Coffee to Car Payments

What would you do with an extra half-million $$?

   Mark and Michelle are 35 years old.  They got married back in 1997 and bought a starter home.  They bought within their means and have been able to make a few extra payments along the way.  That, combined with the increase in the value of their home has left them with a fair amount of equity.

In 2001, Michelle gave birth to twins, Matthew and Madison.  Now the twins are getting ready to turn 7 and the starter home is getting a little small.  However, the equity they have accumulated will enable them to make a nice down payment on a larger home.   So they start shopping.

After a couple months of shopping they find a nice home that they can afford and make an offer.  Their house sells a couple weeks later.  They've already been pre-approved for a mortgage of $200,000 @ 6% interest for 30 years.  Their principal and interest payment will be $1199 per month.

They move into the new home and get settled.  A few months later, Mark reads a book on this thing called equity harvesting.  The author proposes that Mark and Michelle trade their fully-amortized mortgage for an interest-only mortgage.  Assuming the same 6% on $200,000, their interest-only payment will be $1000 per month.  That leaves $200 per month that they can use to invest and build a nest egg.

So, Mark sits down with a financial planner who shows him that if he invests $200 per month faithfully for 30 years and earns an average of 7%, at age 65, he and Michelle will have a nice nest egg of $243,994.  Mark is a smart guy and says, "Hey, wait a minute! I'll still have a $200,000 mortgage that I need to do something about.  So, after 30 years, I'm really only ahead $43,994." 

Mark remains interested in the concept but decides to shelve the idea for now.  Then he comes across this loan called the Home Ownership Accelerator and learns that it is supposed to be a very efficient tool for equity harvesting.  He knows that he and Michelle are locked into paying $1200 per month no matter what for 30 years so he uses that figure when he talks to the offset mortgage professional.

Here's what Mark learned: If he were to take out an offset mortgage and divert the same $200 per month to outside investments earning an average of 7% (same numbers as the interest-only scenario), he would pay off his $200,000 mortgage in only 18 years, 10 months and have an accumulated nest egg of $92,616.  However, he still has 11 years, 2 months before his current 30 year fully-amortized loan would be paid off.  So now, with no payment, he would be able to invest the full $1,200 per month until he turns 65.  After all, the twins would be done with college at this point, and he and Michelle would have a lot more discretionary income.  So, leaving the $92,616 alone and increasing to $1,200 per month until age 65, he learns that he and Michelle would have a nest egg of $448,485 just from the money that would have gone for mortgage payments.

Now, the only question is, "Does he tell all his friends or just keep it to himself?" 

No-Sweat Equity

Would you store 53% of your life savings under a mattress?  How about in a coffee can?  Would you go to the bank a put in a safe deposit box?  Of course not!  You probably want as much of your money working for you as possible at any given time.

We've heard time and time again that your home is your biggest investment.  We've also been told that the best mortgage is no mortgage but let me ask you a question.  Does your home appreciate faster or slower based on how much equity you've accumulated?  That's right.  It makes no difference how much or how little you owe on your mortgage.  The value of your home is what it is. 

Many equity harvesting gurus will recommend that you continue to refinance every five years or so to continuously tap the equity in your home for other investments.  Your parents and grandparents keep saying to pay off your home as quickly as possible.  I said "They're both right!"  That is you can do both.

In the first quarter of 2007, we Americans owned $20.8 trillion dollars worth of residential real estate on which we owed only $9.8 trillion dollars.  That's an average of 53% equity in our homes.  Let me just add right here that the sub-prime mortgages that are causing such a commotion and turmoil in the market represent less than 20% of all outstanding mortgages.  You've heard the saying that the squeaky wheel gets the most grease.  Well, This quarter 1 2007 balance sheet shows that while consumer debt is growing, overall we still have a positive net worth.  $65.6 trillion in assets-$12.5 trillion in liabilities equals a positive $53.1 trillion in collective net worth!

I agree with Marian Snow when she suggests that we stop sitting on our assets, but beware that an interest only loan or a series of them will leave you with a big mortgage during retirement that will eventually need to be repaid.   The Home Ownership Accelerator offers an extremely efficient platform for equity repositioning along with the ability to retire mortgage free.   

By combining this powerful tool and safe money savings vehicles, you could call it "no-sweat equity"

There's gold in them there walls!!

