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, which we learned from our parents is wrong. They taught us to make a and big down grandparents, They mortgage, taught us and payment, get isa wrong. fixed rate 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 said, are a necessary evil at best. early as you can. Mortgages, they 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The problem with this rationale is it has become outdated. Therationale rules ofismoney The problem with this it has have become outdated.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. our job grandparents, no longer have Unlike the same 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 want to retire want to retire before the age 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 rate premium for a 30-year fixed rate premium 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 how you handle issues of home they are likelyfrom to only use thegenerations first 4.2 knowledge previous when factdetermine whether you achieve financial ownership may well determine whether years of the mortgage. We can only there were few options other than the 30 year success.” you achieve financial success.” conclude they are operating on outdated fixed mortgage. Wealthy Americans, those 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, those work with the ability to pay off their mortgage but refuse to do so, In order to discover how our parents order to discover how 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 in loan agreements gaveagreements banks adjustable rate interest-only mortgages, clause money down, they keep their mortgage the right to demand full repayment of banks the right to demand full repayment and most importantly they integrate their balance as high as possible, they choose theof loan any time. Since thisSince was like theatloan at any time. this was like mortgagerate intointerest-only their overallmortgages, financial plan to asking 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 crashed October 29,money, 1929much millions of to continually increase their wealth. This is investors loston huge sums of Thethe game is the same, but while most of itinvestors how richboard get richer. lost huge sums of money, on margin. Back then, 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, few investors wanted aregame playing chess. good news is the the$10 of stock for a $1. 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 and take out cash to cover their margin rest of America as well. Any home-owner can so 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 the strategies of the wealthy to tocash coverand their margin It didn’t take for the rest of America as well. Any homeruncash 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 New York York Times Best demand to buy these homes, so prices planners in the country a New payments every month. However, there Times Best Selling author, summarizes in The continued to drop. To cover the margin Selling author, summarizes 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 important implications for the homevery 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