With over twenty years of experience in the real estate lending profession, Bill Reidy has helped hundreds of families realize their home ownership dreams and achieve their financial goals. Bill is committed to his clients and is dedicated to making sure that they receive the highest level of service combined with a mortgage strategy that gives them the lowest cost loan over time.
For more information on Bill Reidy or to contact him, please visit his web site at: http://www.williamreidy.com/
Most of what we learned from our parents and grandparents about mortgages is no longer valid. They taught us to make a large down payment, get a fixed-rate mortgage, and make extra principal payments to pay of your loan as early as possible. A mortgage, they told us, is a necessary evil at best.
The problem with this rationale is it has become outdated. The rules of money have changed. Unlike our grandparents, we will no longer have the same job for 30 years or depend on our company’s pension plan for a secure retirement. Also, unlike our grandparents, we will no longer live in the same home or keep the same mortgage for 30 years.
Statistics show that the average homeowner lives in their home for only seven years. According to the Federal National Mortgage Association, the average American mortgage lasts 4.2 years. People are refinancing their homes to improve their interest rate, restructure their debt, remodel their home, or pull out money for investing, education or other expenses.
Given these statistics, it’s difficult to understand why so many Americans continue to pay a high interest rate premium for a 30-year fixed rate mortgage, when they ate likely to use less than 5 years of it. We can only conclude that they are operating on outdated knowledge from previous generations when there were limited options.
Wealthy Americans—those with the ability to pay off their mortgage but who refuse to do so—understand how to make their mortgages work for them. They put very little money down, keep their mortgage balance as high as possible, choose adjustable-rate interest-only mortgages and, most importantly, integrate their mortgage into their overall financial plan. This is how the rich get richer.
The good news is that any homeowner can implement the strategies of the wealthy to increase their net worth.
Why You Shouldn’t Fear Your Mortgage
Back in the 1920s, a common clause in loan agreements gave banks the right to demand full repayment of the loan at any time. When the stock market crashed on October 29, 1929, millions of investors lost huge sums of money, much of it “on margin,” borrowed from their broker. Since the value of stocks dropped, few investors wanted to sell, so they had to go to the bank and take out cash to cover their margin calls and pay back their broker. It didn’t take long for the banks to run out of cash and start calling loans due from good Americans who were faithfully making their mortgage payments every month. However, there wasn’t any demand to buy these homes, so prices continued to drop. To cover the margin calls, brokers were forced to sell stocks and once again there wasn’t a market for stocks so the prices kept dropping. Ultimately, the Great Depression saw the stock market fall more than 75% from the 1929 highs. More than half the nation’s banks failed and millions of homeowners lost their homes.
Out of this the American Mantra was born: Always own your home outright. Never carry a mortgage. The reasoning was simple: If the economy fell to pieces, at least you still had your home and the bank couldn’t take it away from you. Fortunately, since the Great Depression, laws have been introduced that make it illegal for banks call your loan due unless you default on your loan. Additionally, the Federal Reserve is now quick to infuse money into the system if there is a run on the banks, as we saw in 1987 and Y2K. In addition, the FDIC was created to insure banks. Still, it’s no wonder the dread of losing their home became instilled in the hearts and minds of the American people, and they quickly grew to fear their mortgage. And because of this, for nearly 75 years most people have overlooked the opportunities their mortgage provides to build financial security.
Why You Shouldn’t Hate Your Mortgage
Many people hate their mortgage because they know that over the life of a 30-year loan, they will spend more in interest than the house cost them in the first place. To save money, it becomes very tempting to make a bigger down payment or extra principal payments. But saving money is not the same as making money. Or put another way, paying off debt is not the same as accumulating assets. By tackling the mortgage payoff first and the savings goal second, many fail to consider the important role a mortgage plays in our savings effort. Every dollar we give the bank is a dollar we do not invest. While paying off the mortgage saves us interest, it denies us the opportunity to use that money to earn interest, which compounds over time.
For additional resources about the new rules of real estate equity management, I highly recommend the following books: Missed Fortune 101 by financial strategist, Douglas Andrew and The New Rules of Money by noted financial planner, Ric Edelman.