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How the Affluent Manage Home Equity to Safely and Conservatively Build Wealth


If you had enough money to pay off your mortgage right now, would you? Many people would. In fact, the ‘American Dream’ is to own your own home, and to own it outright, with no mortgage. If the American Dream is so wonderful, how can we explain the fact that thousands of financially successful people, who have more than enough money to pay off their mortgage, refuse to do so. The answer? Most of what we believe about mortgages which we The answer?and Mosthome of whatequity, we believe about mortgages and home equity, learned from our parents and grandparents, weThey learned fromusour iswhich wrong. taught to parents make a and big down grandparents, is wrong. They taught us and payment, get a fixed rate mortgage, to make a big down payment, get a fixed make extra principle payments in order to pay rate mortgage, and make extra principle off your loan as early as you can. Mortgages, payments in order to pay off your loan as they arecan. a necessary evilthey at best. earlysaid, as you Mortgages, said, are a necessary evil at best.

The problem with this rationale is it has become outdated. Therationale rules ofismoney The problem with this it has have become outdated. Thegrandparents, rules of moneywe will changed. Unlike our have changed. Unlike our grandparents, no longer have the same job for 30 years. In we will no longer have the same job for many cases people will switch careers five 30 years. In many cases people will switch orcareers six times. Also, unlike our grandparents, five or six times. Also, unlike our we can no longer on ourdepend company’s grandparents, we depend can no longer pension plan for a secure retirement. on our company’s pension plan for a A recent secure survey retirement. A recent Gallup showed that Gallup 75% ofsurvey workers showed that 75% of workers to retire want to retire before the agewant of 60, yet only before thethey age can. of 60, yet only 25% think 25% think they can.

Unlike our grandparents, we will no longer Unlike our grandparents, we will no live in the same home for 30 years. Statistics longer live in the same home for 30 show that the average homeowner lives in years. Statistics show that the average their home for only sevenhome years. homeowner lives in their forAnd onlyunlike our grandparents, we willour nograndparents, longer keep the seven years. And unlike we will no longerforkeep the same mortgage same mortgage 30 years. According to the for 30 years. According to the Federal Federal National Mortgage Association, or National Mortgage Association, or Fannie Fannie Mae, the average American mortgage Mae, the average American mortgage lasts 4.2 years. People are refinancing their lasts 4.2 years. People are refinancing homes everyevery 4.2 4.2 years their homes yearstotoimprove improve their interest rate, restructure their debt, remodel their interest rate, restructure their debt, remodel their home, or tomoney pull out their home, or to pull out formoney investing, for investing, education or other expenses. education or other expenses. Given these Given these to statistics, it’sstatistics, difficultit’stodifficult understand why understand why so many Americans so many Americans continue to pay a high continue to pay a high interest rate interest premiumrate premium for a 30-year fixed rate mortgage, when they are likely to only use

the first 4.2 years of the mortgage. We can financial planning goal, and in fact how you only conclude theyrate aremortgage, operatingwhen on outdated ultimate handle issuesplanning of homegoal, ownership financial and in may well for a 30-year fixed fact how you handle issues of home they are likely to only use the first 4.2 knowledge from previous generations when determine whether you achieve financial years the mortgage. can than only the 30 year ownership thereofwere few optionsWe other success.”may well determine whether conclude they are operating outdated those you achieve financial success.” fixed mortgage. Wealthy on Americans, knowledge from previous generations with the ability to pay off their mortgage but when there were few options other than Why people fear mortgages, refuse to do understand how to make Why people fear mortgages, the 30 year fixedso,mortgage. Wealthy and whyyou youshouldn’t shouldn’t and why their mortgage for them. Americans, thosework with the ability to pay off their mortgage but refuse to do so, In order to discover how our order to discover howparents our parents and They go against manytheir of mortgage the beliefs of andIngrandparents understand how to make got the idea that a grandparents got the idea that a mortgage traditional work for them.thinking. They put very little mortgage was a necessary evil at best, a necessary evil at best, we must go back money down, they keep their mortgage we was must go back in time to the Great in time toInthe Depression. They go against many the beliefs of choose Depression. theGreat 1920’s a commonIn the 1920’s balance as high as ofpossible, they traditional thinking. They put very little a common clause in loan gave banks adjustable rate interest-only mortgages, clause in loan agreements gaveagreements money down, they keep their mortgage right tothe demand repaymentfull of repayment right full to demand and most importantly they integrate their thebanks balance as high as possible, they choose theof loan at any time. Since this was loan at any time. Since like this was like mortgagerate intointerest-only their overallmortgages, financial plan to askingthe adjustable for the moon and the stars, no one asking for the moon and the stars, no one continually increasethey theirintegrate wealth. This and most importantly their is how worried about it. When the stock market worried about it. When the stock market mortgage intoricher. their overall financial plan the rich get crashed on October 29, 1929 millions of crashedlostonhuge October 29,money, 1929much millions of to continually increase their wealth. This is investors sums of Thethe game is the same, but while most of itinvestors how richboard get richer. lost huge of money, on margin. Back then,sums you could buy much Americans are playing checkers, the affluent $10ofof itstock for a $1. Since value on margin. Back the then, youofcould buy The board is theThe same, but while stocks dropped, wanted aregame playing chess. good news is the the$10 of stock for afew $1.investors Since the value of the most Americans are playing checkers, the to sell, so they had to go to the bank strategies used by the wealthy work for the stocks dropped, few investors wanted to sell, affluent are playing chess. The good news out cash to cover their margin rest of America as well. Any home-owner can andsotake they had to go to the bank and take out is the strategies used by the wealthy work call. It didn’t take long for the banks to implement strategies ofAny thehomewealthy to runcash tocash coverand their margin It didn’t take for the rest of the America as well. out of start callingcall. loans increase net worth. owner cantheir implement the strategies of the theAmericans banks to who run were out of cash and duelong fromfor good wealthy to increase their net worth. faithfully makingloans their mortgage start calling due from payments good Americans RicEdelman, Edelman,one oneofofthe thetop topfinancial financial planners every month. However, there wasn’t any Ric who were faithfully making their mortgage in the country and aand Newa New York York Times Best demand to buy these homes, so prices planners in the country payments every month. However, there Times Best Sellingsummarizes author, summarizes in The continued to drop. To cover the margin Selling author, in this book wasn’t any demand to buy these homes, so this book The Truth About Truth About Money, “TooMoney, often,“Too people buy calls, brokers were forced to sell stocks prices continued to drop. To cover the margin often, people buy homes in a vacuum, homes in a vacuum, without considering how and once again there wasn’t a market calls, brokers were forced to sell stocks and without considering how that purchase is that purchase is going to affect other aspects for stocks so the prices kept dropping. going to affect other aspects of their lives. once again thereDepression wasn’t a market for stocks Ultimately, the Great saw the of their lives. This can beand a big mistake, and stock market fall more than 75% from its This can be a big mistake, therefore so the prices kept dropping. Ultimately, the therefore you mustthat recognize owning a 1929 highs. you must recognize owning athat home Great Depression saw the stock market fall holds very important implications for the home holds very important implications for more than 75% from its 1929 highs. rest your plan. Although a theofrest of financial your financial plan. Although a fine goal, owning a home is not the

fine goal, owning a home is not the ultimate

More than half the nation’s banks failed and millions of homeowners, unable to raise the


Money, Ric tells the story of two brothers,

More than half the nation’s banks failed

cashand they needed to payoff their loans,tolost millions of homeowners, unable theirraise homes. Out ofthey thisneeded the American Mantra the cash to payoff their loans, lost their homes. Out of this was born: Always own your home outright. thecarry American Mantra was born: Always Never a mortgage. own your home outright. Never carry a

Themortgage. reasoning behind America’s new mantra The reasoning behind ifAmerica’s new fell was really quite simple: the economy mantra was really quite simple: if the to pieces, at least you still had your home economy fell to pieces, at least you still andhad the your bankhome couldn’t take it away from you. and the bank couldn’t take Maybe youfrom couldn’t put foodyouoncouldn’t the table it away you. Maybe putor payfood youronbills, but your home was secure. the table or pay your bills, but your secure. Since Great Since thehome Greatwas Depression lawsthe have been Depression have been introduced introduced thatlaws make it illegal for banks to illegal for banks to call your call that yourmake loanitdue. The bank can no longer loan due. The bank can no longer call you call up youand upsay, and“We’re say, “We’re running a little running a little short on shortcash on and cashneed and you need you to pay your to pay off youroff loan in loanthe in next the next thirtythirty days.”days.” Additionally, the Fed is now quick to

Additionally, the into Fed the is now quick to infuse infuse money system if there is money into the system if there is a run on a run on the banks, as we saw in 1987 Y2K. the in FDIC wasand created the and banks, asAlso, we saw 1987 Y2K. to Also, insure banks. Still, it’s no wonder the fear the FDIC was created to insure banks. Still, of losing their home became instilled in it’s no wonder the fear of losing their home the hearts and minds of the American became instilled in the hearts and minds people, and they quickly grew to fear of the and and they60’s quickly theirAmerican mortgage.people, In the 1950’s grewfamilies to fearwould theirthrow mortgage. In the 1950’s mortgage burning to celebrate paying off their andparties 60’s families would throw mortgage home.parties And so,tobecause this fearoff of their burning celebrateofpaying their mortgage, for nearly 75 years most home. And so, because of this fear of their people have overlooked the opportunities mortgage, for nearly 75 years most people their mortgage provides to build financial havesecurity overlooked the opportunities their mortgage provides to build financial security.

Why people hate their mortgage andtheir whymortgage you Why people hate andshouldn’t why you shouldn’t Many people hate their mortgage because

Many hate the their because theypeople know over lifemortgage of a 30 year loan, theythey know lifeinofinterest a 30 than year the loan, will over spendthe more house cost them in the first place. To save they will spend more in interest than the money becomes veryfirst tempting house costit them in the place.toTomake save a bigger down payment, or make extra money it becomes very tempting to make principal payments. Unfortunately, saving a bigger down payment, or make extra money is not the same as making money. principal Or, put payments. another way,Unfortunately, paying off debtsaving is money is not the as same as makingassets. money.ByOr, not the same accumulating mortgage put tackling anotherthe way, paying pay-off off debtfirst, is and not the the same as accumulating assets. By tackling the mortgage pay-off first, and the savings goal second, many fail to consider the important role a mortgage plays in our savings effort.

Common Home Equity Misconceptions Many Americans believe the following statements to be true, but in reality they are myths, or misconceptions:

Your home equity is a prudent investment.

FALSE Extra principal payments on your mortgage saves you money.

FALSE Mortgage interest should be eliminated as soon as possible.

FALSE Substantial equity in your home enhances your net worth.

FALSE Home Equity has a rate of return.

FALSE savings goal many failistoaconsider Every dollar wesecond, give the bank dollar we important role apaying mortgage plays in our didthenot invest. While off the mortgage savings effort. Every dollar we give the saves us interest, it denies us the opportunity bank is a dollar we did not invest. While to earn interest with that money. paying off the mortgage saves us interest, it denies us the opportunity to earn interest with that money.

