Welcome to the Mortgage Mistakes and Misconceptions presentation. You are going to learn how to leverage your home equity for more wealth, and why it may not make sense to pay off your mortgage in the traditional sense.. Most people don’t really understand how the home works as a leveraged investment, as tax shelter, as a tax free way to grow their wealth, but they do understand it is better than renting. Many just leave it at that, and never take the time to examine the home investment, or maximize it’s ability to help you create wealth over your life time. In this presentation we are going to look at exactly that.
Let me start off by giving you this simple quiz. (go through the quiz). “ The reason that we went through this is I want to make it clear as to why people have decided to pay off their homes.” It was the fear that they could lose their home to the bank at any time.
When the stock market crashed in 1929, people who had stocks on margin had their margins called. The problem in the 20’s was that you could buy stocks on margin with only 10% down, so many of the clients couldn’t make their margin calls. The brokers turned to the banks to get money, the banks didn’t have enough money to support the demand so they called the loans on the mortgages that they had outstanding. Since they could demand full repayment at any time, many mortgage holder lost their homes because they couldn’t repay the mortgage balance. Ever since then, people have done everything they can to pay their homes off as quick as possible, many times not realizing the mistakes that they are making along the way.
Here are some of the changes that have taken place to ensure that people don’t lose their homes and we don’t have a situation like 1929 again. First consumers can no longer purchase stock with 10% down, also banks are no longer underwriting stock. Banks can not demand full repayment and can not cancel your mortgage at any time. The FDIC was created to protect the consumers and the Fed gives banks unlimited access to cash through the secondary market. SO, the most important thing you need to realize is that you don’t need to fear having a mortgage.
These are the main reason that people buy homes according to a Fannie Mae national survey. The first is as a long term financial investment. The second is for the feeling of ownership. The third is to be in a neighborhood they like. The main reason people said they buy their home is to make a long-term financial investment. We are going to focus on that in this presentation. We are going to talk about how to maximize your home as an investment.
There are other reasons that people buy homes though, in fact a home covers our basic human needs of shelter, comfort, security and privacy. On top of that, your home can offer potential tax savings, you can leverage your home to grow your assets, protect yourself from inflation by locking in a payment and establish your credit history. You home can be one of the best investments that you ever make, the key is to avoid some of the common mistakes that the majority of homeowners are making, and that’s what we’ll talk about in this presentation.
Most people we talk with understand the importance of effectively managing their assets to accumulate wealth for retirement. Unfortunately what you are going to see in this presentation is many people make the big mistake of not managing the equity that they have accumulated in their homes. 67% of all home owners have more equity in their home than in all of their other investments combined. In the US, there is over 8.63 trillion dollars in unmanaged home equity that people aren’t using correctly. After watching this presentation, you will know more about your mortgage than 99% of all financial planners, cpa’s, insurance agents and attorneys Let me ask you this question: WHAT % OF YOUR TOTAL WEALTH IS IN YOUR HOME TODAY? If most of your wealth is tied up in your home equity, you will learn how you can unlock that equity to put it to work for you and create more wealth.
Investments are compared using a few simple criteria. Let’s look a little closer at each of these aspects. Rate of return is pretty simple, what do you earn each year on your investment Safety-is there any potential for you to lose your principal? Liquidity-Do you have the ability to access and use your investment if you need to Tax Free or Tax Advantage-Can you realize gains on your investment without paying taxes on the gains
Retirement Income-Will the investment generate income for you when you need it most Legacy for your family-Will the investment provide for your family after you are gone Diversification-Do you have risk because all of your eggs are in one basket A QUESTION I have for you is this: HAVE YOU COMPARED YOUR HOME TO YOUR OTHER INVESTMENTS BEFORE?
This is the most important question that I will ask right now, and the most important question to answer if you want to be in the best possible position for your retirement. How much of your assets would you invest in something that is: Potentially Unsafe Partially to totally illiquid Earns NO rate of return Can’t provide income And is not diversified? I know it seems like a silly question, but I think what you’ll see is that many of you are probably doing this as we speak. You are not alone, 95% of all Americans are doing the same thing
Safety is the first thing I want to address when it comes to your mortgage. The basic definition of safety is guaranteed, insured or totally protected from volatility. For this presentation we’ll use a more flexible definition, as in viewing safety as minimizing your risk or potential for loss
So how safe is your house? The fact is it’s not that safe of an investment, you can lose equity in your home in 3 different ways. First, if your home depreciates you will lose equity. If your lender forecloses on your home, you will lose all of your equity, and if you lose your home in a lawsuit you lose equity. Your home isn’t protected from any of those potential problems.
Typically a home is considered a safe asset, but a market bubble could destroy and equity you have built up over the years. There is more and more talk about how the real estate market is currently overvalued, a market bubble could eliminate your appreciation, principal that you have paid in and your down payment if you have to sell your home in a depreciated market
The biggest thing to also remember with having too much equity in your home is you won’t be diversified. A depreciating market will have a greater impact on you if you have more equity in your home.
Next, let’s address liquidity in investments, and see how liquid your home really is. Liquidity is really how quickly can you access your money if you need it. With Cash you have same day access, with bonds/stocks and mutual funds also same day or at least next day access. With your home however, you either have to refinance or sell your home to get any assets out of it. That is going to take somewhere between 30-180 days. Y
Your home equity is one of the least liquid investments that you own. Furthermore, it is the only investment you own that requires you to qualify to be able to take your own money out. If you don’t have the necessary income, chances are you won’t be able to access your OWN equity.
