What if everything you believed to be true about mortgages, wasn’t actually true after all? Would you rather know now or later? In my experience, I have come to understand that many, if not most, clients come ‘pre-conditioned’ by what has long been termed “conventional wisdom”. For generations, people have been told that when buying a home, they should:
- Make a big down payment
- Obtain a fixed-rate-mortgage; 15 years if you can afford it
- Make additional principal payments whenever possible
- Pay off your loan as quickly as you can
People see a mortgage as a “necessary evil”- one that they should be afraid of and try to eliminate as soon as they can. And while the concept of being mortgage-free may seem attractive on the surface (and may have been an acceptable strategy in the past), we no longer live in the same world that our parents and grandparents did. Unlike previous generations:
- We will not have the same job for life. Most people will have five to six different careers. That simple fact will preclude most people from a company pension as part of a retirement strategy.
- We cannot realistically count on Social Security to exist in its current form. Either your benefits will have to be reduced or pushed off to later years to enable the fund to remain solvent.
- We won’t have “Mortgage Burning Parties”. People live in their homes on average just seven years now and, because of refinancing, their mortgages will only last 5 years.
Ultimately, we have to appreciate that we live in a very different world and that the tactics and solutions of the past no longer fit the challenges of the present or future. I believe we have an obligation to custom design our clients’ mortgage in a way to enhance cash flow, minimize income taxes and help implement alternative strategies to protect their assets and create wealth.
I know clients can make better choices if they are armed with the understanding that every dollar applied to the principal of their mortgage (through down payments, regular mortgage payments, and even pre-payment strategies) is NOT the strongest fiscal strategy. When you pay down your mortgage, the BANK is in a less risky position. Whose risk is increasing? YOURS!
I have seen clients apply money towards their principal balance of their 5% tax-deductible mortgage, while carrying 18% non-deductible credit cards. Why not get rid of the revolving debt? I know you need discipline to actually save the money you would normally apply to lower your mortgage balance. However, I promise you that good mortgage professionals can show you the power of separating the equity from the home; the increased liquidity, the phenomenon of compounding interest and why the actual rate of return on home equity is 0%.
I imagine many will dispute my contentions here, but they are mathematically proven. If you have discipline, there IS a better way to manage your finances. Explore them and decide for yourself.
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