A tale of two brothers

Ric Edelman has educated his clients for A tale of two brothers years on the benefits of integrating their mortgage intohas their overallhisfinancial Ric Edelman educated clients plan. Inforhisyears book, The New Rules of Money, Ric on the benefits of integrating their overall financial tells themortgage story of into two their brothers, each of whom plan. In his book, The New Rules of secures a mortgage to buy a $200,000 home. Each brother earns $70,000 a year and has $40,000 in savings. The first brother, Brother A, believes in the old way of paying

off a mortgage, which aismortgage as soon astopossible. each of whom secures Brother A bites thehome. bulletEach and brother secures a fifteenbuy a $200,000 earns $70,000 a year and has year mortgage at 6.38% APR $40,000 and shells out in savings. A, down all $40,000Theoffirst hisbrother, savingsBrother as a 20% believes in the old way of paying off payment, leaving him zero dollars ato invest. mortgage, which is as soon as possible. This leaves him with a monthly payment of Brother A bites the bullet and secures a $1,383. Since he hasat 6.38% a combined fifteen-year mortgage APR andfederal and income taxofrate 32%, as he is left shellsstate out all $40,000 his of savings a 20%an down payment, leaving zero cost with average monthly nethim after-tax dollars to invest. with a of $1,227. Also, This in anleaves efforthim to eliminate his monthly payment of $1,383. Since he has mortgage sooner, Brother A sends an extra a combined federal and state income tax $100 to his lender every month. Brother rate of 32%, he is left with an average B, in contrast, subscribes the new way of monthly net after-tax cost ofto$1,227. Also, mortgage planning, choosing instead to in an effort to eliminate his mortgage carry a big, long-term He secures sooner, Brother A sendsmortgage. an extra $100 to his lender every month. a 30-year, interest-only loan at 7.42% APR. He outlays a small 5% down payment of Brother B, in contrast, subscribes $10,000 and invests the remaining $30,000 to the new way of mortgage planning, in a safe,instead moneymaking account. His choosing to carry a side big, long-term monthly payment is $1,175, 100% of which mortgage. He secures a 30-year, interestis taxloan deductible 15 ayears, and only at 7.42% over APR.the He first outlays small over 5% down payment $10,000 and him 64% the life of theof loan, leaving invests the remaining $30,000 in a safe, a monthly net after-tax cost of $799. Every moneymaking side account. His monthly month he adds $100 to his investments (the payment is $1,175, 100% of which is tax same $100 Brother A sent to his lender), plus deductible over the first 15 years, and 64% the he’sofsaved from his lower over$428 the life the loan, leaving him mortgage a payment. investment earns an monthly netHis after-tax cost ofaccount $799. Every month $100 to his investments 8% rateheofadds return. (the same $100 Brother A sent to his

Which brother madehe’s thesaved rightfrom decision? lender), plus the $428 his lower mortgage payment. His investment The answer can be found by looking into account earns anjust 8% rate return. the future. After five of years Brother A has received $14,216 in tax savings, however he Which brother made the right decision? made zero dollars in savings and investments. The answer can be found by looking into Brother B,After on the hand, has received the future. justother five years $22,557 savings$14,216 and hisin savings and Brother A in hastax received tax savings, however he made zero dollars in investment account has grown to $83,513. savingswhat and investments. Brother B, on thelose Now, if both brothers suddenly other hand, has received $22,557 in tax their jobs? The story here turns rather bleak savings and his savings and investment Brother A. Without any money in savings, for account has grown to $83,513. Now, what he hasbrothers no way tosuddenly get through the crisis. if both lose their jobs? Even though hasturns $74,320 of equity The storyhe here rather bleak for in his Brotherhe A. can’t Without money in savings, home, getany a loan because he doesn’t he has no way to get through the crisis. have a job. With no job and no savings, he Even though can’t make his monthly payments and has no choice but to sell his home in order to avoid foreclosure. Unfortunately, at this point it’s a fire sale so he must sell at a discount, and

3


A Tale of Two Brothers Adapted from the book, The New Rules of Money

Our story begins with two brothers, each earning $70,000 a year. They each have $40,000 in savings and both are buying $200,0000 homes.

Brother “A” believes in “The Old Way” – paying off the mortgage as soon as possible

Brother “B” believes in “The New Way” –carrying a big, long mortgage

then pay real estate commissions. Brother B, while not particularly happy at the prospects of searching for a new job, is not worried becauseofheequity has $83,513 in savings to he has $74,320 in his home, tide him over. He doesn’t need a loan he can’t get a loan because he doesn’tand can easily his monthly payments, even if he have amake job. With no job and no savings, he can’t make his monthly payments and is unemployed for years. He has no reason to has no choice but to sell his home in panic, as he is still in control. Remember… order to avoid foreclosure. Unfortunately,

at this is point it’s a fire sale so he must sell Cash King! at a discount, and then pay real estate

15-year mortgage at 6.38% APR

30-year mortgage at 7.42% APR

$40,000 Big Down Payment

$10,000 Big Down Payment

$0 left to invest

$30,000 left to invest

$1,383 Monthly Payment

$1,175 Monthly Payment

(56% is tax deductible first year/33% average)

(100% is tax deductible first 15 yeas/64% average)

$1,227 Monthly Net After-Tax Cost

$799 Monthly Net After-Tax Cost

Sends $100 monthly to lender in effort to eliminate mortgage sooner

Adds $100 monthly to investments, plus $428 saved from lower mortgage payment where account earns 8% rate of return

Results after 5 Years Received $14,216 in tax savings

Received $22,557 in tax savings

has $0 in savings and investments

has $83,513 in savings and investments

What if both brothers suddenly lost their jobs? Has no savings to get him through crisis

Has $83,513, in savings to tide him over

Can’t get a loan – even though he has $74,320 more in equity than his brother – because he has no job

Doesn’t need a loan

Must sell his home or face foreclosure because he can’t make payments

Can easily make his mortgage payments even if he’s unemployed for years

At this point – it’s a fire sale – he must sell at a discount and pay real estate commissions (6-7 %)

has no reason to panic since he’s still in control – remember... cash is KING!

Results After 15 Years Received $25,080 in tax savings

Received $67,670 in tax savings

Has $30,421 in savings and investments

Has $282,019 in savings and investments

Owns home outright

Remaining mortgage balance is $190,000 – and he has enough savings to pay it off and still have $92,019 left over, free and clear

Results After 30 Years Received $25,080 in tax savings

Received $107,826 in tax savings

Has $613,858 in savings and investments

Has $1,115,425 in savings and investments

Owns home outright

Owns home outright – so starts fresh and enjoys the same benefits once again

commissions. Now, let’s say neither brother lost his job. We’ll check in on them after fifteen years have Brother B, whilethey not particularly passed since purchasedhappy their athomes the prospects of searching for a new job, and evaluate the results of their financing is not worried because he has $83,513 in strategies. Brother A He hasdoesn’t now need received savings to tide him over. $25,080 in tax savings, he has $30,421 in a loan and can easily make his monthly payments, even if he savings and investments (once his home is unemployed years.saving He hasthe noequivalent was paid off hefor started reason to panic, as he is still in control. of his mortgage payment each month), and Remember… owns his home outright. Not too bad, right? Cash is King!

Now let’s check on his Brother. Brother B Now, let’s say neither brother lost his job. has received $67,670 in tax savings and has We’ll check in on them after fifteen years $282,019 in since savings investments. have passed theyand purchased their If he chooses to, he can pay off the remaining homes and evaluate the results of their financing strategies. A has now mortgage balance ofBrother $190,000 and still have received $25,080 in tax savings, he has $92,019 left over in savings, free and clear. $30,421 in savings and investments (once his homelet’s was assume paid off he started saving Finally, that rather than pay the equivalent of his mortgage payment off his mortgage at fifteen years, Brother B each month), and owns his home outright. decides to ride out the whole thirty years of the Not too bad, right?

loan’s life. While Brother A has still received only inon taxhissavings, savings Now $25,080 let’s check Brother.his Brother B and investments grown $613,858, has received have $67,670 in taxto savings and and hasstill $282,019 investments. he owns inhissavings homeand outright. Brother B, If he to, he has can received pay off thea whopping on thechooses other hand, remaining mortgage balance of $190,000 $107,826 in tax savings, has accumulated and still have $92,019 left over in savings, an incredible $1,115,425 in savings and free and clear. investments, and also owns his home outright. Heassume can start Finally, let’s thatover ratherfresh than and pay enjoy off his mortgage fifteenagain. years,Unfortunately, Brother the same benefitsat once B decides to ride out the whole thirty the majority of Americans follow the same yearsas of Brother the loan’s A they path A,life. as While it’s theBrother only path has still received only $25,080 in tax know. Once the path of Brother B is revealed savings, his savings and investments to them, a paradigm shifting epiphany often have grown to $613,858, and he still occurs as they Brother B’sB,path enables owns his homerealize outright. Brother on the homeowners to received pay their ahomes off sooner (if other hand, has whopping they choose to), while significantly increasing


Are you still doing this?

“Here is is an an extra extra $100 $100 “Here principal payment payment Mr. Mr. Banker. Banker. Don’t Don’t pay pay me me any any interest interest principal on it. it. IfIf II need need itit back, back, I’ll I’ll pay pay you you fees, fees, borrow borrow itit back back on on on your terms, terms, and and prove prove to to you you that that II qualify.” qualify.” your

Money you give the bank is money you’ll never see again unless you refinance or sell.

$107,826 in tax savings, has accumulated

Many Americans believe the best way to

occurs as as they they realize realize Brother Brother B’s B’s path path occurs enables homeowners to pay pay their homes homes off homeowners to their In enables 2003, Doug Doug Andrew, aa top top financial planneroff In 2003, Andrew, financial planner sooner (if they choose to), while significantly sooner theythe choose while significantly from Utah,(if was was the first to), to clearly clearly articulate from Utah, first to articulate increasing their their net net worth worth and and maintaining maintaining increasing the strategy strategy the the wealthy wealthy have have been been using using the the added added benefits benefits of liquidity liquidity and and safety safety the the the of for decades in his book, Missed Fortune. The forentire decades in his book, Missed Fortune. The entire way. way.

between aa 15-year 15-year loan loan and and aa 30-year 30-year loan, loan, between as well well as the the tax tax savings savings intoteaches safe side side Cram Investment Groupinto teaches an as as aa safe Cram Investment Group an investment account earning a conservative educational seminar for the public based investmentseminar account for earning conservative educational the apublic based rate of of return, you will willFortune have enough enough to pay rate return, you have to largely on the Missed concepts. In largely on the Missed Fortune concepts.pay In your home off in 13½ years (or in 15 years your home off in 13½ years (or in 15 years the seminar, seminar, we we break break down down the the four four key key the with $25,000 $25,000 to to spare!). spare!). Chapter Chapter one one in in with benefits of integrating your mortgage into benefits integrating your mortgage into MissedofFortune Fortune talks about about the $25,000 $25,000 Missed talks the your financial plan (increased liquidity, safety, your financial planby (increased safety, mistake made by millions of ofliquidity, Americans who made millions Americans who ratemistake of return, and tax deductions) in order to rate of return, and tax deductions) in order to choose the the fifteen-year fifteen-year loan. loan. choose

Certified Financial Planners) contained

Certified Financial contained believe bestasway yearMany loanAmericans and aa 30-year 30-year loan,the as well well thetotax tax 4-5%, the chances chances arePlanners) pretty good good that you you year loan as the are pretty that thethe first academic academic study undertaken on pay offand a home home early earlyloan, is to to as pay extra extra principal 4-5%, the first study undertaken on pay off a is pay principal savings into a safe side investment account can earn 5% on your money. Interest rates savings intomortgage. a safe side investment account can the earnquestion 5% onof money. Interest rates the question ofyour 15-year versus 30-year on your your mortgage. Similarly, many finance finance 15-year versus 30-year on Similarly, many earning a conservative rate of return, you will are relative. In the 1980’s, money was costing earning a conservative rate of return, you will are relative. In the 1980’s, moneythe was30-year costingloan mortgages. They concluded the 30-year loan professors think think aa 15-year 15-year loan loan saves saves you you outright. He He can can start start over over fresh fresh and and enjoy enjoy mortgages. They concluded professors outright. have enough to pay your home off in 13½ 15%, but individuals could still earn 15% on is better. Based on the same logic, wouldn’t money by reducing the interest you pay. the same benefits once again. Unfortunately, have enough to pay your home off in 13½ 15%, but individuals could still earn 15% on is better. Based on the same logic, wouldn’t money by reducing the interest you pay. the same benefits once again.home Unfortunately, Successfully managing years (or in in 15 15 yearsAndrew with $25,000 $25,000 to spare!). spare!). their money. money. Due Due to to the the tax tax deductibility deductibility of of However, Doug Andrew points out out in his his the majority majority of of Americans Americans follow follow the the same same years (or years with to their However, Doug points in the equity to increase liquidity, an interest-only interest-only loan be better better than than an book, one Missed Fortune,Fortune that this thistalks thinking is mortgage Chapter one in Missed Missed Fortune talks about path as as Brother Brother A, A, as as it’s it’s the the only only path path they they Chapter mortgage interest and and compounding returns, an loan be an book, Missed Fortune, that thinking is in about path interest compounding returns, amortizing loan? If mortgage money cost you flawed. If you do the math, you find if you know. Once the path of Brother B is revealed safety, rate of return, and the $25,000 mistake made by millions of you can borrow at a higher rate and invest atyou If mortgage money If you do the made math, you find if youof youamortizing know. Once the path of Brother B is revealed theflawed. $25,000 mistake by millions can borrowloan? at a higher rate and investcost itit at 4-5%, the chances are pretty good that you set aside the monthly payment difference to them, a paradigm shifting epiphany often Americans who choose the fifteen-year loan. aa lower 4-5%, theand chances are pretty good that you lower rate and still make make significant profit. set asidewho thechoose monthlythe payment difference them, a paradigm shifting epiphany often Americans fifteen-year loan. rate still aa significant profit. taxto deductions $107,826 in taxand savings, has accumulated their net worth worth maintaining the added added their net and maintaining the an incredible incredible $1,115,425 in savings savings and an $1,115,425 in and benefits of liquidity and safety the entire way. benefits of liquidity entire way. investments, and and alsosafety owns the his home home investments, and also owns his