Here is another huge problem with building up too much equity in your home. Many people make pre payments or pay extra money towards their principal to try and pay their home off quicker, not realizing the impact that could potentially have for them. For example, let’s assume you have a $3,000 monthly payment and you decide to pay an extra $300 a month towards your principal and each year you make one extra payment for $3000. Or you could take that same $300 a month and put it into a savings account and put the $3000 deposit into the savings account also. After doing this for 3 years, you would have either $19,800 in equity in your home if you were making extra payments, or you would have $19,800 in a savings account if you were depositing the money there instead.
Now, let’s say something unfortunate happens and you become disabled or become unemployed. Here is an important question, do you think the bank cares that you have been making extra payments for 3 years and that you’ve given them an extra $20,000 over the past 3 years? The answer is no, the bank only cares that you are able to make the next month’s payment. Had you saved the money in a savings account instead of paying down your principal, you would be able to continue to make payments for 6 straight months without having any concerns about losing your home. So, here is an important question for you: HOW IMPORTANT IS USE AND CONTROL OF THE WEALTH IN YOUR HOME? HAVE YOU CONSIDERED THE LIQUIDITY OF THE WEALTH IN YOUR HOME BEFORE TODAY?
The Rate of Return you earn on your home is important to look at also. If you learned that a portion of your wealth was earning an annual rate of return of ZERO percent and would never change throughout your lifetime would you be concerned with that?
Well, here is the sad facts for many people, something they don’t realize. Equity in your home will always grow at a rate of ZERO percent. The only way that equity in your home increases is through principal repayment or property appreciation. Your home never appreciates because you are earning interest on your equity.
If you take a look at this concept you’ll see how you can dramatically improve your situation. The fact is your home will appreciate whether you have equity in it or not. You could own your home free and clear or have it completely mortgaged and it would appreciate at the same rate. What I want to show you in this presentation is how to get ahead by leveraging your equity to create two assets working for you. First, let’s look at the traditional method of one asset, your home. If you have a home worth $200,000 that appreciates at 5% every year, it would be worth $325,778 in 10 years. Now, let’s assume that $200,000 home actually had $100,000 in equity. I said earlier, your equity earns ZERO, it’s a dead asset. So your equity in 10 years would not grow at all.
If you were to take that equity and invest it and earn 5% on your investment, you would now have 2 assets working for you instead of one. Your home would still appreciate at the same rate of 5% a year, in 10 years it would be worth $325,778. However, by investing your equity and earning a rate of return on it of 5%, in 10 years, your equity will have grown to $162,889.
If we compare the one asset approach that most people take versus the two asset approach, you will see that after ten years you will have over $60,000 more in total net worth with the two asset approach, even with just a conservative 5% annual return. As you can see your home appreciates at the same rate, the only difference is you are putting your equity to work for you.
Not only are you increasing your net worth, you are immediately doubling your assets and getting better diversification with your assets. You still have your $200,000 home which is appreciating in value, plus you now have $200,000 in a safe investment, also earning money.
If your home and your safe investment grow at 7%, you immediately double the increase in your assets, instead of $14,000 you now have $28,000. There are not many options you have available to you that will allow you to immediately double your assets, except for your mortgage.
What many people wonder though is this, what about the new mortgage payment. Let’s examine that and you’ll see how separating your equity can dramatically improve your wealth. Let’s assume you take out $200,000 in equity and have to pay 7% on an interest only mortgage. Your annual payment will be $14,000. If you are in a 28% tax bracket, the government pays $3920, you pay $10,080. Now, if your home appreciates at 7% and your safe investment earns 7%, you will have increased your assets by $28,000. If you subtract out your $10,200 annual payment, you have $17,920 left. You just increased your assets by 14% in one year instead of just 7% by separating out your equity. Think of the impacting increasing your assets by 28% will have over a period of 10,15 to 20 years. Have you considered the rate of return of the wealth in your home before today? Did you realize the equity in your home always earns a 0% rate of return
Let’s examine the tax benefits a little closer. If you had a payment that you had to make every month and the government was willing to pay up to 35% of that payment for you, would you take full advantage of it?
The Government gives you a great tax break on your mortgage interest. You can deduct your mortgage interest on your first mortgage up to $1,000,000 on your first loan, and up to $100,000 on a second mortgage or home equity line of credit. Your total tax savings combined you can receive is up to $374,000 in a 34% tax bracket.
Let’s look at how it works. If you have a $1500 monthly mortgage payment, you really only pay $080, the government pays for $420 of your payment each month Over the course of the year, the IRS has helped you pay over $5,000 of your mortgage payment, why would you ever stop taking their Free money? This example assumes that you are only paying the interest on your mortgage. Principle payments are not deductible.
We talked about the qualities of a good investment at the beginning of the presentation. Now that we’ve talked about the equity in your home, let’s review how it does as an investment and see if it passes the test for a good investment. We now know your home is not liquid, it’s not a safe investment, you don’t earn any interest, you DO have some favorable tax advantages with your home, but it can not provide retirement income, nor does it provide maximum retirement income after taxes. If you die, it won’t necessarily provide money for your beneficiaries and it’s not diversified, all of your eggs are in one basket. So of the eight keys to a good investment, your home equity only meets one. That folks is a bad investment.
