How the Affluent Manage
Home Equity to
Safely and Conservatively
Build Wealth
The answer? Most of what we believe about mortgages and home equity, which we learned from our parents and grandparents, is wrong. They taught us to make a big down payment, get a fixed rate mortgage, and make extra principle payments in order to pay off your loan as early as you can. Mortgages, they said, are 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The problem with this rationale is it has become outdated.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. In many cases people will switch careers five or six times. Also, unlike our grandparents, we can no longer depend on our company’s pension plan for a secure retirement. A recent Gallup survey showed that 75% of workers want to retire before the age of 60, yet only 25% think they can.
Unlike our grandparents, we will no longer live in the same home for 30 years. Statistics show that the average homeowner lives in their home for only seven years. And unlike our grandparents, we will no longer keep the same mortgage for 30 years. According to the Federal National Mortgage Association, or Fannie Mae, the average American mortgage lasts 4.2 years. People are refinancing their homes every 4.2 years to improve their interest rate, restructure their debt, remodel their home, or to 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 are likely to only use the first 4.2 years of the mortgage. We can only conclude they are operating on outdated knowledge from previous generations when there were few options other than the 30 year fixed mortgage. Wealthy Americans, those with the ability to pay off their mortgage but refuse to do so, understand how to make their mortgage work for them.
They go against many of the beliefs of traditional thinking. They put very little money down, they keep their mortgage balance as high as possible, they choose adjustable rate interest-only mortgages, and most importantly they integrate their mortgage into their overall financial plan to continually increase their wealth. This is how the rich get richer.
The game board is the same, but while most Americans are playing checkers, the affluent are playing chess. The good news is the strategies used by the wealthy work for the rest of America as well. Any homeowner can implement the strategies of the wealthy to increase their net worth.
Ric Edelman, one of the top financial planners in the country and a New York Times Best Selling author, summarizes in this book The Truth About Money, “Too often, people buy homes in a vacuum, without considering how that purchase is going to affect other aspects of their lives. This can be a big mistake, and therefore you must recognize that owning a home holds very important implications for the rest of your financial plan. Although a fine goal, owning a home is not the ultimate financial planning goal, and in fact how you handle issues of home ownership may well determine whether you achieve financial success.”
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The information presented here is not specific to any individual's
personal circumstances.
To the extent that this material concerns tax matters, it is not
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purpose of avoiding penalties that may be imposed by law. Each taxpayer should
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