book isis based based on on the the concepts concepts of of successfully successfully book managing home home equity equity to to increase increase liquidity, liquidity, managing Successfully managing home Successfully managing home safety, rate of return, and tax deductions. safety, rate of return, and tax deductions. equity toreaders increase liquidity, equity to increase Doug educates to view viewliquidity, their mortgage mortgage Doug educates readers to their safety, rate of return, and and home equity through a different lens, the the ratethrough of return, and andsafety, home equity a different lens, same lens used by by the the affluent. affluent. He He shows shows taxlens deductions same used tax deductions how relatively relatively minor minor changes changes in in home home equity equity how In 2003, 2003, Doug Doug Andrew, Andrew, aa top top financial financial In perception and positioning can produce perception andUtah, positioning canto clearly produce planner from from was the the first first planner Utah, was to clearly monumental long-term effects in financial monumental effects in financial articulate the thelong-term strategy the the wealthy have articulate strategy wealthy have security. security. been using for decades in his book, Missed

been using for decades in his book, Missed Fortune. The The book book is is based based on the concepts concepts Fortune. the Many Americans believe theonbest best way to to Many Americans believe the way of successfully managing home equity to of successfully managing home equity to payincrease off aa home home earlysafety, to pay pay extra principal pay off early isis to principal liquidity, rateextra of return, return, and increase liquidity, safety, rate of and ontax your mortgage.Doug Similarly, many finance on your mortgage. Similarly, many finance deductions. educates readers tax deductions. Doug educates readers professors thinkmortgage 15-year loan saves you to view view their their mortgage andloan homesaves equityyou professors think aa 15-year to and home equity money byaareducing reducing the the interest you pay. through different lens, lens, the sameyou lens pay. used money by the interest through different same lens used However, Doug Andrew Andrew points outrelatively in his his book, book, by the the affluent. affluent. He shows shows how relatively However, Doug points out in by He how minor changes in home equity perception Missed Fortune, that this thinking is flawed. minorFortune, changesthat in home equity perception Missed this thinking is flawed. IfIf and positioning can produce monumental youand dopositioning the math, math, you you find youmonumental set aside aside the the canfind produce you do the ifif you set long-term effectsdifference in financial financialbetween security. a 15long-term effects in security. monthly payment

monthly payment difference between a 15-

can earn earn 5% 5% on on your your money. money. Interest Interest rates rates can are relative. relative. In In the the 1980’s, 1980’s, money money was was costing costing are 15%, but individuals could still earn 15% on 15%, but individuals could still earn 15% on their money. Due to the tax deductibility of their money. Due to the tax deductibility of mortgage interest and compounding returns, mortgage interest and compounding returns, you can cash borrow at aa higher higher rate and invest invest By having available ftorrate emergencies can borrow at and By you having cash available ftor emergencies it at a lower rate and still make a significant at a lower rate and still make a significant andit investment investment opportunities, most homeand opportunities, most homeprofit. profit.

Large equity in your home can be a big disadvantage

owners are are better better off off than than ifif their their equity equity isis tied tied owners up in their residence. Large, idle equity, also up in their residence. Large, idle equity, also look at at each each one one in in more more detail detail look Large equity ineggs your home Large equity your home called ‘having all your yourin eggs in one one basket,’ called ‘having all in basket,’ Cram Investment Investment Group Group teaches teaches an an Cram Our goal is to help clients conserve their home can be a big disadvantage can be risky if the homeowner suddenly Oureducational goal is to help clientsfor conserve theirbased home can can be aif big disadvantage be risky the homeowner suddenly educational seminar for the public public based seminar the equity, not consume it. We are one of the needs cash. While employed and in excellent equity, not consume it. We are one of the largely on on the the Missed Missed Fortune Fortune concepts. concepts. In In needs While andemergencies in excellent largely By cash. having cashemployed available ftor ftor By having cash available emergencies few financial planning firms who encourage health, borrowing onopportunities, home isis easy, easy, buthomemost the seminar, we break break down theencourage four key key fewthe financial planning firms who health, aa home but most seminar, we down the four andborrowing investmentonopportunities, most and investment most homeclients to secure debt in order to become debt benefits of integrating your mortgage into people, especially retirees, unexpectedly clients to secure debt in order become debt benefits of integrating yourtomortgage into people, especially owners are better betterretirees, off than than ifif unexpectedly their equity equity owners are off their your financial plan plan (increased (increased liquidity, liquidity, safety, safety, need freeyour sooner. need cash when they are sick, unemployed or financial free sooner. is cash tied up up in their their residence. Large, idle idle or when theyresidence. are sick, unemployed is tied in Large, rate of of return, return, and and tax tax deductions) deductions) in in order order to to haveequity, rate insufficient income. Obtaining a home also called called ‘having all your youraeggs eggs in insufficient income. Obtaining home also ‘having all in In look Aprilat 1998, Thein Journal of Financial Financial haveequity, look at 1998, each one one in more more detail In April The Journal of each detail one basket,’ can be risky if the homeowner loan under these circumstances can be either basket,’ be risky if the under thesecan circumstances canhomeowner be either Planning (published (published by by the the Institute Institute of of loanone Planning suddenly needs cash. While While employed employed impossible orneeds very expensive. expensive. suddenly cash. impossible or very Our goal goalFinancial is to to help help clients clients conserve their Certified Financial Planners) contained Our is conserve their Certified Planners) contained and in in excellent excellent health, health, borrowing borrowing on on aa and home equity, not consume it. We are one the first academic study undertaken on How not consume it. We are one Howhome manyisisof ofeasy, us feel feel when we go to the bank home easy, but most people, especially thehome first equity, academic study undertaken on many us when we go to the bank but most people, especially of question the few few financial financial planning firms who who of the planning firms the of 15-year versus 30-year retirees, unexpectedly need cash when they we almost need to prove we don’t need thethey the question of 15-year versus 30-year we almost retirees,need unexpectedly need cash when to prove we don’t need the encourage clients to secure secure debt in order order to encourage clients to debt in to are sick, unemployed or have insufficient mortgages. They concluded the 30-year loan money before they’ll loan loanoritithave to us? us?insufficient The bank bank are sick, unemployed mortgages. They free concluded the 30-year loan money before they’ll to The become debt debt free sooner. become sooner. income. Obtaining a home loan under these is better. Based on the same logic, wouldn’t income. Obtaining a home loan under these wants to know we have the ability to repay is better. Based on the same logic, wouldn’t wants to know we have the ability to repay circumstances can be either impossible or an Ininterest-only interest-only loan be better better than an an the can be how either impossible the circumstances loan. You You can can imagine imagine how aa conversation conversationor an loan be than loan. April 1998, 1998, The The Journal of Financial Financial In April Journal of very expensive. verygo amortizing loan? mortgage money cost you might might with your your banker: banker: “I“I brought brought up up amortizing IfIf mortgage Planningloan? (published by the themoney Institutecost of you goexpensive. with Planning (published by Institute of


your loan application up to the board this There are actually three primary reasons:

How many of us feel when we go to the morning and I explained to them you’re going bank we almost need to prove we don’t through some hard financial times, you’re need the money before they’ll loan it to us? unemployed, your credit is not so good and The bank wants to know we have the ability maybe lendcan youimagine some cash to repaythey the could loan. You how to a get through thesemight rough times. Their response conversation go with your banker: “I was... ‘Fatupchance!’ brought your loan application up to the board this morning and I explained to them What many is that even you’re goingpeople throughdon’t somerealize hard financial if they’ve consistently been making double times, you’re unemployed, your credit is not so good and maybe they could mortgage payments for five yearslend in ayou row, the some cashhas to get rough times. bank still no through leniency.these If suddenly they Their response was... ‘Fat chance!’ experience a financial setback, the bank will

not care. They can go to the bank and plead,

What many people don’t realize is that even “I never thought in a million years this would if they’ve consistently been making double happen to me, but it did. I’ve been paying my mortgage payments for five years in a row, mortgage in has advance for years, how about if the bank still no leniency. If suddenly I justexperience coast on my mortgage payments for a they a financial setback, the bank fewnot months?” Theycan get go thetosame answer every will care. They the bank and plead, never thought in ajust million time... “I‘Fat chance!’ Banks don’tyears workthis that would happen to me, but it did. I’ve been way. Regardless of how much you’ve paid your paying my down mortgage in advance for payments years, mortgage or how many extra how about if I just coast on my mortgage you’ve made, next month’s payment is still payments for a few months?” They get the due in its entirety no matter what. same answer every time... ‘Fat chance!’ Banks just don’t work that way. Regardless of how much you’ve paid your mortgage down or how many extra payments you’ve made, next month’s payment is still due in its entirety no matter what.

mortgage payment, or have an additional financial times, would your rather have $25,000 of equity trapped in your home? $25,000 of cash to help you make your Almost every person who has ever lost their mortgage payment, or have an additional home to foreclosure would have been better $25,000 of equity trapped in your home? off if they hadperson their who equity from Almost every hasseparated ever lost their 1. Liquidity home in a liquid,would safe, conservative side home to foreclosure have been better These three elements are also commonly their 2. Safety be equity used toseparated make mortgage off if that they could had their from used asofthe test of a prudent investment. fund 3. Rate return their home in a liquid, safe, conservative side payments during their time of need. When evaluating a potential investment, fund that could be used to make mortgage These three elements experienced investors are will also ask commonly the following The importance of liquidity became all too payments during their time of need. used as the test of a prudent investment. three questions: clear when the stock market crashed in cash position. Why in the world would you want to have the1.equity removed from your Liquidity home? There are 2. actually Safetythree primary reasons: 3. Rate of return

When evaluating a potential investment, experienced1.investors will ask the following How liquid is it? three questions: (Can I get my money back when I want it?)

2. How 1. How liquid issafe it? is it?

(Can I get my back when I want it?) (Is itmoney guaranteed or insured?)

3. Whatsafe rate ofisreturn 2. How it? can I expect? (Is it guaranteed or insured?)

Home equity fails all three tests of a prudent investment. Let’s examine each can of these core 3. What rate of return elements in more detail to better understand I expect? why home equity fails the tests of a prudent Home equity and, fails allmore three tests of a prudent investment, importantly, why investment. Let’sbenefit examinebyeach of these core home-owners separating the elements in more detail to better understand equity from their home. why home equity fails the tests of a prudent investment, and, more importantly, why home-owners benefit by separating the equity from their home.

The importance became too October of 1987.of Ifliquidity someone had alladvised clear when the stock market crashed in you to sell your stocks and convert to cash, October of 1987. If someone had advised they would have been a hero. Or, if you had you to sell your stocks and convert to cash, enough liquidity you could have weathered they would have been a hero. Or, if you had the storm. Those with other liquid assets were enough liquidity you could have weathered able to remain invested. Theyliquid wereassets rewarded the storm. Those with other aswere theable market rebounded to remain invested.and Theyrecovered were fully withinas90the days. However, those and without rewarded market rebounded recovered fully withinto90 However, liquidity were forced selldays. while the market those without liquidity were forcedsignificant to sell was down, causing them to accept while the market was down, causing them losses. In Missed Fortune, Doug Andrew tells to accept significant losses. In Missed the story of a young couple who learned what Fortune, Doug Andrew tells the story of a he calls “The $150,000 Lesson on Liquidity”. young couple who learned what he calls In“The 1978 this couple built a beautifulIn home $150,000 Lesson on Liquidity”. that be featured Better home Homesthat and 1978would this couple built a in beautiful Gardens. couple’s home appreciated would be The featured in Better Homes and The by couple’s inGardens. value, and, 1982,home it wasappreciated appraised for in value, by 1982,They it was appraised for just underand, $300,000. had accumulated under $300,000. They had accumulated ajust significant amount of equity, not because a significant amount of equity, not because they had been making extra payments on they had been making extra payments on the property, but because market conditions the property, but because market conditions improved improvedover overthat thatfour-year four-yearperiod. period.