There are a lot of benefits that we’ve discussed about separating your equity out of your home and allowing it to grow. First, we’ve seen that your home’s equity is one of the least liquid investments and you have to qualify to take the money out. If you have the money in a safe investment you can access it at any time. By diversifying your assets and separating your equity you have protected yourself against a market bubble that could cost you your equity. You will dramatically increase your rate of return. Home Equity always earns ZERO percent, by investing your equity you have seen the growth you will experience. You will maximize your tax deductions, and let the IRS pay for a portion of your payment every year. And finally by separating out your equity, you will protect yourself, your family and insure that you are able to keep your house should you become disabled or unemployed. There are a lot of advantages to separating and maximizing your home’s equity.
The key to this whole presentation is I want you to understand how to accumulate more wealth for your retirement. Currently in the United states, 30% of homes have no mortgage at all on them, they are completely paid off. Of those homes that are completely paid off, 65% of those homes are owned by seniors over the age of 65. On the flip side, the average senior today has a combined household income of $21,450 per year. Many retirees have accomplished the goal of having their home paid off, but what is the price they have paid for that? Are they sacrificing an enjoyable and rewarding retirement for the sake of having their home paid off.
I think this is probably the most important thing to consider. From 1990 to 2000 the average retirement age moved from almost 67 years of age down to under 63 years of age. The average retirement age is dropping an average of 5 months per year. During that same period of time the average life expectancy is increasing by an average of 4 months per year. The fact is that we are retiring at younger ages, which gives us less time to save money for retirement, but we are living longer than ever before, which means we need more wealth to support us during our retirement years. The fastest growing class of citizens in the US is centenarians, people turning 100. If you retire in your early 60’s and live into your 100’s, you will need enough wealth to support you for over 40 years of retirement. A traditional retirement account will not do this for you.
The question you have to ask yourself is where can we find the money to support the retirement lifestyle we want to live for over 40 years. The key the longer you can put money to work for you the more dramatic the growth will be because of compounding. The most difficult thing for most people comes in finding the additional money to save and maintaining the discipline to continue saving that money over a period of time. Hopefully, during this presentation, you will see how your mortgage can play an important role in helping you find the assets to invest to build a retirement nest egg. By consolidating long-term debts in a new mortgage, you can often find the money to cover the payments on your equity investment.
Unfortunately, most people that I talk to are doing reverse tax planning and it’s because of bad advice they get from most financial planners or brokers. Common advice people receive is to pay of their home as quick as possible. Many of you are probably making extra payments or bi-weekly payments trying to accomplish this. The other common piece of advice people receive it to maximize their contributions to their qualified plan or IRA. Is this advice really helping you prepare for and enjoy a successful and financially rewarding retirement?
If you did follow that advice to prepare for retirement, here’s the situation you’ll be in once you are retired. First off, by paying off your mortgage, you have eliminated your biggest tax deduction, mortgage interest. Instead of allowing the IRS to pay for 35% of your payment, you have gotten rid of it. Secondly, all of the income you are taking from your qualified plan in 100% taxable as ordinary income. By following this advice you have created the least favorable tax situation that you possibly could. You have 100% taxable income, with no help or deductions from the government. This is not the best way to prepare for your retirement. If you finish watching this presentation understanding just one thing, this should be it.
But, it doesn’t have to be that way. Your mortgage can be your BEST ally in creating maximum wealth for your retirement years if you take advantage of it. Let me ask you a question. After watching this presentation, what would be more important to you, paying off your home early, or adding $1 million to your retirement savings?
I will show you how you can acquire a tremendous amount of wealth by leveraging your mortgage. In fact I’ll show you how to make over a million dollars using your mortgage. You can accumulate over one million dollars tax-free for retirement by borrowing $160,000 of your home equity at 7.5 percent and investing it at 7.5 percent. For the purpose of this illustration, your home equity totals $160,000. An interest-only loan for $160,000 is taken out at 7.5% for 30 years. The $160,000 is then invested in a tax-free account at 7.5%. At the end of thirty years, your tax-free investment is worth $1,240,793. After deducting your mortgage balance and the total net interest paid ($160,000 + 237,600 = 397,600), your tax-free investment has a net profit of $1,003,193. There are two key elements to creating such financial wealth: Borrow money at the lowest rate possible. An interest-only mortgage is the most desirable because you can maximize the deductibility of the interest, thereby using the IRS as your partner. Conventional loans also work well, but they slowly begin to accumulate equity in your home, possibly requiring you to refinance more frequently. Your investment should be safe and earn the highest rate of interest possible. Invest in a tax-free account. Moderate returns will yield excellent results! It is not worth incurring high risks on serious money, like home equity, in order to try to earn higher returns. This is not a get-rich-quick scheme. Let common sense and compound interest create your wealth safely and slowly. Patience will pay!
