Many people do things because they have been programmed to do them by their parents, grandparents, teachers, and other people with influence. In order to help you achieve your financial goals, it is sometimes necessary to help you understand the difference between what is done out of habit versus what might be done out of reason if you had an understanding of the differences between now and past generations.

Because of this, we have developed this report to help you understand the differences between the way things are now as opposed to past generations.

Old School:

Pay your house off so that you will not have to worry about losing it.

New School:

During the Great Depression, Consumers had no protection against home foreclosures. A law to protect consumers was enacted in the 1930s that allows lenders to foreclose on a property only if the borrower is delinquent on the mortgage according to the terms of the note.

Old School:

My equity is already giving me a great return on investment.

New School:

Equity in your home provides no return on investment. A $250,000 home will appreciate at the same rate whether it is owned free and clear or if it is mortgaged to the hilt. By keeping money in your home, you are actually losing out to inflation.

Old School:

Paying of the mortgage worked for my grandparents, it will work for me.

New School:

There are several things at work here. First of all, years ago, most people worked for one company their entire career and earned a pension. Their retirement was all mapped out. Second, 40-50 years ago, the price of a home was much more in line with a borrower’s wages (e.g. a borrower who was making about $25,000 per year could buy a nice home for about $40,000). Homes have appreciated at a much faster rate than incomes. For example, a person earning $100,000 per year may live in a house which is valued in excess of $400,000. Additionally, statistics show that the average loan is only kept about four to seven years, because of the sale of the home or a refinance. So why would you ever want the higher interest associated with a 30-year fixed rate? Finally, as your home appreciates, you should consider refinancing every three to five years to pull out the equity and fund investments to increase wealth.

Old School:

All debt is bad; I need to pay my mortgage off as quickly as possible.

New School:

While most debt is bad, managing your debt wisely can help you create wealth. Since the Tax Reform Act of 1986, mortgage interest and margin interest are the only tax-deductible interest items available to consumers. Using the equity in your home together with a cash-flow friendly mortgage can provide the tools to generate wealth.

Old School:

The bank tells me that the best thing for me is a low, 30-year fixed-rate mortgage.

New School:

Banks are for-profit institutions and rarely have your best interest at heart. In fact, banks love to receive your money on 30-year fixed-rate loans, as well as other amortizing loan options, because it means that they have a continuous influx of revenue to turn around and lend elsewhere (investing for them). Why do you think banks have had such high profits over the years? Furthermore, if you choose a cash-flow maximizing loan such as the Option A.R.M., you could have money to invest and, if interest rates go up because the economy is doing well, generally you get increasingly better returns on your investments.

Old School:

Deferred interest / negative amortization is bad.

New School:

Most people create the equivalent of deferred interest without knowing it. If you have a home equity line of credit or you refinance to consolidate debt or you just roll the closing costs into your loan, you are creating deferred interest (because you are increasing your mortgage). As long as you use the cash flow from deferred interest wisely, you are practicing proper debt management strategies. With that in mind, there are many loan programs currently available engineered specifically, for minimizing deferred interest. Using one of those programs, you capitalize on the appreciation of your home as well as an appreciating investment account working for you, not to mention maintaining a good tax deduction by not paying down your mortgage.

Old School:

“I’m too conservative for this type of loan.”

New School:

The more conservative you are, the more money you will need to live in retirement. Being conservative means that you would over-prepare for retirement by investing more money because you expect less of a return on your investments. The more conservative you are the more money you need and the more you should work this program.

Old School:

“This is too risky for me.”

New School:

This comes down to how you define “risk.” Risk may also be viewed as not having enough money to enjoy retirement; risk may be relying on Social Security and things like IRAs hoping that the market will have better-than-average returns over an extended period so you can retire comfortably. There is a lot less risk in using all of the money available through the equity in your home to invest and create wealth.

Old School:

“I won’t need as much money in retirement.”

New School:

This is a myth. The most recent statistics show that retired people spend as much as 20% more on average than when they were working. Instead of spending a good portion of their day working and earning money, retirees have a lot more time on their hands to do things that cost money such as travel, golf, and other past-times.

Times have changed, shouldn’t you?

Times have changed since our parents and grandparents got their first mortgages. There are literally thousands of mortgage programs available today. Prior to 1972, there were only three!! Fewer and fewer companies offer pension plans / defined benefit plans so most people (even those who contribute regularly to a 401(k) and / or an IRA) don’t know how much they will have at retirement. Social Security is also very uncertain. This means that we need to use every tool we have to help us prepare for our financial future.

There are three key ingredients to creating wealth:

Cash

Time

Return on Investment.

By virtue of the appreciation on your home, every three to five years, you have the could ability to pull out a lump sum of money to invest elsewhere. This accomplishes some important things:

It can increase your liquidity (unless you invest in more real estate).

Provides diversification

Allows the opportunity for increased returns (there are more assets to grow).

Last, through the interest deduction on your mortgage, the government actually subsidizes your mortgage payment. This means that mortgage money is relatively cheap in comparison to other loans and / or credit cards.

Creating Wealth Through Smart Mortgage Planning