Why separate equity from your home?

Separating equity to increase liquidity

In the book, Missed Fortune, Doug Andrew suggests people strongly Why from equity considerseparate separatingequity as much your as theyhome? possibly can from their house, and place it overMissed in a cash position. in the In the book, Fortune, DougWhy Andrew world would youstrongly want to have the equity suggests people consider separating as much equity as they possibly removed from your home?

What is the biggest secret Separating equity toin real estate? Your mortgageliquidity is a loan against your income, increase not a loan against the value of your house. What is the biggest secret in real estate? Your Without an income, in many cases you cannot mortgage is a loan against your income, not a get a loan. If you suddenly experienced loan against the value of your house. Without This couple thought they had the world by difficult financial your get rather an income, in manytimes, caseswould you cannot a This couple thought they had the world tail. They had a home valued at $300,000 have of cashexperienced to help you make loan. $25,000 If you suddenly difficultyour the by the tail. They had a home valued at

can from their house, and place it over in a


“It’sbetter bettertotohave haveaccess access “It’s tothe theequity equityororvalue valueofofyour yourhome home to andnot notneed needit,it,than thantotoneed needit itand and and notbe beable abletotoget getatatit.”it.” not

during which forced with first and second mortgages owingowing only during highs. And, most importantly, he learned better tomost have access to theheequity or value $300,000 with first and second mortgages owing who which got stucktime withthe the lender deficiency balance ofhighs. waswas forced toof to with first and second mortgages owing only importantly, learned betterAnd, to have access to the equity or value of $300,000 with first and second mortgages who got stucktime withthe the lender deficiency balance your home and not need it, than to need it a only $150,000. They had “made” $150,000 in four $30,000 on their credit report? The original pay the first mortgage and also accrued an $150,000. They had “made” $150,000 in four never to allow a significant amount of equity yourtohome not need amount it, than toofneed it and only$150,000. $150,000.They Theyhad had“made” “made”$150,000 $150,000ininfour four pay $30,000 on mortgage their creditand report? original the first alsoThe accrued an never allowand a significant equity not be able to get at it. Keeping home equit short years. owners, of course! additional $30,000ofofinterest interest and penalties.to accumulate short years. to accumulate in his property. not be able in to his get at it. Keeping home equity short years. owners, of$30,000 course! additional and penalties. short years. property. safe is really a matter of positioning yoursel By the time the home finally sold, less the safe is really a matter of positioning yourself to By the time the home finally sold, less the act instead of not react to same market ov They had thethe misconception that the Thiscouple couplenot not only had a foreclosure They had the misconception that theequity equityinin $30,000 Home equity is asconditions cash in the act instead of not react tothe market conditions over They had the misconception that the This only had a foreclosure They had misconception that the Home equity is the same as cash in the in accrued indebtedness, guess $30,000 in accrued indebtedness, guess which you have no control. equity in their home had a rate of return when, in appear on their credit report for seven years, their home had a rate of return when, in fact, it bank; only cash in the bank is the same as which youcash haveinno equity their home had of a rate of return appear onstuck theirwith creditthe report for seven years,of bank; theirinhome had a rate return when, when, in fact,init who only thecontrol. bank is the same as who got deficiency balance got stuck with the deficiency balance of fact, it was was just a number number onsheet asheet sheet ofpaper. paper. the report also showed a deficiency balance just a number on a of paper. cash in the bank. Being house fact,was it just a on a of the report also showed a deficiency balance was just a number on a sheet of paper. cash in the bank. Being house richrich andand cashcash $30,000 ontheir theircredit credit report? The original $30,000 on report? The original owing $30,000 on a home they had lost owing $30,000 on a home they had lost Separating equity poor a dangerous position to in. be Itin.isIt is Separating equity tototo poor is ais dangerous position be owners, ofcourse! course! nearlyone year Then, series of unexpected unexpected events reduced Then, series of unexpected unexpected events reduced owners, ofone nearly year Then, aa series of events reduced Then, aa series of events reduced better to have access to the equity or value increase safety of principal to have access to theofequity or value of of increase safety principal earlier.InIna atime time of financial setback they lostbetter their income to almost almost nothingfor fornine ninemonths. months. their income to almost nothing for nine earlier. of financial setback they lost their income to nothing their income to almost nothing for nine This This couple not onlyhad had a foreclosure appear your home not need it, than to need it and couple not only a foreclosure appear your home andand notTimes, need it,inthan to need it and one their most valuable assets due They couldn’t borrow money tokeep keep theirto keep one The Seattle an article published ofoftheir most valuable assets due to to a a They couldn’t borrow money to their months. They couldn’t borrow money The Seattle Times, in an article published months. They couldn’t borrow money to keep onlack their creditreport report forseven seven years, not beMarch able to get atKeeping it. Keeping home equity their credit forhad years, thethe notin beMarch to get at it.reported, home equity liquidity. If they separated their mortgage payments current currentbecause becausewithout inable 2004, “Remember lack ofofliquidity. If they had separated their mortgage payments 2004, reported, “Remember that that their mortgage payments currentwithout because onreport their mortgage payments current because also showed a deficiency balance owing safe is really a matter of positioning $150,000 home equity and repositioned an they did did not nothave havethe theability abilitytoto report also showed aequity deficiency balance owing safehousing ishousing really a prices matter of positioning and do level off.yourself $150,000 ininhome and repositioned an income income they prices cancan and do level off.yourself without ansix income theythey didnot nothave have the ability $30,000 without an income they did the ability on a home they had lost nearly one to act instead of react to market conditions it into a safe side account, they would have repay. Within months had sold two sometimes decline – witness Souther $30,000 on a side homeaccount, they had lostwould nearlyhave one to They actThey instead of react to market conditions it into a safe they repay. Within six months they had sold two sometimes decline – witness Southern to repay. Within sixmonths months theyhad hadsold sold two year to repay. Within six they two easily been their mortgage other properties to bring bring theirmortgage mortgage outof of earlier. Inaable a time of financial setback they over over which you have no control. California just a little more than a decade easily been toto make their mortgage other properties to their out year earlier. Inable time ofmake financial setback they which you nomore control. California justhave a little than a decade other properties to bring bring their mortgage out lost other properties to their mortgage payments and prevented this series ofdue to ago, delinquency. They soon soon realized that orderout ago, when prices 20 percent to 30 oneofoftheir their mostvaluable valuable assets payments and prevented this series ofdue delinquency. They realized that ininorder toto lost when prices tooktook a 20a percent to 30 one most assets to of delinquency. They soon realized that in events. protect their $150,000 of equity they would have of delinquency. They soon realized that in percent corrective downward.” esta protect their $150,000 of equity they would have a aevents. lackofofliquidity. liquidity.If Ifthey theyhad had separated their percent corrective jolt jolt downward.” RealReal estate lack separated their thispoint pointinin the story, Doug admits the to their home. As As Murphy’s Law would have order to protect protect their $150,000 equity they $150,000 equity is no safer than any other investmen AtAtthis the story, Doug admits the to sell sell their home. Murphy’s Law would have order to their $150,000 ofof equity they homeequity equityand andrepositioned repositioned equity is no safer than any other investment $150,000 ininhome youngcouple couple was really and wife, it, would have have to to sell sell their their home. home.AsAsMurphy’s Murphy’s ityoung was really hehe and hishis wife, it, the the whose value is determined byexternal an external value is determined by an into a safe side account, they would have whose it Sharee. into a safe sideobjections account, they would have Sharee. Despite objections from his editor, previously strong real estate market turned soft. Despite from his editor, previously strong real estate market turned soft. market over which personally Law would would have have it,it,the thepreviously previouslystrong strongreal real easily been able to make their mortgage market over which we we personally havehave no no easily been able to make their Doug insisted the story remain inmortgage the book Thecontrol. The Seattle inthe article published Doug insisted the story remain in the book control. In Times, fact, due toan the hidden “risks of li Seattle article published In Times, fact, duein toan hidden “risks of life,” estate market market turned turnedsoft. soft. payments and prevented this series of events. and prevented this series events. because hewanted wanted readers to know Although they they reduced reducedtheir theirasking askingprice priceseveral several payments because he hishis readers to of know hehe in real real estate equity is not nearly as safe as in March 2004, reported, “Remember that estate equity is not nearly as safe as many March 2004, reported, “Remember that m understands first hand the importance of times from $295,000 $295,000 down to $195,000 – they understands first hand the importance of – from down to $195,000 – they other conservative assets. Although they reduced their asking price other conservative assets. they reduced their asking price AtAtthis housing prices and do level off.and prices cancan andinvestments doinvestments level off.and thispoint pointinassets inthethestory, story, Doug admits Doug admits thethe housing positioning in financial instruments could find a buyer. Sadly, they gave up the positioning assets in financial instruments not find a buyer. Sadly, they gave up the A home is either mortgaged to hilt the hilt thatthat is either mortgaged to the several times times –– from from $295,000 $295,000 down down toto young couple was really he and his wife, A home couple liquidity was really he and his wife, They young thatmaintain maintain liquidity in the event of an home in foreclosure foreclosure to tothe themortgage mortgagelender. lender. that in the event of an They sometimes decline – witness Southern or owned totally free and clear provides sometimes decline – witness Southern or owned totally free and clear provides the the $195,000 –– they theycould couldnot notfind findaabuyer. buyer.Sadly, Sadly, Sharee. Despite objections from his editor, Despite objections from had his editor, emergency. If Doug and Sharee had access California Sometimes sad sad stories storiesonly onlyget getsadder. sadder.The Thetwo two Sharee. emergency. If Doug and Sharee access greatest safety for the homeowner. greatest safety for the homeowner. California just a little more than a decade just a little more than a decade ago,ago, they gave up the homein inforeclosure foreclosure the Doug up the home totothe insisted the story remain in the book their home’s equity, they could have used when prices took a 20 percent to 30 percent mortgages on on the the property propertywere wereininthe theamounts amounts Doug insisted the story remain inhave the book tototheir home’s equity, they could used when prices took a 20 percent to 30 percent mortgageand lender. Sometimes sad stories because lender. Sometimes sad stories weather the hishisreaders of $125,000 $25,000, respectively. The it ittotoweather the $125,000 and $25,000, respectively. The because wanted readersto toknow know hehewanted he he corrective corrective downward.” estate equity joltjolt downward.” RealReal estate equity only mortgage sadder. The two two mortgages onthe the understands get sadder. The mortgages on financialstorm storm until they could get backof of second mortgage holder outbid thefirst firstone one financial until they could get back holder outbid the understands first hand the importance first hand the importance is no safer than any other investment whose is no safer than any other investment whose property were in the the amounts of $125,000 were in amounts $125,000 theirfeet. feet. Doug from his own at the ensuing auction, feeling that,of much like onontheir Doug from his own ensuing auction, feeling that, much like positioning assets inlearned financial instruments positioning assets inlearned financial instruments value is determined external market is determined by by an an external market experiencethe importance maintaining value theand owners, ititrespectively. wasininaagood good position. experience importance of of maintaining original owners, was position. $25,000, respectively. The second that $25,000, The second that maintainthe liquidity the eventof ofan an over maintain liquidity in inthe event which we we personally havehave no control. over which personally no control. flexibility toto ride outout market lows that house had appraised flexibilityininorder order ride market lows Knowing that the the house hadbeen been appraised for holder outbid the one the mortgage holder outbid thefirst first oneatatfor the emergency. If Doug and Sharee had access emergency. If Doug and Sharee had access In fact, due to the hidden “risks of life,” real real In fact, due to the hidden “risks of life,” and of of market highs. And, the owing was only andtake takeadvantage advantage market highs. And, $300,000, and the obligation obligation owing waslike onlythe auction, feeling much ensuingand auction, feeling that, that, much like the toto their home’s equity, they could have used their home’s equity, they could have used most hehe learned never to to allow a aestate thought turn and mostimportantly, importantly, learned never allow $150,000, thought itit ititcould could turn around and equity is not nearly as safe as many estate equity is not nearly as safe as many was aaaround good originalit owners, owners, was in in goodposition. position. tosignificant thethefinancial storm until they toweather weather financial until they significant amount of equity tostorm accumulate in inother amount of equity to accumulate sell the property property to to cover coverthe theinvestment. investment.ItIttook took itit conservative investments andand assets. other conservative investments assets. house Knowing that that the thesell, househad hadbeen beenappraised appraised could get could getback backonontheir theirfeet. feet.Doug Douglearned learned A home his hisproperty. property. nine long months months to to sell,during duringwhich whichtime timethe the that is either mortgaged to the hilt A home that is either mortgaged to the hilt and the obligation owing for $300,000, $300,000, and the obligation owing Home equity is experience not thethe same as cash in the hishis own the importance Home equity is not same as cash in of theof or owned totally free and clear provides the lender was forced forced to to pay paythe thefirst firstmortgage mortgageand and from from ownexperience the importance or owned totally free and clear provides the only $150,000, itit thought turn $150,000, thought itofcould could turn maintaining bank; in in the bank is the same as accrued an $30,000 interest bank;only onlycash cash the is to the same alsowas accrued an additional additional $30,000itof interest flexibility inbank outas maintaining flexibility inorder order toride ride out greatest safety for for thethe homeowner. greatest safety homeowner. and toto cover the andBy sell the property cover the market cash Being house rich cash penalties. the time the finally sold, cashinlows inthe thebank. bank. Being house rich and cash andaround penalties. Bysell thethe timeproperty thehome home finally sold, and advantage ofand market lows andtake take advantage ofmarket market investment. ItIt in took nine months sell, position to to bebe in. in. It isIt is lessinvestment. the $30,000 accrued indebtedness, guess took ninelong long monthstoto sell, poor poorisisa adangerous dangerous position $30,000 in accrued indebtedness, guess