This chart shows you the effect of taking a home worth $200,000 and a $100,000 existing mortgage, and borrowing up to 80% of its value to invest. In this case, it is $60,000. By limiting the maximum loan-to-value to 80%, you can get more favorable interest rates, and your mortgage planner can offer you an interest-only mortgage for up to this amount. If you notice, every three years, you either refinance or borrow the additional equity from your home to add to your investment portfolio. You also need to limit the amount you are borrowing to what you can afford to pay back each month from money you would be using to invest. The Interest Only column reflects the annual after-tax cost of the money used to pay on the borrowed equity. We are assuming that you are paying the mortgage using an interest-only loan. The portfolio value is what the invested money is worth at the end of each year, based on the rate shown on the chart. The home value is what the $200,000 home is worth at the end of each year, based on a 5% annual appreciation rate. The LTV column shows you the current Loan to Value based on the end-of-year value of the home. The Investment Gain is what the portfolio is worth at the end of the year, less the outstanding mortgage balance. The Invest the Cash column reflects what you would have if you did not borrow the equity from your home and instead simply took the after-tax interest payments and invested them directly at the same investment rate as the portfolio investment. The last column shows you the effect of how much more you come out ahead by borrowing the equity from your home and investing it compared to investing the after-tax interest payments. As you can see, in this example you come out 37% ahead! This spreadsheet is available from your mortgage planner. Please contact the person identified on this presentation to get it. You need Microsoft Excel to run it.
Here are some things you should know about getting a mortgage. Depending you’re your current loan balance, long-term debt and interest rate, it may be advantageous to refinance your existing mortgage to a new first loan for up to 80% of the value of your home. Higher LTVs can also be done, but the interest rate may start to go up with different lenders. Your mortgage planner can determine how high of a Loan to Value you can go. On a new first mortgage for up to 80% LTV, your credit score can be as low as a 500. Typically, the higher your credit score, the lower your interest rate will be. If it makes sense to leave your first mortgage in place, you can get either a home equity loan or a home equity line of credit, secured by a second mortgage on your property. Typically, you need to have a 620 credit score to get 80% LTV if you go full doc, or a 640 if you want to go stated income. In many cases, your mortgage planner can offer you 3 year, 5 year or 10 year fixed rate terms on your interest-only first mortgage. In our scenario, you will be refinancing or increasing your home equity loan every 3 to 5 years, as the value of your home goes up. With many of the lenders, self-employed and stated income borrowers can get 80% to 100% LTV mortgages, without having to show tax returns or otherwise proving income. On a new first mortgage, the typical closing costs are about 3% of the loan amount. On a home equity loan, the terms are usually based on the prime rate, with an interest rate that may be higher than on a new first mortgage, but the closing costs are often less. If you also use the new mortgage to consolidate your debts, you can save hundreds of dollars per month, freeing up this money to use for your investment program.
Lets look at an example of how you can refinance your mortgage to pay off other debts, letting you free up cash for an equity-based investment program. Assume that you have a current mortgage balance of $100,000 at an interest rate of 6%. Your monthly principal and interest would be around $600 per month. Assume you have credit card and other long-term debt of $25,000, on which you are paying about $750 per month. Also assume that you are in a 28% federal tax bracket. Your new mortgage would be about $128,000. The extra $3000 would cover the closing costs associated with the loan. Assume that the interest rate is 7%, a full percentage point higher than your current mortgage. Your new monthly payment, based on an interest-only program, would be $747 per month. In a 28% tax bracket, your after-tax monthly mortgage payment would be $538 per month, giving you a monthly savings of $812. If you were to determine how much equity you could pull out from your home, and have it paid simply using this monthly savings, you could borrow another $139,000, assuming an interest-only payment program. This money can be invested in a suitable investment as discussed on the next slide.
Once you know you can afford to pull out your equity, where do you invest it? This is a question that your financial planner is qualified to answer. My goal with this slide is to point out some of the considerations you must look at. First is safety of principal. Remember, this is borrowed money, and you will have to pay it back either when you sell the house or refinance the mortgage. You do not want to place this money in any sort of speculative investment. You also want liquidity of funds. If you lose your job or have some other financial need, you want to make sure that you can get access to your equity in a timely fashion. The worst time to try to borrow money from your equity is when you actually need it! The investment return is also important. You want to make sure that when you look at the cost to borrow the money (after-tax, of course), the investment return needs to at least match it or hopefully exceed it. The final consideration is that the investment be tax advantaged. This means that you want your investment to grow tax-free, and have the opportunity to pull it out tax-free. That would be the ultimate win-win for you. Talk to your financial planner about these investment considerations to come up with an investment that meets your needs.
Your financial planner and mortgage consultant will offer you a free consultation that is designed to show you how to avoid common mortgage mistakes that cost you a fortune, and to show you how to increase your tax deductions, your safety, your liquidity and your return on your equity. Your planner will show you how to protect yourself from disability or unemployment. And probably most importantly with this consultation, your financial planner will show you how to create extraordinary wealth for your retirement years. If you are interested in receiving this free consultation contact your financial planner or the mortgage consultant who gave you this presentation. You now know more than 99% of all the people out there when it comes to your mortgage, the only thing left for you to do is to take the necessary actions to become a wealthy retiree.
