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Greg Cowart - Mortgage Broker or Lender at The Securus Group
Greg Cowart - Roseville Loan Guy

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The Secret No One Is Talking About…

Why YOU should stop listening to everyone telling you that you need to pay off your mortgage quickly? Why bi-weekly payments, 15 year loans, large down payments, paying a extra $100 a month, ect are not only a waste of time but counter productive in YOUR overall investment strategy? Why those radio commercials promising to help you pay off your mortgage in half the time are doing you a disservice? Here are the reasons. The secret 99% of loan officers, financial planners, CPAs, etc have not figured out about using your mortgage as a financial tool in your overall financial wellness strategy.

Top national financial planner Ric Edelman recently made a blog post on his website stating “Never own your home outright. Instead, get a big, 30-year mortgage and never pay it off – regardless of your age and income.” Of course this is meant to get the reader telling themselves this guy is crazy, but to keep reading. Those that did all learned the secret and started kicking themselves for doing things they thought were right for them with their mortgage in the past. Here I give me rundown on Ric’s reasoning (this is very basic, check the attached video presentations for examples of how to use your mortgage to build real wealth and achieve true financial security).

Reason #1: A Mortgage Doesn’t Affect a Home’s Value

Most people buy their homes because they think it will rise in value over time (if that were not the case, no one would buy – you’d rent instead). Yet, the eventual rise (or fall) of your home will occur with or without a mortgage.

Reason #2: A Mortgage Will Build Equity Anyways

Many homeowners try to build equity in their house by paying off the mortgage. But that produces weak results when compared to the equity they will build up simply by watching the house appreciate in value.

Reason #3: A Mortgage is Cheap Money

There is no way to avoid debt in today’s society. Cars and college – let along big screen TVs – virtually require loans. Mortgage offer perhaps the cheapest way to borrow.

Reason #4: Mortgage Interest is Tax-Deductible

Not only are mortgage loans low cost, the interest is tax deductible. As much as 35 cents of every dollar paid in interest can be deducted. That means a 6% really costs as little as 3.9%. Why carry non-tax deductible 18 percent credit cards, instead of a six percent mortgage with interest that is tax deductible? Once again, a mortgage is probably the cheapest money available.

Reason #5: Mortgage Interest is Tax-Favorable

Building on Reason #4, assuming a 6% mortgage and a 6% investment profit, the mortgage is deductible at a homeowner’s top tax bracket, but the investments are taxed as low as 15%. For someone in the 25% tax bracket that means the mortgage costs them 4.5% while the investment nets them 5.1% after taxes. In other words, tax law makes it beneficial to maintain a mortgage.

Reason #6: Mortgage Payments Get Easier Over Time

Some homeowners might struggle to make their mortgage payment at first, but over time they can expect their payments to become cheaper relative to their income – especially if it is a fixed rate loan. That way, the payment never rises, but your income does. Making the payment much easier the longer you own your home. Do you think a $1,500 payment today will take up as much of your income in 10 years as it does now?

Reason #7: Mortgages Let You Sell without Selling

Most homes grow substantially in value over time, however that equity could be lost temporarily if there is a decline in real estate values as we saw in 2008. Instead of selling the house to capture the value get a new, larger mortgage. By cashing out some of the equity, they essentially collect the value of the house in cash without actually having to sell the house. This cash could be used for anything, although I recommend talking to your financial planner about what to do with it because it’s best use is to use it to build more wealth.

Reason #8: Large Mortgages Let You Invest More Money More Quickly

Big mortgages (as a percentage of the purchase price) mean small down payments. Small down payments mean you retain lots of cash that you can then invest. If a homeowner who sold a $300,000 home, puts a $50,000 down payment on a $500,000 home (assuming a 7% mortgage rate), the monthly payment would be $2,994. That that same person puts the entire $300,000 down the resulting payment would be $1,330.

That means a small down payment lets the homeowner invest $250,000 right away, while the big down payment costs $1,664 less per month – this is money that can be invested monthly. So which is better: Invest $250,000 today or $1,664 per month for 30 years.?

Without question, investing the larger lump-sum today produces far greater wealth than investing a small amount over long periods. Assuming both investments earn the same 6%, the account that started with $250,000 will be worth $265,420 in just one year, while the account that invested $1,664 monthly would be with only $20,526. After 15 years, the lump-sum investor has $613,523 – $129,601 more than the investor. Clearly the bigger mortgage leads to far greater wealth.

Looking at any of these logical reasons it kind of makes sense not to pay off your mortgage quicker, using any methods, or put down a large down payment. Looking at the all together you really start to see the big picture. Rich people get richer by creating wealth, not by destroying the biggest tax shelter most American’s will ever see. There is not one statistical model that will show the homeowner that put down a larger down payment and pays down their mortgage quicker having more wealth in the end than the homeowner that puts down a small down payment on a 30 year mortgage and pays the minimum payment for 30 years. The numbers are actually quite astounding! I can do a total cost/wealth analysis for you when it comes time to make that decision so you can see for yourself. This isn’t rocket science, it’s just something that goes against conventional wisdom and a century of thinking that has been indoctrinated into all of us. The good news for you and me is that it only takes a few minutes to “unlearn all of that” when you see the real numbers working…

This strategy relies a lot of top financial planner Ric Edelman‘s mortgage strategies.