Separating equity to increase Separating equity to increase safety principal safety of of principal

“Home equity is not “Home equity is not the same asas cash in in thethe the same cash bank. Only cash in in thethe bank. Only cash bank is is the same asas bank the same cash in in thethe bank.” cash bank.”


“Home equity is not the same as cash in the bank. Only cash in the bank is the same as cash in the bank.”

the Enron Corporation collapsed a few years ago, and thousands lost their jobs and homes, again in Houston, Texas. What would happen in the Seattle area if Microsoft or Boeing had major lay-offs? Money you give the bank is money you’ll never see again unless you refinance or sell. When the people in Houston pleaded, “Mr. Banker, I’ve been making extra mortgage payments for years. I’m well ahead of schedule. Will let you let me coast for a while?” The bank replied, “Fat Chance!”

Americans typically believe home equity is a very safe investment. In fact, according to a recent study, 67% of Americans have more of their net worth in home equity than in all other investments combined. However, if 100 financial planners looked at a client portfolio that was 67% weighted in a single investment, 99 out of 100 of them would immediately To reduce the risk of foreclosure recommend the client diversify to reduce during unforeseen set-backs, their risk and increase safety of principal. keep your mortgage balance as Holding large amounts of home equity puts the homeowner at unnecessary risk. This risk high as possible could be greatly reduced by diversifying their Is your home really safe? Unfortunately, home equity into other investments. many home buyers have the misconception An example of the necessity of keeping your that paying down their mortgage quickly home’s equity safely separated from your is the best method of reducing the risk property can be can be found in Houston, of foreclosure on their homes. However, Texas. When oil prices fell to all time lows in reality, the exact opposite is true. As in the early 1980’s the city of Houston was homeowners pay down their mortgage, hit hard. Thousands of workers were laid off they are unknowingly transferring the risk and ultimately forced to sell their homes. from the bank to themselves. When the With a glut of homes on the market, housing mortgage balance is high, the bank carries prices plummeted. Unfortunately, there the most risk. When the mortgage balance were far too many sellers and far too few is low, the homeowner bears the risk. With a buyers. Homeowners were unable to sell and low mortgage balance the bank is in a great unable to make their mortgage payments. position, as they stand to make a nice profit As a result, 16,000 homes were foreclosed. if the homeowner defaults. In addition to Did these 16,000 families suddenly become assuming unnecessary risk, many people who bad people? No, they just couldn’t make their scrape up every bit of extra money they can to mortgage payments. Just prior to this series apply against principal often find themselves of events many of these people were making with no liquidity. When tough times come, extra principal payments. Unfortunately, they they find themselves scrambling to make could not coast on those extra payments, and their mortgage payments. with so many houses on the market for sale, Assume you’re a mortgage banker looking some people literally had to walk away from at your portfolio, and you have 100 loans their home. that are delinquent. All of the loans are The equity these people had worked so hard for homes valued at $300,000. Some of to build up was lost completely. They learned the loan balances are $150,000 and some the hard way that home equity is fragile, and are $250,000. Suddenly, there is a glut in certainly not as safe as they once thought. the market and the homes are now worth Could this happen today? Just look at when $200,000. Which homes do you as the banker foreclose on FIRST? The ones owing the least

amount of money, of course. After all, as a banker you’d make money taking back those homes, however you’d lose money trying to sell a home for $200,000 that still owed $250,000 on it. Banks have been known to call delinquent homeowners with high mortgage balances and offer assistance, “We understand you are going through some tough times, is there anything we can do to help you? We really want you to be able to keep your home.” The last thing they want to do is take back a home that they will lose money reselling. It’s interesting to note, during the Great Depression, the Hilton chain of hotels was deeply affected by the stock market crash and couldn’t make their loan payments. What saved them from financial ruin? They were so leveraged, in other words they owed so much more on their property than it was worth, that the banks couldn’t afford to bother wasting their time foreclosing on it. The Hiltons understood the value of keeping high mortgage balances thereby keeping the risk on the banks. The Houston homeowners would have been better off if they had removed a large portion of their equity and put it in a safe and liquid side fund, accessible in a time of need. Ask yourself, if you owned a $400,000 home during an earthquake in California (and you didn’t have earthquake insurance), would you rather have your equity trapped in the house or in a liquid, safe side fund? If it were trapped in the home, your equity would be lost along with the house.

Separating equity to increase rate of return What do you think the rate of return on home equity was in Seattle for the last 3 years? What about Portland? Careful, this is a trick question. The truth is, it doesn’t matter where you live or how fast the homes are appreciating, the return on home equity is always the same, ZERO. We have a misconception that because


our our home home appreciates, appreciates, oror our our mortgage mortgage balance is going down, that the equity has the home’s appreciation. Therefore, balance is going down, thatTherefore, the equityhome has aa the home’s appreciation. home rate of return. That’s not true. Home equity equity simply ininthe does rate of return. That’s not true. HomeItItequity equity simplysits sitsidle idle thehome. home. does not earn any rate of return. Assume you has NO rate of return. Home values fluctuate rate of Home return.values Assume you hasnot NOearn rateany of return. fluctuate have home $100,000 you due totoamarket conditions, not due the have amarket homeworth worth $100,000 which you due conditions, notwhich due to to the own free and clear. If the home appreciates mortgage balance. Since the equity in the own free and clear. If the home appreciates mortgage balance. Since the equity in the 5%, own an $105,000 at 5%,you you own anasset asset worth $105,000 at home has no relation totoworth the value, home hasof no relation the home’s home’s value, the end the year. the of theresponsible year. ititisis ininend nonoway for the home’s way responsible for the home’s appreciation. Therefore, home equity simply appreciation. Therefore, home equity simply Now, assume you had separated the Now, assume you had separated the sits idle in the home. It does not earn any rate sits idle in the home. It does not earn any rate $100,000 $100,000ofofhome homeequity equityand andplaced placed itit in in ofofareturn. Assume you have a home worth return. Assume youside have a home worth account earning asafe, safe,conservative conservative side account earning $100,000 which you free clear. If the 8%. side be worth $100,000 youown ownwould freeand and 8%.Your Yourwhich sideaccount account would beclear. worthIf the home appreciates 5%, you own an asset worth $108,000 atatthe ofofthe You home appreciates 5%, ownyear. an asset worth $108,000 theend endyou the year. You still still own the home, which appreciated 5% $105,000 at the end of the year. own theathome, which appreciated 5% and and $105,000 the end of the year. isisworth worth$105,000. $105,000.By Byseparating separatingthe the equity equity

Now, assume you had separated the you was Now, assumeaanew youasset hadwhich separated the youcreated created new asset which was also also $100,000 of home equity and placed it in a able to earn a rate of return. Therefore, $100,000 of home equity and placed it in able to earn a rate of return. Therefore, a safe, conservative side account 8%. you earned than you safe, conservative sidemore account earning 8%. you earned$8,000 $8,000 more thanearning youwould would have if the money were left to sit idle Your side account would be worth $108,000 have if the money were left to sit idle Your side account would be worth $108,000 the home. beyear. fair, do have a atatinthe end ofofTo the You still own inthe the home. To fair,you you end thebe year. You do stillhave owna the the mortgage payment you didn’t have before. mortgage payment you didn’t have before. home, which appreciated 5% and is worth home, which appreciated 5% and is worth However, since interest are relative, However,By since interestrates rates are relative, $105,000. separating the equity you $105,000. By separating the equity you if ifwe are assuming aarate of return of 8%, we are assuming rate of return of 8%, created a new asset which was also able created aalso newassume asset which was also able to to we can aastrategic interestwe can also assume strategic interestearn a rate of return. Therefore, you earned earn a mortgage rate of return. Therefore, you atearned only would 5%. onlymortgage wouldbe beavailable availableat 5%. $8,000 more than would the $8,000 moremortgage than you youinterest wouldishave have the Also, since 100%ififtax Also, since mortgage interest is 100% tax

money to sit sit idle idle in in the the home. home.To Tobe be money were were left left to fair, you mortgage payment you deductible, the net cost of of the thepayment moneyisisyou fair, you do do have have aa mortgage deductible, the net cost money didn’t have before. However, since interest only produces 4.4% positive didn’t have This before. However, since interest only 3.6%. 3.6%. This produces aa 4.4% positive spread between the cost of money and rates are relative, if we are assuming a rateofof spread betweenif the costassuming of moneyaand rates are relative, we are rate the earnings on that money. return of can also assume aa strategic strategic the earnings oncan thatalso money. return of 8%, 8%, we we assume interest-only mortgage would be available interest-only mortgage would be available atat The story gets much more more compelling The story gets much compelling 5%. Also, since mortgage interest 100%tax tax 5%. Also, since mortgage interest isis 100% over time, although the mortgage debt over time,the although theofmortgage debt deductible, net cost the money is only deductible, the net cost of thecompound money is only remains constant, through remains constant, through compound 3.6%. This produces a 4.4% positive spread 3.6%. Thisthe produces a 4.4%continues positive spread interest, side account to interest, the side account continues to between the cost of money and theThe earnings between the cost of money and the earnings grow at a faster pace each year. grow at a faster pace each year. The on that onearnings that money. money. on $100,000 in year 1 are

earnings on $100,000 in year 1 are $8,000. Then in year year 2, 2, the the 8% 8% earnings earnings $8,000. Thenmuch in The story gets more compelling over The story gets much more compelling on $108,000 are $8,640. $8,640. In In year year 3, 3, the theover on $108,000 are time, although the mortgage mortgage debt remains time, although the debt remains earnings $116,640 at 8% 8% are are $9,331. earnings on on $116,640 at $9,331. constant, through compound interest, the constant, compound interest, Since mortgage debt remains remains the the Since the thethrough mortgage debt the side account continues to grow grow faster same, the between the cost cost the side account continues to atat aaofoffaster same, the spread spread between the the pace each year. The earnings on $100,000 mortgage money and the pace each year. The earnings on $100,000 mortgage money and the in year Then in inequity year 2, 2, the the 8% 8% on the separated separated equity inearnings year 11 are are $8,000. Then year earnings on$8,000. the continues to widen further in the earnings on $108,000 are $8,640. $8,640. In year year3,3, continues widen further in the In earnings on to $108,000 are homeowner’s favor every year. If we allow the earnings on $116,640 at 8% are $9,331. everyatyear. If we$9,331. allow thehomeowner’s earnings on favor $116,640 8% are home equity to remain idle in the home, home to remain in thethe home, Since the mortgage debtidle remains the same, Since theequity mortgage debt remains same, we give the opportunity to to put put itit to to we give up up the opportunity the spread between the cost of the mortgage the spread between thegrow costand of the mortgage work to compound. work and and allow allow itit to grow and compound.