1. Mortgage Mistakes and Misconceptions “ How to Leverage Your Home Equity For More Wealth” Presented By: Your Name Mortgage Planner Company Name Phone Number Your Name Financial Planner Company Name Phone Number SAMPLE. NOT FOR USE BY A PLANNERc
2. Mortgage History Quiz <ul><li>What was the Typical Cost of a New Home in 1920? </li></ul><ul><li>Answer: $5,000 </li></ul><ul><li>What was the Typical Annual Income in 1920? </li></ul><ul><li>Answer: $1,434 </li></ul><ul><li>What Provision was in Loans that Motivated all People to Pay their House off as Quickly as Possible? </li></ul><ul><li>Answer: Banks had the Option to Demand Balance Repayment at anytime </li></ul><ul><li>What happened on October 29,1929? </li></ul><ul><li>Answer: Stock Market Crash </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
3. Why People Pay Off Their Mortgage <ul><li>Stock Market Crash 1929 </li></ul><ul><li>Margin Calls ($10 to Borrow $100) </li></ul><ul><li>Run on the Bank </li></ul><ul><li>Banks Called Loans </li></ul><ul><li>Mortgage Holders Lost Homes </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
4. Why People Should Not Fear Mortgages <ul><li>Consumers can No Longer Purchase Stock with 10% Down </li></ul><ul><li>Banks are no longer underwriting stock </li></ul><ul><li>Banks can no longer cancel mortgages </li></ul><ul><li>FDIC was created to protect consumers </li></ul><ul><li>Banks now have access to unlimited cash through the secondary market </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
5. <ul><li>Material presented regarding use of home equity and additional mortgage obligations are not appropriate for everyone. Loan proceeds used for direct investment purposes should be used only when clearly suitable. Discuss all investment opportunities with your financial planner based on your risk tolerance. Only borrow an amount that you can afford to pay from funds you have available to invest. </li></ul>Important Information- Disclosure SAMPLE. NOT FOR USE BY A PLANNERc
6. Why do Consumers Buy Homes? <ul><li>Top 3 Reasons that consumers cited for buying a home? </li></ul>*2003 National Housing Survey – Fannie Mae – page 4 #1 Long Term Financial Investment 84% #2 Feeling of Ownership 74% #3 Neighborhood I Like 67% SAMPLE. NOT FOR USE BY A PLANNERc
7. What Other Reasons Do People Own Homes? <ul><li>It provides for Basic Human Needs </li></ul><ul><ul><li>Shelter, Comfort, Security, and Privacy </li></ul></ul><ul><li>In Addition to </li></ul><ul><ul><li>Potential Tax Savings </li></ul></ul><ul><ul><li>Potential Leveraged Asset Growth </li></ul></ul><ul><ul><li>Inflation Protection with Locked in Payments </li></ul></ul><ul><ul><li>Establishes Credit History </li></ul></ul><ul><ul><li>Forced Savings </li></ul></ul>SAMPLE. NOT FOR USE BY A PLANNERc
8. American's Assets 67% of American Home Owners have more Equity in their Home, than in all other investments SAMPLE. NOT FOR USE BY A PLANNERc
9. What makes up a Quality Investment? <ul><li>Investments are compared using these simple criteria: </li></ul><ul><li>Rate of Return- What do You Earn? </li></ul><ul><li>Safety – Potential to lose your principal? </li></ul><ul><li>Liquidity - Ability to use and control your Investment? </li></ul><ul><li>Tax Free or Tax Advantage- Ability to realize gains on your investment without paying taxes? </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
10. What makes up a Quality Investment? (continued) <ul><li>Investments are compared using these simple criteria: </li></ul><ul><li>Retirement Income- Ability to Generate more Income when you Need It? </li></ul><ul><li>Legacy For Family- Can You Provide for Them After You are Gone? </li></ul><ul><li>Diversified- Are all Your Eggs in One Basket? </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
11. Important Asset Question <ul><li>What percent of your assets would You typically invest in something that is: </li></ul><ul><li>Potentially Unsafe </li></ul><ul><li>Partially to Totally Illiquid </li></ul><ul><li>Guarantees a 0% Annual Return </li></ul><ul><li>Can’t Provide Income </li></ul><ul><li>Is Not Diversified </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
12. Surprise Answer <ul><li>This investment is your home equity! </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
13. Safety Definition <ul><li>Basic Definition of Safety </li></ul><ul><li>Guaranteed, Insured, or totally protected from Volatility. </li></ul><ul><li>More Flexible Definition </li></ul><ul><li>Minimizing Risk or Potential for loss </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
14. How Safe is Your House? <ul><li>These are 3 ways you can lose the value of the equity in your home: </li></ul><ul><li>Reduction in value due to economic or business changes </li></ul><ul><li>Foreclosure for failure to make mortgage or tax payments </li></ul><ul><li>Lawsuit where your personal assets are attached </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
15. How Safe is Your House? <ul><li>While a home is considered a Safe Asset a </li></ul><ul><li>“ Market Bubble” or change in local economic outlook could reduce or eliminate: </li></ul><ul><li>Price Appreciation (main source of equity growth) </li></ul><ul><li>Current Equity (can’t borrow if the equity is not there) </li></ul><ul><li>Source of Down Payment (for future purchase) </li></ul><ul><li>This loss occurs if you sold the house during a </li></ul><ul><li>depreciated market </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
