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
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