money earnings on on the the separated separated money and and the the earnings equity continues to widen widen further the equity continueswould to inin off the Homeowners actuallyfurther be better better off Homeowners would actually be homeowner’s favor every year. If we allow homeowner’s favor everybackyards year. If we allow burying money in their than burying money in their backyards than

homeequity equitytotoremain remainidle idleininthe thehome, home,wewe home giveup updown theopportunity opportunity putsince ittotowork work and paying down theirmortgages, mortgages, money give the totoput itsince and paying their money allow it to grow and compound. buried inthe thebackyard backyard liquid(assuming (assuming allow itinto grow and compound. buried isisliquid

youcan canfind findit),it),and anditsitssafe safe(assuming (assuming you Homeowners would actually bebetter better off Homeowners would actually be no one else finds it). However, neither no one else finds it). However, neither isis off buryingmoney money theirbackyards backyards than paying earning rateofin ofin return. It’sactually actually losing burying their than paying earning aarate return. It’s losing down their mortgages, since money buried valuedue dueto toinflation. inflation.Few Fewpeople people today inin down their mortgages, since moneytoday buried value thebackyard backyard liquid (assuming youcan can find bury moneyinis inisthe the back yardororunder under their the liquid (assuming you find bury money back yard their mattresses, because they have confidence it),and anditsitssafe safe (assuming noone one elsefinds findsit).it). mattresses, because theyno have confidence it), (assuming else in thebanking banking system. Theyalso also understand However, neither is earning a rate of return. in the system. They understand However, neither is earning a rate of return. idle money loses value while invested idle money while It’sactually actuallyloses losingvalue value duetoinvested toinflation. inflation.Few Few It’s losing value due moneygrows growsand andcompounds. compounds.AsAsAlbert Albert money people today bury money in the back yard people bury in the back yardinoror Einsteintoday said,“The “Themoney mostpowerful powerful force Einstein said, most force under their their mattresses, mattresses,because becausethey theyinhave have under the universe is compound interest.” Afterall,all, the universe is compound interest.” After confidence thebanking banking system.They They also confidence inin the system. also homeswere were built housefamilies, families, notstore store homes built totohouse not understand idle money loses value while understand idle money losestotovalue while cash.Investments Investments weremade made storecash. cash. cash. were store

invested money moneygrows growsand andcompounds. compounds.AsAs invested Albert Einstein said, “The most powerful force Takenfrom fromaadifferent different angle, suppose you Albert Einstein said, “The mostsuppose powerful force Taken angle, you in the the universe is compound interest.” After offered anis investment that couldnever never inwere universe compound interest.” After were offered an investment that could go up in value, but might go down. How all,up homes were built house families, not go in value, but might down. How not all, homes were built totogo house families, much of it would you want? Hopefully none. store cash. Investments were made to store much of it would you want? Hopefully store cash. Investments were made tonone. store Yet, thisisishome homeequity. equity.It Ithas hasnonorate rateofof Yet, this cash. cash. return, so it cannot go up in value, but it could return, so it cannot go up in value, but it could go down thereal real estate market Taken from adifferent different angle, suppose you go down ininvalue ififthe estate market Taken from avalue angle, suppose you declines or the homeowner experiences were offered an investment that could never declines or the anan were offered anhomeowner investment experiences that could never uninsured loss (e.g. an earthquake), disability, goup upininvalue, value, butmight might down.How How much uninsured loss but (e.g. an earthquake), disability, go gogodown. much oraaforeclosure foreclosure or


5%.we It’sgive whatupmakes millionaires, millionaires! $100,000 of equity in of it would you want? Hopefully none. Yet, this TheLet’s home, the “opportunity” to earn a The power of leverage costsayofyou nothadborrowing Learn to be your own banker. By using the your home that could be separated. Current

is home equity. It hasano ratecan of return, so it 5 percent return on the money. Let’s be clear, buying home be a great (employment cost vs.isopportunity cost) principles that banks and credit unions use, mortgage interest 5%, so the cost of that cannot go up in value,thebutwealthy it could gothe down investment. However, buy you can amass a fortune. A bank’s greatest money would be $5,000 per year (100% tax By separating the equity we give it new life. in value if as thelittle realofestate market declines home with their own money as or When homeowners separate equity to assets are its liabilities. You can substantially deductible). Rather than bury the $100,000 We give ourselves the opportunity to put it to possible, leaving the majority ofan their cash in the homeowner experiences uninsured reposition it in a liquid, safe,going side to account, net worthon byit.optimizing in the backyard, we are put it toa workenhance and earnyour something Assumingthe a other investments where it’s liquid, safe, and loss (e.g. an earthquake), disability, or a mortgage payment is created. Theanmortgage assets that you already have. By being your work, or “employ” it. If I were employer, 28 percent tax bracket, the net employment earning a rate of return. One of the biggest foreclosure own banker you can make an extra $1 Million why would I be willing hire an assistant payment is considered the to Employment Cost. cost for is not 5%, but 3.6%, or $3,600 per year misconceptions homeowners have is that their retirement. for $35,000 per year? The expectation is I What many people don’t understand is when home is the best investment they ever made. after taxes (mortgage interest is 100% tax am going to be able to grow my business If you purchased a home in 1990 for $250,000 we leave equity trapped in our home, we incur deductible). It’s not too difficult to find tax and earn a profit on it. As a business owner, to create an extra and sold it in June of 2003 for $600,000, that the same cost, but we call it a lost Opportunity free How or tax deferred investments earning I believe that by investing in an assistant I Let’s be clear, buying a home can be a Cost. represents a gain of 140%. During the same dollars fortaxretirement will earn a return that’s greater than the costmoremillion than 3.6%. Using the benefits of a period, the Dow Jones grew fromthe 2590 to 9188, great investment. However, wealthy of employing that assistant. If we choose to you can create your own arbitrage that’s parked in your home doing mortgage, By repositioning $200,000 into an equity abuy gainthe of 255%. realityashere is that homeThewith little of financing their The money leave the $100,000 of equity in our home, by management borrowing at one rate and earning account with a financial advisor could be put to work earning you your was the investment decision own home money as best possible, leaving the nothing we incur almost the same cost. The only you can achieve gain ofhigher $1 million investment returns ata net a slightly rate. that you ever made. When you purchased the something. majority of their cash in other investments difference is, instead of referring to that cost over thirty years. Assume you separate the It’s what the banks and credit unions do all $250,000 house in 1990, you only put $50,000 employment cost, it is referred to as an where it’s liquid, safe, and earning a rate of Let’sassay $200,000 of home equity using a mortgage you had $100,000 of equity in down. The $50,000 cash investment produced a borrow our money at 2% and opportunity cost. By leaving the equity in thethe time.aThey return. One of the biggest misconceptions 5% interest rate. If the $200,000 profit of $350,000. That is a total return of 600%,your home that could be separated. Current thenwith loan it back to us at 5%. It’s what makes home, we give up the “opportunity” to earn a grows homeowners have is that home is mortgage at a conservative rate of 6.75% per far outpacing the measly 255%their earned by the interest is 5%, so the cost of that millionaires, millionaires! Learn to be your 5 percent return on the money. year, it will be worth $1,419,275 in 30 years. the best investment they ever made. If you stock market. money would be $5,000 per year (100% tax own banker. By using the principles that After deducting the $216,000 in interest purchased a home in 1990 for $250,000 deductible). Ratherthe thanequity bury the $100,000 By separating we give it newinlife. banks and credit use, youmortgage, can amassyou payments andunions the $200,000 and sold it inofJune 2003 for $600,000, the backyard, The cost notofborrowing we are going put it to work, or it toa fortune. We give ourselves the to opportunity to put A bank’s greatest assets are itsA still have $1,003,275 left in your account. that represents acost gainvs. of 140%. During cost) the “employ” work it. and on why it. Assuming If Iearn weresomething an employer, would I a liabilities. (employment opportunity net gain over one million enhance dollars. your Youofcan substantially same period, the Dow Jones grew from be willing 28 percent tax bracket, the net employment to hire an assistant for $35,000 per net worth by optimizing the assets that you When homeowners separate equity to reposition isexpectation not 5%, butis3.6%, or $3,600 per year 2590 to 9188, a gain of 255%. The reality year?cost The I am going to be able Thishave. example simplyyour shows timeyou already By being owna one banker it in a liquid, safe, side account, a mortgage after taxes (mortgage interest is 100% tax here is that financing your home was the to grow repositioning of equity. Imagine how the my business and earn a profit on it. As an extra $1 Million for retirement. payment is created. The mortgage payment is deductible). It’s not too difficult to find tax can make best investment decision that you ever a business numbers grow for individuals that harvest owner, I believe that by investing in considered the Employment Cost. What many free or tax deferred investments earning and reposition their home equity every 5 made. When you purchased the $250,000 an assistant I will earn a return that’s greater people don’t understand is when we leave more than 3.6%. Using the tax benefits years as their home continues to appreciate! house trapped in 1990,inyou putwe$50,000 down. equity ouronly home, incur the same thanofthe cost of employing that assistant. a mortgage, you can create your ownIf This is how the wealthy manage their home The $50,000 investment produced cost, but we callcash it a lost Opportunity Cost. a we choose to leave the $100,000 equity arbitrage by borrowing at oneofrate and in equity to continually increase their net worth. profit of $350,000. That is a total return of our home, earningweinvestment returns at a slightly incur almost the same cost. The Conversely, if the same $200,000 $200,000 into an were equityleft The money that’s parked in your255% homeearned 600%, far outpacing the measly rate.is, It’sinstead what the andtocredit only higher difference of banks referring that By repositioning to sit idle in the home for 30 years, it would doing could be put to work earning you account with a financial advisor by the nothing stock market. unions do all thecost, time.it They borrow ouran management cost as employment is referred to as not have earned a dime. something. money at 2% and then loan it back to us at you can achieve a net gain of $1 million