16. Diversification <ul><li>You should never have all your EGGS in one basket!! </li></ul><ul><li>Too much equity in your home doesn’t allow you to be properly diversified!! </li></ul><ul><li>QUESTION: </li></ul><ul><li>How important is it to you to protect your wealth in your home? </li></ul><ul><li>Have you considered the safety of the wealth in your home before today? </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
17. How Liquid are Your Assets? <ul><li>How quickly can you access your money? </li></ul><ul><li>Cash </li></ul><ul><li>Same day access </li></ul><ul><li>Bonds/Stocks/Mutual Funds </li></ul><ul><li>Same day access </li></ul><ul><li>Home Equity </li></ul><ul><li>Refinance: 30-90 days (assuming that you qualify) </li></ul><ul><li>Sell the Home: 60 – 180+ days </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
18. Home Equity Liquidity <ul><li>Home equity is typically the least liquid investment you have and the only investment that requires you to qualify to access your wealth. </li></ul><ul><li>To get your money, you have to prove that you DON’T need it! </li></ul><ul><li>Credit, employment, current debt load and closing costs all affect your ability to get to your equity. </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
19. Problems With Extra Pre-Payments <ul><li>Assume your monthly payment is $3,000 </li></ul><ul><li>You make an extra payment of $ 300 a month every month = $3,600 </li></ul><ul><li>OR </li></ul><ul><li>You make a $300 deposit into the savings account each month = $3,600 </li></ul><ul><li>After 5 years you have $18,000 in equity or savings </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
20. You Become Disabled or Unemployed <ul><li>Does the Bank care that you’ve been making extra payments for 3 years? </li></ul><ul><li>NO, the Bank only cares about you making the next month’s payment!! You STILL need to come up with $3,000! </li></ul><ul><li>Had you saved the money instead of building equity, you could make payments for over 6 months </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
21. Liquidity <ul><li>QUESTION: </li></ul><ul><li>How important is use and control of the wealth in your home? </li></ul><ul><li>Have you considered liquidity of the wealth in your home before today? </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
22. Rate of Return <ul><li>What if you learned that a portion of your wealth was earning an annual rate of return of 0% and wouldn’t be changing throughout your lifetime? </li></ul><ul><li>Would that be a major concern? </li></ul><ul><li>Would you make an investment that guaranteed you a 0% return? </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
23. Equity in your Home <ul><li>The equity in your home always appreciates at a rate of 0%. </li></ul><ul><li>Equity in your Home only increases through: </li></ul><ul><ul><li>Principal Repayment </li></ul></ul><ul><ul><li>Property Appreciation </li></ul></ul>SAMPLE. NOT FOR USE BY A PLANNERc
24. One Asset vs. Two Assets SAMPLE. NOT FOR USE BY A PLANNERc $100,000 Value of Current Equity in Home 0% Rate of Return on that Equity $100,000 Value of that Equity in 10 years $325,778 Home Value in 10 years 5% Appreciation by Year* $200,000 Home Value One Asset (Traditional Method)
25. One Asset vs. Two Assets SAMPLE. NOT FOR USE BY A PLANNERc $100,000 Conservative Equity Growth Account 5% Rate of Return $162,889 Value of Equity in 10 years $325,778 Home Value in 10 years 5% Appreciation by Year* $200,000 Home Value Two Assets
26. One Asset vs. Two Asset Comparison SAMPLE. NOT FOR USE BY A PLANNERc $100,000 Value of Equity in 10 years $425,778 Total Net Worth $100,000 Value of the Equity in Home 0% Rate of Return $325,778 Home Value 5% Appreciation by Year* $200,000 Home Value One Asset $162,889 Value of Equity in 10 years $100,000 Conservative Growth Account 5% Rate of Return $488,664 Total Net Worth $325,778 Home Value 5% Appreciation by Year* $200,000 Home Value Two Assets
27. Immediately Double your Accumulating Assets <ul><li>Asset-Home </li></ul><ul><li> $200,000 </li></ul><ul><li>No Mortgage </li></ul><ul><li>- Or - </li></ul><ul><li>Asset-Home Asset- Safe Investment </li></ul><ul><li> $200,000 $200,000 </li></ul><ul><li>Mortgaged </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
28. How Will This Impact Your Growth? <ul><li>Asset-Home 1 Asset- Safe Investment 2 </li></ul><ul><li> $200,000 $200,000 </li></ul><ul><li> + 7% Appreciation + 7% Growth $214,000 $214,000 </li></ul><ul><li>Increase in Assets </li></ul><ul><li> $28,000 </li></ul><ul><li>1 Home is worth $200,000, with no mortgage </li></ul><ul><li>2 Borrow the $200,000, invest it at 7% </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
29. What About the Payment? <ul><li>$200,000 Interest-Only Mortgage at 7% </li></ul><ul><li>$14,000 yearly interest </li></ul><ul><li>28% tax bracket </li></ul><ul><li>$3,920 taxes saved </li></ul><ul><li>$10,080 net interest cost </li></ul><ul><li>End of Year Results </li></ul><ul><li>Home Appreciates 7% $14,000 </li></ul><ul><li>Safe Investment earns 7% $14,000 </li></ul><ul><li>Assets Increased total of $28,000 </li></ul><ul><li>Less net interest cost $10,080 </li></ul><ul><li>Profit by Investing Home Equity $17,920 </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
30. Important Question <ul><li>If the government said they would pay up to 35% of your monthly mortgage payment, would you take full advantage of it? </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
