what has your home/mortgage done for you lately?

Cheers.

 

Cyrus Khadivi
Managing Partner

Freedom Lending Group, Inc.
http://www.freedomlg.com/

 

 

Copyright 2008 Cyrus Khadivi. All rights reserved.

 

Andres Munar
Keystone Alliance Mortgage - State College, PA
Experience The Difference
cyrus where did you hear that rates would be cut by the end of the month if not sooner i'm really interested in that.............great post by the way
Feb 18, 2008 06:27 AM
Cyrus Khadivi
Freedom Lending - San Diego, CA

I follow the bond market, the treasury reports, economic reports, as well as rate lock advisories.  Rates have already been cut by the Fed to an unanticipated level.  So the majority of actual rate CUTS has already occurred.  I think I should clarify what I meant to say, which is rates will be dropped again--not cut.  Lenders will probably drop rates again shortly.  Once the legislation for conforming and FHA loan limits is made concrete, lenders will be making some rate drops since they no longer have to bundle up these loans and sell them to off-shore investors.  They can sell them directly to Fannie and Freddie.

Sorry for the confusion.

And thank you for the kind words!  Have a blessed day.

Feb 18, 2008 06:32 AM