The power of leverage

How to create an extra million dollars for retirement

opportunity cost. By leaving the equity in the


“Homes “Homes are are designed designedtotohouse house families,not families,notstore storecash.” cash.” “Investments “Investmentsare aredesigned designed to to store storecash.” cash.” from the NASD: “Brokers are not prohibited Betting theAssume ranch;yourisking 401 vacation condo make the mortgage payments. over thirty years. separatehome the investment client recommendations. This would include from thetoNASD: are not prohibited from making such“Brokers a recommendation per Betting the ranch; risking home 401 vacation condo investment to make the mortgage payments. over thirty years. Assume you separate the client recommendations. This would $200,000 of home equity using a mortgage adequately explaining the risks suchinclude an equity to buy securities Many successful people in the of Northwest from making such a recommendation per se, so long as the investment is reasonably Home equity is Serious Money. We don’t $200,000 of home equity using a mortgage adequately explaining the risks of such equity to buy securities Manyof successful people in athe Northwest with a 5% interest rate. If the $200,000 grows Home which and are significant, to thean dream retiring buying second se, so long as Serious the investment isWe reasonably suitable for isinvestment in general, and it is investment, equity Money. don’t Recently the NASD issued an alert, “… gamble home equity. Liquidity and safety with 5% interest rate.issued Ifofthe6.75% $200,000 growsit investment, whichorsimply are buying significant, to the dream of retiring and second atRecently aa conservative per year, The NASD wants ensure home in Arizona Hawaii. Withato one suitable for the investment in general, it istoinvestor.” the anthat alert, “… for specific customer. Inand order because weNASD arerate concerned investors gamble home equity. Liquidity and safety are the key philosophies when separating atwill a who conservative rate of 6.75% per year, it investor.” The NASD to homedollars in Arizona orsimply Hawaii. With oneensure million or more savedwants in their be must worth $1,419,275 in that 30returns years. consumers are receiving prudent advice. the specific customer. In order to determine suitability, a broker should because werely are concerned investors on investment toAfter are suitable theequity. key for philosophies when separating home Rate of return is a distant million dollars or more saved in their IRA/401Ks, they decide to retire and buy will be worth $1,419,275 in 30 years. After consumers are receiving prudent advice. determine suitability, a broker should consider the client’s investment objectives, deducting the $216,000 in interest payments who must rely on investment returns toend make their mortgage payments could home equity. Rate of return is a distant third benefit. Also, it is not necessary or IRA/401Ks, they decide to retire and buy the vacation home where they will spend consider the client’s investment objectives, deducting themortgage $216,000 inhome interest payments financial status, tax status, and any other make their payments end upthe defaulting on their loans if their and $200,000 mortgage, youcould still have Tax deductions to third benefit. Also, it is not necessary or the winters. vacationWhat home where they willthey spend their a surprise when invest into make highly volatile financial status, tax status, and any other information atofirm uses suitable upinvestments defaulting on home loans if their and they unable and the $200,000 mortgage, you still have $1,003,275 leftdecline in their your account. Aarenet gain ofto recommended Tax deductions to discover that to pay cash for a $350,000 their winters. What a surprise when they recommended to invest in highly volatile or aggressive investments. You can make client recommendations. would include offset 401k withdrawals information a firm uses toThis make suitable meet payments.” The investments decline and they A are $1,003,275 leftmonthly indollars. yourmortgage account. netunable gain ofto over onetheir million condo they need to withdraw nearly discover that to pay cash for a $350,000 aggressive investments. You can make adequately explaining theThis risks of such an offset 401k withdrawals client recommendations. would include thousands of dollars by simply borrowing at NASD is absolutely correct inpayments.” advising against meet monthly mortgage The or over onetheir million dollars. $500,000 from theirto401K/IRA. What if condo they need withdraw nearly successful retirees have the majority investment, which are significant, to the adequately explaining the risks of such an Most separating equity if the client must rely on of dollars by in simply borrowing at 5% and investing at 5% safe conservative This example simplycorrect showsin advising a one time NASD is absolutely againstthousands instead they from had purchased theequity condo $500,000 their 401K/IRA. What if successful have the majority their assets in retirees their home and investor.” Thewhich NASD simply to ensure the returnsequity from their investment to make investment, are togoing the ofMost separating if the client must rely on investing at 5% insignificant, safewants conservative This example simply shows a one time fixedand investments without ever repositioning of equity. Imagine how thethe 5% 15 years earlier, when it cost $175,000, by instead they had purchased the condo consumersThe areNASD prudent advice. mortgage payments. As theyinstart fundsand of their assets theirwithdrawing home equity simply wants togoing ensureIRA/401Ks. the returns from their investment make into investor.” securities. Inreceiving general, individuals numbers grow individuals harvest investments without ever repositioning of for equity. Imaginethatto how thethe fixed using the equity inwhen their home? 15 years earlier, it cost $175,000, Home equity is Serious Money. We don’t consumers are receiving prudent advice. their IRA/401Ks, theywithdrawing are hit withfunds aby mortgage payments. IRA/401Ks. As they start shouldsecurities. not invest home equity forindividuals “current from and reposition their home equity In general, numbers grow for individuals that every harvest5 into using the equity in their home? gamble home equity. Liquidity and safety are Home equity is Serious Money. don’t annual tax bill. they Moreover, the with kids a Taxnotdeductions to offset from their are$175,000 hit income” unless investment fixed significant years askey their home to We appreciate! investthe home equity foris“current and reposition their continues home every 5 should Today theirIRA/401Ks, net worth would be the philosophies whenequity gamble home equity. Liquidity and safety are movedannual out, the thetax mortgage is paid,the and significant bill.would Moreover, kids deductions to interested offset 401k withdrawals and Tax guaranteed. Individuals in have Thisseparating is how wealthy manage their home income” higher, condo’s appreciation, unless the investment is fixed years as theirthe home continues toofappreciate! Todaydue theirtonet worth be $175,000 home equity. Rate return the key philosophies when tax deductible contributions to 401Ks have moved out, thecondo’s mortgage is paid, and and they due would the mortgage variable investments should have askinterested themselves, equity to continually increase their net 401k withdrawals guaranteed. Individuals in have This the wealthy manage home and higher, to have the appreciation, isisahow distant third benefit. Also, ittheir is notworth. Most successful retirees the majority separating home equity. Rate of return stopped. When they could use the mortgage interest deduction to help off-set their have deductible contributions to 401Ks “Howof will I assets make inmytheir mortgage payment if tax and Conversely, ifthird therecommended same $200,000 were left they would have the mortgage or to in to variable their home investments should askequity themselves, equity to continually increase their net isnecessary a distant benefit. Also, it isinvest notworth. Most successful retirees have the and majority interest IRA/401K withdrawals. addition tomortgage the deduction the could most, they don’t have When they use the highly or aggressive investments. interest deduction toInhelp off-set their my investments Do I have reserve sitnecessary idle involatile the home for$200,000 30 years, itinvest would IRA/401Ks. Asdecline? they start withdrawing funds will make mytheir mortgage payment if stopped. Conversely, if or the same were left to “How recommended to innot of theirI assets in home equity and financial advantages, they would have it. As part of long term planning, someone You of dollars by simply funds IRA/401K withdrawals. In addition to the from IRA/401Ks, they are hit with a deduction the most, they don’t have or their a secure income?” InI have April 2004, earned a dime. highly volatile orthousands aggressive investments. Dowithdrawing reserve sithave idle incan themake home for 30 years, it would not my investments IRA/401Ks. Asdecline? they start funds interest enjoyed the lifestyle benefits of may owning who is preparing for retirement want borrowing at 5% and investing at 5% in safe the significant financial advantages, they would have annual tax bill. Moreover, the kids it.their As part of long term planning, someone following question was posed to2004, the You can make thousands of dollars by simply funds from IRA/401Ks, they are hit with a or their a secure income?” In April have earned a dime. vacation condo 15 years sooner conservative fixed investments without ever NASD, to have a mortgage going into retirement have moved out, the mortgage is paid, and enjoyed the lifestyle benefits of owning “Where annual can I find language preparing borrowing at 5% and investing at 5% in safe the significant tax the bill. Moreover, thanisthey planned.for retirement may want following question wasexact posed tothe thekids who Betting the ranch; going into securities. Inrisking general, individuals tax deductible contributions to 401Ks have their vacation condo 15 years to help offset the annual IRA/401k tax bill conservative fixed investments without ever NASD, thatand to have a mortgage going intosooner prohibiting a broker from retirement have moved out, the recommending mortgage is paid, “Where can I find the exact language should not invest home equity for “current stopped. When they could use the mortgage than they planned. enhance their financial goals. home equity to buy securities Betting thesecurities. ranch; going into Inrisking general, individuals I taketax deductibleout 401Ks have and a mortgage onthemy housetoand invest toMaking help offsetuncle the overall annual IRA/401k tax bill income” unless the investment is fixed sam your prohibiting brokercontributions from recommending interest adeduction most, they don’tthat haveFor many, the mortgage interest deduction should not invest home equity for “current stopped. 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IESTYN DULAIS

HUGO MEJIA

MISTY FIDUCCIA

Born and raised as a US Citizen in Wales. Fluent in Welsh and English.

Born in Guadalajara, Mexico, raised in Arizona. Fluent in Spanish and English.

Born in Boaz, Alabama, raised in Arizona.

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CHANGING THE

iBuyer game Beat the Odds with The iReal Estate Pro Certification. Q&A with owner Dan Noma, Jr. Confused about how to interact with ibuyers such as OpenDoor, Zillow, or Offerpad? I recently sat down with Dan Noma, Jr to discuss his new online training certification program designed to give real estate agents across the country new cutting-edge strategies and information about how to capitalize on this growing opportunity. Dan is the designated broker of Venture REI, a full-service real estate brokerage firm that specializes in commercial and residential investment properties. He is recognized as one of the state’s leading real estate brokers and is ranked among the top five residential agents in Arizona by the Phoenix Business Journal. In 2013 and 2014, he also was named “40 Under 40” by the Southeast Valley Regional Association of Realtors.

Russell Hathcock: What is the name of this certification? Dan Noma, Jr: iReal Estate Pro™ Certification. You can learn more at www.irealestatepro.com. Russell: Is iReal Estate Pro™ Certification qualified by any state regulatory agency or the National Association of Realtors? Dan: No regulator. iReal Estate Pro is a ten module online training course. The mission of the of the iReal Estate Pro™ Certification program is to empower real estate agents with the tools they need to create a better consumer experience. You can learn more at www.irealestatepro.com The iBuyers, also call Internet Buyers, they pay

cash to homeowners who visit their website and fill in information about their house. A cash offer is made with no fix up, listing, showings or hassle. Few Agents are equipped to help consumers navigate that process. As agents, we can complain or we can fill a genuine consumer need. iReal Estate Pro™ education teaches real estate agents to leverage the iBuyer and leverage their institutions so that they can bring those opportunities to consumers and come from a place of transparency. Southwest Airlines tagline is “Transparency;” we are the voice of transparency. The iREP training allows them to do is to get any and all available cash offers available to the consumer, bring them to the consumer’s attention to create credibility with that consumer. If an agent refuses to bring an OpenDoor offer to the consumer at lower commission, the consumer


house with the Agent who brought them multiple offers.

just drove past five OpenDoor billboards. In Phoenix, 74% of the time the consumer already has their offer direct. We teach “bring Zillow and all the cash offers;” show the consumer all available option to them. Also show them what you make in writing; if it’s the best option for the consumer, recommend that option. Take the best option because it’s not self-serving. By agents not talking about OpenDoor, Zillow, Offerpad, Purple Bricks, we as agents segment ourselves against them. Whereas it doesn’t have to be that way. If Agents just answer the call and show up with all available options to our consumers, we actually can earn credibility which may be like the first time in our industry’s history that would be. Russell: So I often, in some of the blogs and Facebook groups, I see it’s common to see an Agent say something to the effect of, ‘hey consumer you just lost twenty to thirty thousand dollars because they (iBuyers) lowballed you, you didn’t know any better, you sold your home for way undervalue, had you hired me I would have more than made up for that’. Does your program speak to agents in a way that helps them to bridge that gap? Dan: iReal Estate Pro™ certainly does. We teach agents to not be the judge and jury to our consumer. If the consumer “cost of convenience” is $20,000, we are not to say that it wasn’t worth it for the consumer. We are not in their shoes; we don’t know what they lost in the cash offer discount to the retail price. They probably gained it on whatever they were trying to achieve. So, if the goal is to sell their house in a period of time and they were less concerned about the actual dollars then, they did what they wanted to do. Non-economic factors matter such as flexible closing dates, free local moves, no finance contingency; all those concerns the iBuyer answers. All of that stuff answers to whatever that consumer demand is. Consumer want fair and close to top dollar price. However, if they know what their other options are, and they know there is a cost to doing those, they may make that decision. We find 50% of the time they decline the cash offers to list the

Russell: So, with your program, what you’re saying is, “at least agents can bring all of that - all of the above to the table and help them make a wise decision or get informed to make an educated decision. Dan: Right. So, if a consumer gets on Amazon, the analogy is all time is that, consumer gets on Amazon, Amazon doesn’t tell us that these are the best electronics in the world. Amazon gives us all available options and then we as a consumer get to read consumer reviews, see how they’ve done in different areas, maybe the pricing is something we can filter by or whatever is important to us. Real estate is the last industry where the industry in the world that is not designed for transparency. We are ushering in the future. Russell: Is the iReal Estate Pro™ Certification course national? Dan: We have agents that are in Georgia, Idaho to California, completing the nearly four hour online video course divided into ten video modules to become certified. Russell: Is this program something you are currently doing in your own business? Dan: The course content, marketing material, resources, document templates are my exact toolbox


and that of Kenny Klaus. It contains what we did to sell 3500 homes last year. So, the only person that bought more assets than us was OpenDoor themselves. And it’s because we just came with a different message.

all of our marketing tools, all of our scripts, they’re getting all of our videos. After they’ve gotten through all the training, they access the Resource Center and Lab Center, join our iREP Community for best practices with other iREPs and monthly updates.

