Pay Off Mortgage: Strategy Could Be Worst Financial Move
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Pay Off Mortgage: Strategy Could Be Worst Financial Move

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  • 1. ==== ====For more tips on Safe Mortgage Investing go ====So, we hear all the time from financial pundits, "Invest in your home. Pay off mortgage early.Home equity is safe and liquid." Conventional wisdom tells us your home is an asset. Since youlive in the home, the equity is safe and available to you. Pay off your mortgage as fast as you canso you can avoid paying interest. Accelerate the payments.Of course, were here to challenge those statements. Imagine I am your financial advisor. I havean investment opportunity I want to present to you. Let me tell you of the following "features".-You can determine the amount of monthly contributions and length of time for each of thecontributions to continue.-You can pay more than the minimum monthly contribution, but not less.-If you attempt to pay less, the financial institution keeps all of the previous contributions.-The money in the account is not liquid.-The money deposited in the account is not safe from loss of principal.-Each contribution made to the account results in less safety of the principal.-The money deposited in the account earns zero percent rate of return.-Your income tax liability increases with each new contribution.-When the plan is fully funded, there is no income paid out to you.(The components of this investment were derived from Missed Fortune 101 by Douglas R.Andrews.)So, how does that sound? Have you fired me yet?Because of the unappealing features, most would instantly reject this kind of investment. However,if you have a traditional mortgage, then youve already bought into the investment detailed above.Well refer to this as your Pay Off Mortgage Strategy.Lets look into these features of a traditional mortgage further. Lets make it interesting; lets keepscore.The Traditional MortgageTo lay the foundation, the traditional mortgage is a 30 year amortized loan. At the end of the term,30 years, you own the home outright. Now, onto the things this investment offers...You can determine the amount of monthly contributions and length of time for each of thecontributions to continue.
  • 2. In our example, the term is 30 years. However, many homeowners want to pay it off sooner andlook to the 15 year mortgage (the Pay Off Mortgage Earlier Strategy). Regardless, it is you thatdetermines the amount and length of the loan by selecting the loan options offered to you by thefinancial institution. Once you select, its set.Pay Off Mortgage Strategy: +1You can pay more than the minimum monthly contribution, but not less.Now that youve selected, your mortgage, you are allowed to pay more than the minimum monthlyamount (how gracious of the bank). What many dont consider is that you cant pay less.Remember, its a binding contract so you must abide by the terms set by the financial institution.If you are currently making more than the minimum monthly payment, you are effectively saying,"Here you go Mr. Banker. No, I dont want to earn a rate of return on this money. But if I ever wantit back, I would like to prove to you that I need it for a reason you deem worthy, can repay it, andon your terms." Crazy isnt it?Pay Off Mortgage Strategy: -1If you attempt to pay less, the financial institution keeps all of the previous contributions.If you miss three payments, the mortgage lender has the power to foreclose on your home.I know individuals that tell me to pre-pay my mortgage or have bought into the strategy. Most dontrealize that pre-paying your mortgage this way is risky. Why? Because...It doesnt matter if you have:Doubled up your payments for 10 years...Put 80% down as a down payment...Or, have one year left on the mortgage......The next payment is always due. If you dont pay, then you are increasing the risk offoreclosure...and ultimately the home equity you may have locked into your home. Could theAmerican Dream cause a nightmare?Pay Off Mortgage Strategy: -1The money in the account is not liquid.Home equity is not liquid. Its trapped into the mortgage of the home. In order to access the cashthat is in the form of home equity, you would either have to sell the property or refinance.Lets look at a possible scenario. Lets say that you have experienced a downturn in the economyand you have lost your job. Unfortunately, you need to access the equity in your home in order to
  • 3. sustain your current lifestyle. Now, you have to prove to the financial institution that you need itand can repay the loan. But chances are, your ability to repay doesnt look good. Remember,youre unemployed. Banks only lend money on the fact that you have the ability to repay.And why shouldnt they? I think we would all take the same stance and only loan money on theability of the other party to pay it back.You would not have this problem if your "home equity" was separate in a liquid account.Pay Off Mortgage Strategy: -1The money deposited in the account is not safe from loss of principal.Lets say that Person A owns his $100,000 outright. There is no mortgage. Person B has the samehome down the street but has $80,000 of equity separate in a liquid fund and only $20,000trapped in the mortgage.The housing market in that area decreases 30%.Since Person A has all his money in his home in the form of equity, he has just lost 30%. PersonBs house value dropped the same amount as well. However, he still has $80,000 of "equity" in hisliquid fund. Whos in a better position?I know what youre thinking: "But Person B has a mortgage!". Sure, he has a mortgage. But dontyou think he can be more productive with that $80,000 in a liquid account than in the house losingvalue?Pay Off Mortgage Strategy: -1Each contribution made to the account results in less safety of the principal.As mentioned, the amount of equity plays no part in determining the the value of your home.If you have a lot of equity in your home and you are facing foreclosure, it may be a primary targetfor your bank. Who do you think a bank would want to foreclose on first: a home with equity or ahome that is mortgaged to the hilt? It would be a home with equity because they are able torecapture their losses faster.Youll find that banks are willing to work more with the customers that have less equity.Pay Off Mortgage Strategy: -1The money deposited in the account earns zero percent rate of return.Using the same example of the $100,000 homes for Person A and B, lets imagine that thehousing market is booming and the houses in the area appreciated 30%. How much is Person Ashouse? $130,000. How much is Person Bs house? $130,000.