31. Tax Break <ul><li>Mortgage interest on first mortgages is deductible on loans up to $1,000,000 and on a second mortgage or home equity line of credit up to $100,000. </li></ul><ul><li>You can create tax savings on a combined total of $374,000 in a 34% tax bracket. </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
32. Free Government Money <ul><li>$1,500 Monthly Mortgage Payment </li></ul><ul><li>You Really Pay $1,080 </li></ul><ul><li>Government Pays $420* </li></ul><ul><li>You Receive $5,040 a Year From the IRS (assuming payment is interest)!! </li></ul><ul><li>$151,200 over 30 years </li></ul>*Assuming 28% tax bracket SAMPLE. NOT FOR USE BY A PLANNERc
33. Does your Home Equity Pass the Test? <ul><li>Test Results </li></ul><ul><li>7 No’s </li></ul><ul><li>1 Yes </li></ul><ul><li>Score- Poor Investment </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc No Maximum net Retirement Income (after taxes paid) No Diversified No Upon Death- Money for Beneficiaries No Retirement Income for Life Yes Tax-Free or Tax-Advantaged No Earn Interest Every Year No Safety (No Risk to Principal) No Liquidity
34. Benefits of Separating Your Equity from Your Home <ul><li>Increase Liquidity – Have access to the money </li></ul><ul><li>Enhance the Safety – No longer affected by any “housing bubble”, or by loss of equity from foreclosure. </li></ul><ul><li>Protect Yourself from Disability and Unemployment – You have cash to make the payments if you need it. </li></ul><ul><li>Become More Diversified – Put your eggs into more than one basket. </li></ul><ul><li>Increase Your Rate of Return – Equity has a 0% return. </li></ul><ul><li>Maximize Your Tax Deductions – Payments on the investment are tax-deductible. </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
35. Is Your Home Creating Wealth? <ul><li>Currently in the US, 30% of US homes have no mortgage, with 65% of those homes are owned by Seniors over the age of 65. </li></ul><ul><li>The average Senior in the US today has combined household income of $21,450 per year. </li></ul><ul><li>They’ve accomplished the goal of having the home paid for, but at what price? </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
36. Why is This Important? <ul><li>The average retirement age in the U.S. moved from 66.9 to 62.7 between 1990 and 2000, dropping an average of 5 months per year </li></ul><ul><li>The average life expectancy in the U.S. is currently increasing by an average of 4 months per year since 1970. </li></ul><ul><li>Have you even considered outliving your retirement savings? </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
37. Where Do You Find the Money? <ul><li>The longer you can put money to work for you the more dramatically it can compound. </li></ul><ul><li>The difficulty often comes in finding additional money to save, and maintaining the discipline to continue saving. </li></ul><ul><li>By consolidating long-term debts in a new mortgage, you can often find the money to cover the payments on your equity investment. </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
38. Retirement Account Fallacies <ul><li>IRA’s and 401(k)’s are NOT Financially Beneficial to Your Retirement </li></ul><ul><li>Example: </li></ul><ul><li>Save $4,000 per year for 30 years: $120,000 </li></ul><ul><li>Income Tax Bracket: 34% </li></ul><ul><li>Annual Taxes Deferred: $1,360 </li></ul><ul><li>30 Year Tax Savings: $40,800 </li></ul><ul><li>$4,000 / year @ 10%/yr for 30 years: $723,774 </li></ul><ul><li>Withdrawal 10% per year: $72,000 </li></ul><ul><li>Subtract 34% taxes: $24,000 </li></ul><ul><li>From age 65 to 85, $500,000 in taxes are paid vs. $40,800 saved during your contribution years . </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
39. Retirement Account Fallacies <ul><li>In the FIRST two years of retirement, every dollar of taxes saved is paid back. </li></ul><ul><li>A person living a normal life expectancy will pay over 10 times the taxes on a qualified retirement plan during their retirement years than the taxes saved during their contribution years </li></ul><ul><li>Whose retirement are we planning? Ours or Uncle Sam’s? </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
40. Predictability Game <ul><li>Pick a number between 1 and 10. </li></ul><ul><li>Double it. </li></ul><ul><li>Add 8 to the total. </li></ul><ul><li>Divide it by 2. </li></ul><ul><li>Subtract your original number. </li></ul><ul><li>If 1=A, 2=B, 3=C, 4=D, 5=E, 6=F, 7=G, 8=H, 9=I and 10=J, think of a country that begins with the letter next to the number you are left with. </li></ul><ul><li>Take the next letter in the alphabet and think of an animal that begins with that letter. </li></ul><ul><li>Now think of a color that is usually associated with that animal. </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
41. Predictability Game <ul><li>You have selected a </li></ul><ul><li>Grey Elephant from Denmark ! </li></ul><ul><li>This is an example of predictability. The government can predict how much money we will be paying in taxes in our retirement years. We need a way to out-smart them! </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
42. Reverse Tax Planning <ul><li>Common Advice from Financial Planners </li></ul><ul><ul><li>PAY OFF YOUR HOME AS QUICK AS POSSIBLE </li></ul></ul><ul><ul><ul><li>Extra Payments </li></ul></ul></ul><ul><ul><ul><li>Bi-weekly Payments </li></ul></ul></ul><ul><ul><li>Maximize IRA contributions </li></ul></ul><ul><ul><li>Are they really helping you plan for retirement? </li></ul></ul>SAMPLE. NOT FOR USE BY A PLANNERc