Russell: What differentiates Venture REI from iReal Estate Pro™?

Russell: Who are the instructors in the video training?

Dan: Venture REI, where I am Broker/Owner, is unrelated to the iReal Estate Pro Certification program.

Dan: Kenny Klaus and me. We teach ten modules of three sections each from beginning to end. We shift their mindset to how to actually transact with the iBuyers. iREPs get all the tools they need to transact this way. That’s when they get downloadable material and scripts, tons of it. And then they also get to be a member of the Community and that’s where we find the biggest value for them. When they join the Community, iREPs keep up to date with that information to not be left behind. Kenny and I digest new developments to find opportunities for Agents.

Russell: So, Venture REI is a traditional real estate brokerage? Dan: Yes. An agent doesn’t need to do anything with Venture REI to get certified. The certification stands alone. Russell: How does an agent interact with the iReal Estate Pro™ Certification program? Is it a web-based platform? Dan: Yes. Think about how Agent first thought about short sales. A lot of Agents got in the short sale game late in the belief, ‘oh I don’t want to do short sales they’re too much work and it doesn’t affect me’. Suddenly, it became a large segment. The iBuyer is the new short sale - the new version of how to do real estate and agents that don’t embrace it are going to be left behind. The certification is all encompassing. It’s everything they’re going to need to transact with iBuyers effectively. So, they’re getting

Russell: What would you say differentiates your program to, say, going to the local Realtor Board and get their GRI or other education? Dan: We are the only Certification in the country focused to the iBuyer and institutional funds.


Dan: Kenny and I are the teaching faculty.

Russell: With the web-based video tutorials, access to downloads, access to networks, etc; does this include access to mastermind groups that can help troubleshoot and problem solve if the agents have some issues in some scenario or another? Dan: Correct. Russell: Is the iReal Estate Pro™ software as well? Dan: Yes. So, iREPs get Net Sheet Aggregator tool for download. They get their own cash offer website so now they can they can play with iBuyers. Russell: How does the pricing work, is there a monthly subscription? Dan: It’s $499 for the course, certification. The continuing education and resources are $49 per month of $499 per year. Russell: How often is the iReal Estate Pro™ information updated, what advantage is there for them to stay plugged into the system, and can they offer updates they may be seeing in their market? Dan: We update the content almost daily like iBuyer Buy Box changes that are hard for Agents to get on their own. In the iREP Community, an Agent in San Diego shares a piece of marketing so an Agent an agent in Atlanta could use that same piece of marketing material and change it for their market. Russell: How did this program get started? Dan: In a recent event in Phoenix, 320 Agents attended; 250 Agents signed up for the course and Certification. Agents get it - the biggest impact on their business today. iREP Certification allows them to understand how to be relevant, not from a place of fear but from a place of opportunity, empowerment, and education. Russell: How does Kenny Klaus fit into the program?

Russell: As I understand it, he’s at another brokerage Keller Williams. Is there direct competition between the two of you? Dan: No competition. We are resolved that consumer choice be driven by Agents including options that are advantageous to them with a lower commission to us. Russell: If agents aren’t showing iBuyer properties could there be a violation of fiduciary responsibility? Dan: We’re just starting to see the rumblings of some of those first things. There’s a case where an agent didn’t get an offer from OpenDoor property to the seller and the property sat on the market for six months. The seller finally sold the house on the retail market. They found out later they could have sold their property to OpenDoor for the same price or better. And they said, ‘well had I known that I would have done that my agent didn’t tell me about it’. So, the agent didn’t tell him about it because the agent wasn’t going to get paid the same amount. Well guess what? They just violated their fiduciary responsibility. Russell: In terms of commission splits are you able to enhance the agents experience or does that become a non-issue to them? Dan: Our belief is that we don’t get to decide any-


more. Our consumers are going to pick the best option for them, and those options have varying degrees of what their fees are that are available to us and if we can put ourselves aside and let the consumer make the best choice available to them, now we’ve created raving fans for life. Those people will come back to us. People will send us referrals and word of mouth that will lead to success down the road. I can tell you that 60% of the time, with iREP, consumers still list their property traditionally. They just want to be able to make that decision on their own. They do it in every other aspect of their life. No one tells them what to do except in real estate. Agents say your property is worth this X and it’s listed for X. It’s the only industry in the world that does that. And, it shouldn’t. It doesn’t have to be that way. We as agents have a really bad reputation with consumers that they think of us as just above used car salesmen. So, by leading with transparency there really isn’t anything they can argue with. We show everybody all of our fees, all available options, let the consumer drive, and now we’re just in an advisory type role and we can really win and create kind of lasting business. We not going to win if we’re trying to take advantage of people, our consumers have gotten way smarter. Consumer access to cash offers - and it is right – to be transparent. 40% of the properties that hit OpenDoors at API last month that went to the MLS, of them, 40 percent of the properties that actually got to the MLS, OpenDoor saw before they ever contacted an Agent. If we don’t do it our consumers are doing it without us anyways.

By agents not bringing all cash offers and show all my fees, that consumer can make an educated decision. If I’m the agent and I’m deciding for my consumer what’s in the best interests of the consumer then I’ve done the consumer an injustice and I’m not saying the consumer is not going to pick them. Consumers are, 60 percent of time, still pick that agent traditionally because that will probably always yield the highest dollar volume. But it doesn’t work in every case. If we as agents aren’t bringing these iBuyers to the table then they’re going there without us. Russell: In terms of your market reach with this certification. Where are you at or where are you going? Dan: We have agents all across the country that have already taken the Certification typically in iBuyer markets, or are coming soon markets, or we know that I iBuyers are going there. The iREP course and Certification is available to Agents in all 50 states.

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Top Ten Reasons to opBuy TenLife Reasons to Insurance uy Life Insurance

Life insurance is one of those things that just about everyone needs but far too few people actually have. It’s easy to put off urance is one of those things that just about everyone purchasing a policy when you’re young and relatively healthy. but far too few people actually have. It’s easy to put off But the longer you wait, the greater the chances of something sing a policy when you’re young and relatively healthy. happening before you get yourself coverage. Maybe buying longer you wait, the greater the chances of something life insurance been on your to-do list for a while but you ing before you get yourself coverage. Maybe buying haven’t gotten around to it yet. Check out these 10 reasons urance been on your to-do list for a while but you why you can’t afford to wait any longer. gotten around to it yet. Check out these 10 reasons u can’t afford to wait any longer.

1. Replace Lost Income

other outcome could result in creditors trying to collect from your estate. While that gets rid of your debts, your other outcome could result in creditors trying to collect Replace Lost Income heirs will receive the depleted remainder. Life insurance Life insurance works to provide financial security to your from your estate. While that gets rid of your debts, your allows those you leave behind to take care of any lingering loved ones after you pass away. You have to consider what heirs will receive the depleted remainder. Life insurance urance works to provide financial security to your financial responsibilities. would happen if you were to die suddenly. This is especially allows those you leave behind to take care of any lingering nes after you pass away. You have to consider what true if your loved ones rely solely on your income. Get financial responsibilities. happen if you were to die suddenly. This is especially yourself adequate coverage. That way, you won’t leave your your loved ones rely solely on your income. Get loved ones helpless when the monthly bills come around. College Planning f adequate coverage. That way, you won’t leave your nes helpless when the monthly bills come around. College Planning There are a number of ways to save money for your child’s education. You may not have thought that a life insurance Cover Burial Expenses There are a number of ways to save money for your child’s policy would be a viable option. But insurance payouts education. You may not have thought that a life insurance can actually provide a good supplement your savings. Cover Burial Expenses Sadly, even a basic funeral service can run upwardspolicy of would be a viable option. But insurance payouts If your child ends up borrowing money to get through several thousand dollars. While it’s possible to pre-pay for can actually provide a good supplement your savings. school, the insurance proceeds could also help wipe out even a basic funeral service can run upwards of your funeral, people don’t often think that far ahead. PreIf your child ends up borrowing money to get through pesky student loans. thousand dollars. While it’s possible to pre-pay for payment can ensure everything is in place for your loved school, the insurance proceeds could also help wipe out uneral, people don’t often think that far ahead. Preones after you die. However, there are risks to pre-payment. pesky student loans. nt can ensure everything is in place for your loved Life insurance can give you and your beneficiaries more of fter you die. However, are risks tothem pre-payment. a guarantee, liftingthere a burden off of as well as yourself. Build Cash Value urance can give you and your beneficiaries more of ntee, lifting a burden off of them as well as yourself. Build Cash Value Term life insurance, a type of life insurance, stays in place for a set period of time. But another option, whole life Pay Off Debt Term lifeinsurance, insurance,provides a type ofpermanent life insurance, stays in place coverage that only ends if for a set you period of time. But another option, whole life cancel the policy. Whole life insurance allows you to Pay Off Debt Just because you die doesn’t necessarily mean your debts insurance,build provides permanent coverage only endsprospect if up cash value over time, that an attractive to will disappear. In the instance that you and your spouse you cancelany thepeople. policy. That Whole life insurance allows you to cash value acts as an extra cushion that cause you die doesn’t mean your debts have co-signed for anecessarily mortgage or other loans, your spouse build up you cashcan value over time, anThis attractive prospect to if you tap at any time. may come in handy appear. In the instance that you and your spouse may become entirely responsible for repayment. The any people. That cash value acts as an extrathe cushion have a financial emergency down road. that -signed for a mortgage or other loans, your spouse you can tap at any time. This may come in handy if you ecome entirely responsible for repayment. The have a financial emergency down the road.

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3.

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6. Diversify Investments Some people also use life insurance as an investment tool with universal life policies. These policies are tied to a specific investment product. Then policyholders receive dividend payments based on the product’s performance. Before you dive into this type of insurance, you’ll want to read the fine print. That way you’ll know the potential risks and returns before you commit.

7. Business Planning If you own a business, it’s vital that you have life insurance. This covers your obligations so your hard work doesn’t go to waste. Are you involved in a partnership with someone else? You should both have coverage. That way, if one of you dies, the other isn’t left holding the heavy financial bag.

8. Estate Taxes When someone passes away, their heirs often face estate and inheritance taxes on any assets they receive. If you’re worried about your loved ones getting hit with a big tax bill, a life insurance policy can help cover these added costs.

9. Coverage is Affordable One of the excuses people tend to make for not buying life insurance is the cost. But truthfully, coverage often ends up pretty affordable for most people. Term life tends to be less expensive than whole or universal life. Plus, the younger and healthier you are, the lower your premiums will be. Unless you smoke or have a preexisting health condition, you could find coverage for as little as $1 a day. Compare policies now to see your affordable options.

10. Peace of Mind No one can truly predict the future. But having life insurance means you and your loved ones can prepare for any eventuality. Even with a small policy, you may find yourself sleeping a little easier at night knowing that your family has protection in place should something happen to you.

Next Steps Convinced that you need a life insurance policy? Call an independent Life Insurance broker find a policy that fits your needs. Written by Bryan Johnson, Independent Life Insurance Broker 480-295-9050


WE STRIVE TO PROVIDE COMPLETE CARE FOR OUR PATIENTS.

Family Medicine Chiropractic Care Physical Therapy Suboxone Program Pain Management Weight loss Programs Massage Therapy At Advanced Spine and Rehab, we take great pride in providing the finest chiropractic and medical care to our patients. Below is a sampling of the different medical and chiropractic services we offer in our Mesa office.

Podiatry

PROVIDERS Michael Crismon, DC

Daniel Graham, DC

Dr. Stanley Miller, MD

Dr. David Ellsworth, DPM

Dr. Rebecca Abraham, MD

Advanced Spine & Rehab PC Advanced Family Healthcare PLLC 4121 E Valley Auto Drive, Suite # 110 Mesa, AZ 85206 480-892-1122 • 480-892-2243 www.advancespine.com


Celebrating 20 Successful Years in the Business… Working Smart, Playing Hard.

LAURIE MARLOWE

RANDI MARTINSON

lmarlowe@atsaaz.com

rmartinson@atsaaz.com

Senior Account Manager

480-290-0948

Marketing Coordinator

602-909-0276

Who you align yourself with MATTERS.


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