Forget that we are in a gloomy economy. Forget the fact that many of you might be struggling. Forget about the Presidential election that is fast approaching or those politicians that are trying to bail out our current real estate mess. How about focusing on yourself, and not always following those gimmicks that show you how to pay off your mortgage in 10 years. Can it be done? Yes, but with most of your pay check. Let's explore a simple concept.
Just the other day, A.J. Nisen wrote this post : Maximizing Wealth by Minimizing Mortgage Debt?
He did an excellent job of breaking down how to use your home in order to build wealth. One thing that wasn't mentioned though was that you should look at your actual debt load before considering taking your extra money to either pay down your mortgage or to invest in a higher rate of return outside your home. This could leave you cash poor in several cases. Or for the fact that you can't get to your money quickly that is in your home.
Do you know how many people that I speak to who have been paying down their mortgage or who have thousands of dollars tied up in investments such as stocks and such, who still have monthly debt? It's been a common thing, because they don't seek advice of a good financial planner. Or their previous loan officer was so stuck on the fact on how to show them to buy a certain program to pay down their mortgage quicker so they could make extra money.
How about the basic fundamentals of financing. Being 'Debt free', but first with your credit cards. You are defusing the whole concept of being 'mortgage free' when you still have balances and payments on credit cards. Yes, saving is hard nowadays. But if you plan on paying down your mortgage, but still have credit card debt, this is hurting your game plan. You will just be caring your debt load for life then.
Ever heard of the statement, "Knowledge is powerful"? What about, "knowledge can be dangerous"? Point in case here. Take the money that you were going to invest on paying down your principal, buying those extra stocks, or putting money into your 401-k plan, and erase your credit card debt first. I am not a financial planner, but I work with a few and have the knowledge to view other people's finances in a different manner that not every loan officer will explain to you. Hence why my first two questions to you when speaking to you about obtaining a mortgage are :
1. What payment would you most feel comfortable with? (and don't tell me zero....) Many ask you what purchase price do you want.
2. What are your goals? Your short term and long term. I get into detail about their kids, if they have any, and where they want to be in life. This helps me better put them into the right mortgage on behalf of my knowledge. (which is my professional opinion)
For other ways of trying to maximize your wealth, you can pull cash out of your home to pay off your credit cards. Some will tell you that this is not a good idea. But you just can't say that without looking at your whole financial picture and your goals. Individuals that mention this in two sentence statements, are misleading you down the wrong path. And in today's market, it's very hard to tap into your equity to do this. But with FHA loans, this is very possible, allowing you to go to 95% of the value of your home with a good, fix rate. Please read this to find out more : Cash Out Mortgages - FHA loans vs Conventional loans
**** There is so much to talk about. But as mentioned below from a few others, my advice in building some of your wealth, would be to save a cushion first. As you pay down your credit cards, make sure that you save money on the side first, in a savings account, to where you just can't write a check. In my opinion, you would want to have at least 3 - 6 months worth of reserves saved, before you think about paying down your mortgage or investing in stocks or other things that would give you a return. Why? Anything can happen to anyone in life. Ie: loss of job, loss of family member, a divorce, injury, etc etc. You would want to have money saved that would help pay your normal monthly expenses for a certain period. After all of this, then start your wealth building process ****
Disclosure : Everything mentioned should be discussed with professionals such as financial planners and or tax consultants. These are my opinions and viewpoints from 16 years of mortgage experience and knowledge.
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For more information on FHA loans, please go to this link. The FHA Expert
For more information on how you can obtain your dream home, please click here : Mortgage Financing Options
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!!
Copyright © 2008 by Jeff Belonger
Jeff,
I think I'm on record and in print about all this! Well maybe not the FHA part, but I encourage looking at FHA these days.
Good advice!
Bill
Jeff- I think you have such informational posts....truly. You are very well versed in your profession and I wished I had a loan officer as smart as you back when I was making mistakes!
Jeff, I think this is great advice, and I follow it myself. I consider myself to be debt free, except for my mortgage, which is of course a great tax deduction. I also am beginning to get how important it is to have some cash reserves.
Jeff, thanks for the mention. I have not even thought about FHA cash out txns. Great post. AJ
Getting cash poor can be dangerous is anything changes like being laid off from their job.
BILL.... lol... you crack me up. You and not a FHA believer as of yet. Well, in regards to your first part of the comment, thanks.
LORI..... thank you very much for those polite compliments.
PAT..... you make an excellent point about cash-reserves, which I didn't mention. Being debt free, even with your house, as the title suggests, can leave you cash poor. I just didn't mention the cash-reserves. Great point and I need to go back and edit this soon.
AJ..... my pleasure on both accounts. thanks for the compliment.
RANDY.... bingo... so many of us live pay check to pay check.... you need to save no matter what, especially in regards to what you stated. Loss of job or sickness, or a famliy death and such.
Jeff, EXCELLENT information and blog post. Pam and I kind of like having the tax break the mortage offers - might not be the right way to look at it - but beyond the house payment and the vehicles we don't keep any other debt.
TIM & PAM....... many like to have the tax breaks. And it's my strong opinion, if you are going to pay down your mortgage, to have your credit cards paid off first. It kind of defeats the purpose if not, because of the interest that you can't write off on your credit cards. Thanks for that polite compliment.
Jeff - this is a great post and think that consumers are trying to keep up with the Jones's too much and need to look at their own situation and not try to compete as much.
Jeff - You make several excellent points above. I commented on AJs post that I don't subscribe to the pay your 'mortgage down first theory'. I believe that you must consider return on investment and future goals. As you mentioned above, it is detrimental to pay down a mortgage and carry credit card balances. Similarly, it is not hard to build more more long-term wealth by investing in 401ks, IRAs, etc than by paying off a low(er)-interest mortgage.
Jeff,
Thanks for the post. This a great read and should be a primer for those looking to do any investing.
NAOMA..... that was definitely one thing that happened in the last 5 years, that people were trying to keep up with the Jones's. And worst of all, getting more money was easier, especially with the stated deals being thrown around. Or, that if you had a pulse, you could get a loan. I wonder if that is half of the foreclosures that are taking place. Another 25% because of job loss, or a death in the family, etc etc.
ERIK..... I also don't believe in pay down your mortgage as much either.... there are different stages though, depending on your age. Meaning, you shouldnt invest in high risk stocks at the age of 55 if you plan on retiring at 60. And those MMA accounts or the mortgage accelerator accounts drive me crazy. People charging money for a program that you can do yourself. And thanks for the compliment.
WILLIAM...... well, thank you very much for those kind words.