Let's pretend you just bought a house in an older neighborhood and you were told the following urban legend at your housewarming party:

The house and several others in your neighborhood had been built during the Great Depression.  It is rumored that some relatively affluent individuals had escaped without suffering total losses in the market but they were still panicked.  So, they cashed in their investments and converted the money into gold and then built a modest, comfortable home to ride out the storm.  They decided that since banks weren't safe, they would stash the gold between the studs of their new home and then cover the opening with plaster.  When things got back to normal, they would simply bust out the plaster, retrieve their gold, and start investing again.  After all, the cost of repairing the hole would pale in comparison to accessing their gold again.  Meanwhile, a handful of these folks passed away before things got better and obviously they hadn't told anyone for fear that some desperate soul would try to steal it.  They never even told their family.

Now, you have it from a fairly reliable source that your house is one such house.  Only trouble is you're going to have to gut it or at least start tearing into it until you find it.  The price of the gold will far exceed any cost you will incur putting your house back together.  You have a friend who is whispering in your ear that he found gold when he was remodeling his home so you really ought to try it.  All of your other friends are saying that your home is lovely and even though there may be gold hidden in the walls, you should just leave it the way it is because at least right now you know what you've got.

What would you do?  You've got a very distinct possibility that there's gold in the walls but, you also are very comfortable with your home just the way it is.  So, you live in your home for a few years and then sell it.  A few months later, you're watching the news and there's a story about a family who purchased a home, started remodeling, and discovered a tidy stash of gold hidden under the plaster.  You remember the rumor and upon closer observation you realize it's the house you used to own.  I'm not going to ask what you'd be thinking at that point. 

That is precisely what equity harvesting is all about.  Many folks including financial planners shy away from it simply because they don't understand it.  The view debt and assets as two completely separate parts of your financial plan.  Debt is bad.  Investments are good.  You get a 15 or 30 year fixed rate mortgage because at least you know what you've got.

The truth is that, with the right tools, you can efficiently siphon equity out of your home for outside, relatively safe savings vehicles and still live out your retirement years with no mortgage payments.  You don't have to choose between paying off your mortgage as fast as possible or staying mortgaged to the hilt and maxing out your retirement savings. 

You can do both!

What if it wasn't about the money?

I'm really looking forward to watching the movie "Bucket List".  I hope it's as good as the previews.  Have you ever started to make a list of the things you want to do before you kick the bucket?  No. I don't mean random ideas that make you think "Wow!  Wouldn't that be cool?".  I mean sit down and start brainstorming about all the things you'd like to do and put it on paper.  When you consider:

• Your career goals
• Places you'd like to visit
• Hobbies that you've not yet found the time to enjoy
• People you'd like to meet
• Some adrenalin-pumping adventure
• A worthwhile cause you'd like to volunteer or contribute to

Chances are if you sit down for half an hour and just write things down as fast as you can to go back and edit later to add meaning and clarity, you'd probably end up with 75 or 100 things.  Go ahead try it. 

Next, you'd rank them in order of priority and be experiencing an overall sense of pleasure just thinking about it.

Now, back up a step.  What if you had to rank them in order of cost and decide which ones you'd have to forgo?

That is why I do what I do...so you can do what you want to do instead of thinking about the money.

But Officer....I was turning left!

When we see a sign that says "no right turn on red", it assumes that we know a couple things already.  First, red means "stop" and second, there is a general exception to that rule if you are turning right. 

This argument will most likely not get you out of a ticket, but this is a good example of what authors, Chip and Dan Heath refer to as the "Curse of Knowledge" in their book Made to Stick: Why Some Ideas Survive and Others Die.  The Curse of Knowledge is simply this:

Knowledge we possess makes it impossible for us to imagine what it's like to lack that knowledge.

This is probably the reason why financial professionals' two biggest challenges when dealing with a client are complexity and apathy.  These two feed off of one another.  The financial professional has a vast amount of information that they can use to help their clients.  The Curse of Knowledge causes them to try to explain every intricate detail to the client.  The client becomes confused and thinks the financial planning process is too complex and decides to put it off.  Now we have apathy.  Isn't the whole idea of seeking advice from a professional to make things simpler?

Here's an example:

I'm almost done with a 500 page book on equity harvesting.  The Curse of Knowledge makes me want to tell you everything I know about equity harvesting when really I could just ask you, "Does the value of your home increase faster or slower just because it's paid for?"  The answer of course is "It will increase or decrease in value exactly the same no matter how much or how little you owe."

So, while it would be nice to not have to plan for a house payment in retirement, in the meantime, maybe your money could be working a little harder for you.

Equity harvesting is simply creating a systematic way to increase your net worth using the equity in you home to build your nest egg.  That's it.  That's all.  I read the book so you wouldn't have to.

The Home Ownership Accelerator is the ultimate tool to make this process systematic, automatic, and with no change to your spending habits.

P.S. Here's a whole list of "But Officer..." excuses just for fun.