Ric Edelman has educated his clients for years on the benefits of integrating their mortgage into their overall financial plan. In his book, The New Rules of Money, Ric tells the story of two brothers, each of whom secures a mortgage to buy a $200,000 home. Each brother earns $70,000 a year and has $40,000 in savings.

(As you read this please note that it is a hypothetical example, it doesn't refer to any real person, the loans spoken of are just pure examples and do not constitute an offer to lend, the tax scenarios are estimates and are not to be construed as tax advice, always consult a tax advisor, the investment does not refer to any particular investment, it is assumed to be a net return after any taxes and costs. This is not to be intrepreted as advice on lending, taxes or investments.)

The first brother, Brother A, believes in the old way of paying off a mortgage, which is as soon as possible. Brother A bites the bullet and secures a fifteen-year mortgage at 6.38%(APR) and shells out all $40,000 of his savings leaving him zero dollars to invest. This leaves him with a monthly payment of $1,383. Since he has a combined federal and state income tax rate of 32%, he is left with an average monthly net after tax cost of $1,227. Also, in an effort to eliminate his mortgage sooner, Brother A sends an extra $100 to his lender every month.

Brother B, in contrast, subscribes to the new way of mortgage planning, choosing instead to carry a big, long-term mortgage. He secures a 30-year interest only loan at 7.42%(APR). He outlays a small 5% down payment of $10,000 and invests the rest of the $30,000 in a safe, money making side account. His monthly payment is $1,175, 100% of which is tax deductible over the first 15 years, and 64% over the life of the loan, leaving him a monthly net after-tax cost of $799. Every month he adds $100 to his investments (the same $100 Brother A sent to his lender), plus the $428 he’s saved from his lower mortgage payment for a total of $528 every month. His investment account earns an 8% rate of return.

Which brother made the right decision? The answer can be found by looking into the future. After just five years Brother A has received $14,216 in tax savings, however he made zero dollars in savings and investments. Brother B, on the other hand, has received $22,557 in tax savings and his investment account has grown to $83,513.

Now, what if both brothers suddenly lose their jobs? The story turns rather bleak for Brother A. Without any money in savings, he has no way to get through the crisis. Even though he has $74,320 of equity in his home, he can’t get a loan because he doesn’t have a job. With no job and no savings, he can’t make his monthly payments and has to sell his home in order to avoid foreclosure. Unfortunately, at this point it’s a fire sale so he must sell at a discount, and then pay real estate commissions.

Brother B, while not particularly happy at the prospects of searching for a new job, is not worried because he has $83,513 in savings to tied him over. He doesn’t need a loan and can easily make his monthly payments, even if he is unemployed for years he has no reason to panic, as he is still in control. Remember...Cash is King!

Now let’s say neither brother lost his job. We’ll check in on them after fifteen years have passed since they purchased their homes and evaluate the results of their financing strategies. Brother A has now received $25,080 in tax savings, he has $30,421 in savings and investments (once his home paid off he started saving the equivalent of his mortgage payment each month), and owns his home outright. Not too bad, right?

Now let’s check on his Brother, Brother B has received $67,670 in tax savings and has $282,019 in savings and investments. If he chooses to, he can pay off the remaining balance of $190,000 and still have $92,019 left over in savings, free and clear.

Finally, let’s assume that rather than pay off his mortgage at fifteen years, Brother B decides to ride out the now thirty years of the loan’s life. While Brother A has still received only $25,080 in tax savings, his savings and investments have grown to $613,858 and he still owns his home outright.

Brother B, on the other hand, has received a whopping $107,826 in tax savings, has accumulated an incredible $1,115,425 in savings and investments, and also owns his home outright. He can start over fresh and enjoy the same benefits once again.

Unfortunately, the majority of Americans follow the same path as Brother A, as it’s the only path they know. Once the path of Brother B is revealed to them, a paradigm shifting epiphany often occurs as they realize Brother B’s path enables homeowners to pay their homes off sooner (if they choose to), while significantly increasing their net worth and maintaining the added benefits of liquidity and safety the entire way.

If you are looking at buying a home or already own one here are some questions you should have already answered.

1. If how you buy and finance a home could cost you $2,000,000 would you want to know how to avoid or correct those unintended consequences involved in the way you bought and financed your home?
2. Have you spoken about the yearly Section 163 ramifications of how you handle the financing of your home with any real estate agents, other lenders or financial professionals?
3. Have you discussed how the AMT may impact your Section 163 benefits with any real estate agents, lenders or financial professionals?
4. How comfortable are you with the prospect of losing some or all of your investment into this house?
5. Have you spoken with anyone regarding the ways you can structure your home loan that will provide an added level of financial protections for you and your family?
6. How much volatility in the value of your house are you comfortable with?
7. How concerned are you with the hidden costs involved with leaving money in your house?

Experience tells us that you probably haven't addressed these questions, in fact if you asked a lender, real estate agent or financial pro these questions they probably wouldn't even know what you were talking about.  See an overwhelming majority of people in the real estate industry just treat the home and it's accompanying mortgage as a commodity.  They don't know what they don't know.

That is why it is so important that you align yourself with a Certified Mortgage Planner or a Real Estate Agent that works with a Certified Mortgage Planner.  If you would like to have a no cost, no obligation Mortgage Planning session to review your current situation if you already have a home or to preview an upcoming purchase just fill out the information below or call our office at 816.582.5532.  That way you will find out what you don't know!