  • 4. Why are they the same? Its because home equity has no rate of return.The homes appreciated in value. The home equity had nothing to do with it. But lets see who didbetter with his money?With the $100,000 locked into his house, Person As asset grew 30% ($30,000) on his money. Notbad.Remember, Person B has only 20% home equity in his house. With the $20,000 locked into hishouse, Person Bs asset grew a whopping 150% ($30,000) on his money. Even better!Which scenario do you like? But remember, none of that growth can be accessed until the time ofsale or refinance.We havent even touched on the fact that Person B has $80,000 in a liquid account that can beearning interest!Pay Off Mortgage Strategy: -1Your income tax liability increases with each new contribution.Mortgage interest is your friend. What? Mortgage interest is good?Lets look at two types of interest: non-deductible and deductible.Credit card interest is non-deductible. You dont get tax advantages when you pay interest onconsumer debt.Mortgage interest, on the other hand, is deductible. Lets say that the interest you pay on amortgage is $6,000. If you are in the 33.3% tax bracket, your true cost is only $4,000. Deductibleinterest is better than non-deductible interest.As you continue to pay down your traditional loan, you decrease this valuable tax deduction. Ofcourse, it isnt wise to incur an interest expense for the sake of a tax deduction. But, rememberwhich is preferred: deductible interest.Pay Off Mortgage Strategy: -1When the plan is fully funded, there is no income paid out to you.This is pretty self-explanatory. Your house doesnt pay you. There is no cashflow. Yes, you nolonger have a mortgage. But remember, the money sitting in your house is only doing one thing.Can you think of other productive ways to use that home equity?Again, you can only realize that equity at the time of sale or refinance.Pay Off Mortgage Strategy: -1
  • 5. Bonus (sort of): Home equity is not protected from lawsuits and creditors.If you own your home under your name, your home equity can be at risk if you are sued. Thevalue is not protected. I dont like to be a downer, but we live in a litigious society today. Frivolouslawsuits are common. The more cash thats in your house, the bigger target you may have on yourback.Pay Off Mortgage Strategy: -1Okay, lets address the real reason why people want to pay off their mortgage early. When you"own" your home, you of course have no more mortgage. And thats what people hate, having tomake those payments.What we have to realize is that everything has a consequence. Its the Law of Cause and Effect.Not having a monthly payment may be a good thing. But now you should be aware of the risks ofpaying off your mortgage in the traditional fashion. Is it worth it? Is there a better way?Pay Off Mortgage Strategy Score Total: (It doesnt matter what I think. You decide.)This way of thinking about your mortgage may be new to you. Im sure that some of you areexperiencing a knee jerk reaction: "No, pay off mortgage early!"Its not difficult to see why this thinking is prevalent. My parents and my wifes parents own theirhomes outright. Of course we were taught by them that this was the best way to pay for and own ahome.But they also think they have no money. They have more than $100,000 locked into their homes,and they think they have no money. Amazing.At the time of this article, many individuals are experiencing foreclosures at an all time high. Manyblame "predatory lenders" and financial institutions. Although they may have played a part, its stillup to the consumer to educate himself or herself on debt.I hope this gives you a different perspective on paying down your mortgage and the importance oflearning how to manage debt. Buying a home is a huge financial decision. Be sure to study how amortgage can dramatically affect your wealth.Learn more about personal debt management strategies.Isnt it time you chose financial freedom?Article Source:
  • 6. ==== ====For more tips on Safe Mortgage Investing go ====