Harnessing the Power of Your Mortgage – Part 1 of 2
Building a secure financial future is not as easy as it used to be. According to the Federal Reserve, consumer debt in 2004 topped 2.1 trillion dollars with credit cards accounting for more than half of that amount.
In the last decade, consumer credit card debt has quadrupled. The average household in
Most people fail to realize the devastating impact this has on their financial future.
Since the fact is that the typical consumer has to borrow money during the course of their lifetime, doesn’t it make sense to borrow as inexpensively as possible? Borrowers should avoid high interest, non-deductible debt such as credit cards, car and other personal loans. Choose the better way by harnessing the power of your mortgage.
The old way of thinking is:
- Get the lowest rate mortgage,
- Start a bi-weekly payment plan,
- Send additional principal payments to the lender when available…
…all so that you can pay off your mortgage as soon as possible. This is exactly what you should not be doing. Where did this mindset originate? This is depression-era thinking.
Brought on by the Stock Market Crash of 1929, there was a run on banks for cash. Speculators needed cash to answer margin calls. Banks needed cash to answer demands and thus, turned to homeowners demanding payment of the mortgages on their property. Mortgages were demand notes in those days. Property owners whose property was mortgaged were foreclosed and lost everything. Those who owned there homes outright lost little. And thus, the mindset of always owning your property outright became the battle-cry of the times. If you had to use a mortgage, the wisdom was to pay it off as soon as possible.
Well, that doesn’t always make sense today. Today’s mortgages are different. As long as payments are made timely and in accordance with the mortgage and note, banks cannot demand pre-payment or foreclose on the property.
Ric Edelman, author of the New York Times best-selling book The New Rules of Money says “[Borrowers] should get a big 30 year mortgage and never pay it off.” Now, why would he say that?
Mr. Edelman argues that pre-paying your mortgage is no different than sticking money in your mattress. He says that you should get the best mortgage, which is not necessarily the one with the lowest rate. He recommends that you stay away from bi-weekly payment plans and never send additional principal payments to the lender or bank. The goal is to make the smallest payment with the biggest tax break possible. That means NEVER paying off your mortgage.
Mr. Edelman states the following as 5 reasons why a borrower should carry a large mortgage and never pay it off:
- Mortgages do not lower home values. The value of your home is independent of the size of the mortgage.
- Your mortgage is the cheapest money you will ever buy. Most people will borrow during their lives, so why borrow at 18-24% on credit cards when you can borrow at 6-8% or less?
- Your mortgage is the best way to lower your taxes. Mortgage interest debt is subsidized by the federal government in the form of a tax deduction. A borrower in a 25% tax bracket with a 7% interest rate actually is only paying at a 5.25% rate.
- Get the cash out of the home while you still can. Most people turn to borrowing when their income has become insufficient to meet their needs. Some suffer job loss, major medical or other financial crises, only to find out that the bank won’t lend them money or they have to sell their property in a fire sale. The time to borrow is now, while you can do so at favorable terms.
- Your mortgage becomes cheaper over time. Depending on the loan program you choose, your payment never changes over time but your income likely will. That means today’s mortgage payment becomes increasingly easier to pay over time.
Keith Pearce is a FL Licensed CPA, Mortgage and Real Estate broker.