43. Reverse Tax Planning <ul><li>Let’s say you follow that advice, what happens during your retirement years? </li></ul><ul><ul><li>By paying off your mortgage, you have eliminated your biggest tax deduction, mortgage interest </li></ul></ul><ul><ul><li>Now, all of your income from your qualified plan is 100% taxable </li></ul></ul><ul><li>You have created a tax situation that is the absolute least favorable situation!! </li></ul><ul><ul><li>100% taxable income, no deductions </li></ul></ul>SAMPLE. NOT FOR USE BY A PLANNERc
44. Retirement Wealth <ul><li>Your Mortgage Can Be Your Best Ally in Creating Maximum Wealth for Your Retirement! </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
45. Use Your Mortgage to Make a Million Dollars <ul><li>Borrowing at 7.5% </li></ul><ul><li>(tax-deductible*) </li></ul>Year $160,000 in Equity 1 5 10 15 20 25 30 $7,920 $39,600 $79,200 $118,800 $158,400 $198,000 $237,600 Investing at 7.5% (compounding tax free) $12,000 $69,701 $169,765 $313,420 $519,656 $815,734 $1,240,793 Difference $4,080 $30,101 $90,565 $194,620 $361,256 $617,734 $1,003,193 *Assuming 34% tax bracket SAMPLE. NOT FOR USE BY A PLANNERc
46. Benefits of Investing Your Equity Assumptions: Initial Home Value - $200,000 Initial Mortgage Balance: $100,000 Max LTV: 80% Mortgage Interest Rate: 7% Investment Rate: 8.75% Tax Bracket: 28% Home Appreciation Rate: 5% Interest Payment is after-tax payment. SAMPLE. NOT FOR USE BY A PLANNERc
47. Benefits of Investing Your Equity (continued) <ul><li>Notes from the Previous Chart: </li></ul><ul><li>Equity up to 80% is pulled out from the house, valued at $200,000. This keeps the interest cost as low as possible. </li></ul><ul><li>The outstanding mortgage balance is subtracted from the amount available to invest. </li></ul><ul><li>The funds are invested in a tax-advantaged account earning an average of 8.75% / year. </li></ul><ul><li>Every three years, accumulated equity is pulled out and added to the portfolio. </li></ul><ul><li>The Investment Gain is the value of the portfolio less the outstanding borrowed money. </li></ul><ul><li>The Invest the Cash column reflect the value of investing the after-tax monthly interest payments on the borrowed money instead of using the money to pay back the loan. </li></ul><ul><li>The value of the home is presumed to go up 5% per year. </li></ul><ul><li>The Net Gain column reflects the difference you earned by borrowing and investing your equity instead of investing the after-tax interest payments directly. </li></ul><ul><li>On a $300,000 home with a $100,000 outstanding mortgage, the net gain after 20 years is $381,995 instead of $208,299. </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
48. Mortgage Basics <ul><li>80% LTV Financing Down to a 500 Credit Score on a Refinance, 620 on a 2 nd Mortgage </li></ul><ul><li>3 Yr, 5 Yr, and 10 Yr Fixed Interest Rates </li></ul><ul><li>Self-Employed Borrowers Accepted </li></ul><ul><li>Stated Income Programs Available </li></ul><ul><li>Closing Costs Average 3% of the Loan Amount </li></ul><ul><li>Debt Consolidation Program Can Save You Hundreds of Dollars Per Month </li></ul><ul><li>This Money Can be Used for Your Investment Program </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
49. Debt Consolidation Example <ul><li>Current Mortgage Balance: $100,000 </li></ul><ul><li>Interest Rate: 6% </li></ul><ul><li>Monthly Payment (P/I): $600 </li></ul><ul><li>Credit Card Debt: $25,000 </li></ul><ul><li>Monthly Payment: $750 </li></ul><ul><li>Tax Bracket: 28% </li></ul><ul><li>New Mortgage: $128,000 </li></ul><ul><li>New Monthly Payment @ 7%, interest-only: $747 </li></ul><ul><li>After-Tax Monthly Payment: $538 </li></ul><ul><li>Monthly Savings: $812 </li></ul><ul><li>Investment Equity This Supports: $139,050 (@ 7%, interest-only) </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
50. Suitable Investments <ul><li>Investment Criteria: </li></ul><ul><li>Safety of principal (don’t want to risk the money) </li></ul><ul><li>Liquidity of funds (need access on short notice) </li></ul><ul><li>Investment return (need above market return) </li></ul><ul><li>Tax advantaged (let capital grow and be removed tax-free) </li></ul><ul><li>Your financial planner can discuss suitable investments that will earn you significantly more than the tax-deductible mortgage interest cost. </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
51. Benefits of Free Consultation <ul><li>Avoid Common Mortgage Mistakes </li></ul><ul><li>Increase Your Tax Deductions, Safety, Liquidity and Return </li></ul><ul><li>Protect Yourself from Disability or Unemployment </li></ul><ul><li>The Fastest, Easiest and Smartest Way to become Mortgage Free </li></ul><ul><li>How to Increase Your Net Worth </li></ul><ul><li>How to Create Extraordinary Wealth </li></ul><ul><li>Overview of Suitable Investments for Your Home Equity </li></ul><ul><li>How to Create an Investment Account to Accumulate Money for Your Retirement Years </li></ul><ul><li>Make Sure Your Retirement is on Course </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc
52. Get More Information <ul><li>The mortgage planner who you would be working with would like to email you a free report that better explains how you can create wealth from your home equity. </li></ul><ul><li>You can also receive a free Excel spreadsheet file so you can work the numbers based on your home’s value, current mortgage balance, appreciation rate, tax bracket and interest rates </li></ul><ul><li>Simply send an email to: [email_address] or call Joseph Kamenar at 215-480-2737. </li></ul>SAMPLE. NOT FOR USE BY A PLANNERc