Turn the market around by teaching financial literacy.

By
Mortgage and Lending with Amerisave Mortgage Corp.

                           Most of the people I deal with on a day to day basis are house rich and cash poor. They have little to nothing in their savings accounts and little hope for retirement. They are taught by their parents to buy a home and do whatever it takes to pay it off and secure their future. People do this with good intentions but fail to realize that all of their money is tied up in their real estate. The only way to access their retirement money is to either sell their property or take on a mortgage and an added monthly expense.

                            Although they might receive a lot of money for selling their property debt free they will also have to buy another home or rent. Buying and renting are also quite costly considering smaller homes have also appreciated in value and inflation has increased rents. What if the market is in a downward trend when you decide it's time to retire and sell? Should you bet your retirement money on inflation, housing values, and the market?

                            The gap between the rich and the poor steadily grows because America is financially illiterate. Recent studies by the U.S. census bureau show that 12.7% of our population lives below the poverty level while approximately 1% of Americans have a net worth of 1 million dollars or more. That one percent also has a combined net worth of over one trillion dollars. What makes the rich so different from the poor? They have their money work for them not the other way around.

                            If we can make our clients come to the realization that their assets are doing nothing for them sitting in their homes our economy would be much stronger and the gap between the rich and the poor would lessen. I ask my clients how much money their equity is earning for them per year. They all say the same thing. "My house appreciated in value by about 7% this year". This is the perfect example of financial illiteracy. It is my job to explain to them the house is earning the money not the equity. If I can make my clients understand that I have started them on their way to becoming financially secure.

                            There are many different types of investment vehicles available today. Wouldn't it be smarter to not only earn money from appreciation in your home but also have a few hundred thousand earning you a liquid return? Here is a simple scenario:

                                         Current House Value - $375,000.00

                                         Original Mortgage Amount - $250,000.00 borrowed @ 5.75%

                                         Current P+I Payment - $1458.93 20 years left

                                         Remaining Balance - $190,000.00

                                         Annual Tax Benefit - $2862.22 (20% used as bracket)

                                         Net Mortgage Payment - $1220.41

                                         Housing Value in 30 Years - $1,675,404.11

                               

                                   After refinancing and leveraging their equity:         

                                         New Mortgage - $300,000.00 borrowed @ 6% interest only

                                         Cash to Invest - $100,000.00

                                         Current P+I Payments - $1500.00

                                         Annual Tax Benefit - $3583.96

                                         Net Mortgage Payment - $1201.34

                                         $100k Invested @ 7% - $811,649.75 in year 30

                                         $100k invested @ 7% - $403,873.88 in year 20

                                         Housing Value in 30 Years - $1,675,404.11

 

                              In the above scenario it is easy to see that the client can maintain the same payment and still accumulate liquid assets. Even if they wanted to pay off their house in 20 years and not increase their term they could do it. Their liquid assets exceed their mortgage balance in year 16 so they could actually pay it off sooner. If they kept refinancing into interest only loan programs for a 30 year period they could pay off the loan and walk away with an extra $500,000.00 in assets. This is a no brainer but unfortunately most people aren't even aware of their potential. 

                               It is our responsibility to make them aware. Not only will people benefit from our shared knowledge but we can increase our sales. Go back to your past clients and ask them if they woud like to discuss the possibilities of being wealthy. I would love to assist you with turning your client roster into a roster full of wealthy, savvy investors. This market is perfect for real estate investing and together we can turn things around.

                                        

 

                                         

                                       

                             

Comments (1)

R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham
Bank of England (NMLS#418481) - Raleigh, NC
Bob Mitchell (NMLS#1046286)

I try and tell people all the time that they should consider putting at least a portion of their equity to work in investments.  It's not that hard to beat 6% with some pretty safe investments and you protect yourself from a liquidity crunch in the event that something seriously affects you and you need the money quickly.

 

Bob Mitchell

ValueList 

May 10, 2007 04:20 AM