Mortgage Mistakes and Misconceptions

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Mortgage Mistakes and Misconceptions
How to Leverage Your Home Equity For More
Wealth
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Presented By
Your Name Mortgage Planner Company Name Phone
Number
Your Name Financial Planner Company Name Phone
Number
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Mortgage History Quiz

• What was the Typical Cost of a New Home in 1920?
• Answer 5,000
• What was the Typical Annual Income in 1920?
• Answer 1,434
• What Provision was in Loans that Motivated all
  People to Pay their House off as Quickly as
  Possible?
• Answer Banks had the Option to Demand Balance
  Repayment at anytime
• What happened on October 29,1929?
• Answer Stock Market Crash

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Why People Pay Off Their Mortgage

• Stock Market Crash 1929
• Margin Calls (10 to Borrow 100)
• Run on the Bank
• Banks Called Loans
• Mortgage Holders Lost Homes

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Why People Should Not Fear Mortgages

• Consumers can No Longer Purchase Stock with 10
  Down
• Banks are no longer underwriting stock
• Banks can no longer cancel mortgages
• FDIC was created to protect consumers
• Banks now have access to unlimited cash through
  the secondary market

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Important Information- Disclosure

• Material presented regarding use of home equity
  and additional mortgage obligations are not
  appropriate for everyone. Loan proceeds used for
  direct investment purposes should be used only
  when clearly suitable. Discuss all investment
  opportunities with your financial planner based
  on your risk tolerance. Only borrow an amount
  that you can afford to pay from funds you have
  available to invest.

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Why do Consumers Buy Homes?

• Top 3 Reasons that consumers cited for buying a
  home?

1 Long Term Financial Investment 84
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2 Feeling of Ownership 74
3 Neighborhood I Like 67
2003 National Housing Survey Fannie Mae page
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What Other Reasons Do People Own Homes?

• It provides for Basic Human Needs
• Shelter, Comfort, Security, and Privacy
• In Addition to
• Potential Tax Savings
• Potential Leveraged Asset Growth
• Inflation Protection with Locked in Payments
• Establishes Credit History
• Forced Savings

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American's Assets
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67 of American Home Owners have more Equity in
their Home, than in all other investments
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What makes up a Quality Investment?

• Investments are compared using these simple
  criteria
• Rate of Return- What do You Earn?
• Safety Potential to lose your principal?
• Liquidity- Ability to use and control your
  Investment?
• Tax Free or Tax Advantage- Ability to realize
  gains on your investment without paying taxes?

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What makes up a Quality Investment? (continued)

• Investments are compared using these simple
  criteria
• Retirement Income- Ability to Generate more
  Income when you Need It?
• Legacy For Family- Can You Provide for Them After
  You are Gone?
• Diversified- Are all Your Eggs in One Basket?

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Important Asset Question

• What percent of your assets would You typically
  invest in something that is
• Potentially Unsafe
• Partially to Totally Illiquid
• Guarantees a 0 Annual Return
• Cant Provide Income
• Is Not Diversified

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Surprise Answer

• This investment is your home equity!

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Safety Definition

• Basic Definition of Safety
• Guaranteed, Insured, or totally protected from
  Volatility.
• More Flexible Definition
• Minimizing Risk or Potential for loss

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How Safe is Your House?

• These are 3 ways you can lose the value of the
  equity in your home
• Reduction in value due to economic or business
  changes
• Foreclosure for failure to make mortgage or tax
  payments
• Lawsuit where your personal assets are attached

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How Safe is Your House?

• While a home is considered a Safe Asset a
• Market Bubble or change in local economic
  outlook could reduce or eliminate
• Price Appreciation (main source of equity growth)
• Current Equity (cant borrow if the equity is not
  there)
• Source of Down Payment (for future purchase)
• This loss occurs if you sold the house during a
• depreciated market

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Diversification

• You should never have all your EGGS in one
  basket!!
• Too much equity in your home doesnt allow you to
  be properly diversified!!
• QUESTION
• How important is it to you to protect your
  wealth in your home?
• Have you considered the safety of the wealth in
  your home before today?

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How Liquid are Your Assets?

• How quickly can you access your money?
• Cash
• Same day access
• Bonds/Stocks/Mutual Funds
• Same day access
• Home Equity
• Refinance 30-90 days (assuming that you
  qualify)
• Sell the Home 60 180 days

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Home Equity Liquidity

• Home equity is typically the least liquid
  investment you have and the only investment that
  requires you to qualify to access your wealth.
• To get your money, you have to prove that you
  DONT need it!
• Credit, employment, current debt load and closing
  costs all affect your ability to get to your
  equity.

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Problems With Extra Pre-Payments

• Assume your monthly payment is 3,000
• You make an extra payment of 300 a month every
  month 3,600
• OR
• You make a 300 deposit into the savings account
  each month 3,600
• After 5 years you have 18,000 in equity or
  savings

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You Become Disabled or Unemployed

• Does the Bank care that youve been making extra
  payments for 3 years?
• NO, the Bank only cares about you making the next
  months payment!! You STILL need to come up with
  3,000!
• Had you saved the money instead of building
  equity, you could make payments for over 6 months

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Liquidity

• QUESTION
• How important is use and control of the wealth
  in your home?
• Have you considered liquidity of the wealth in
  your home before today?

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Rate of Return

• What if you learned that a portion of your wealth
  was earning an annual rate of return of 0 and
  wouldnt be changing throughout your lifetime?
• Would that be a major concern?
• Would you make an investment that guaranteed you
  a 0 return?

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Equity in your Home

• The equity in your home always appreciates at a
  rate of 0.
• Equity in your Home only increases through
• Principal Repayment
• Property Appreciation

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One Asset vs. Two Assets
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One Asset vs. Two Assets
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One Asset vs. Two Asset Comparison
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Immediately Double your Accumulating Assets

• Asset-Home
• 200,000
• No Mortgage
• - Or -
• Asset-Home Asset- Safe Investment
• 200,000 200,000
• Mortgaged

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How Will This Impact Your Growth?

• Asset-Home1 Asset- Safe
  Investment2
• 200,000 200,000
• 7 Appreciation 7
  Growth 214,000 214,000
• Increase in Assets
• 28,000
• 1 Home is worth 200,000, with no mortgage
• 2 Borrow the 200,000, invest it at 7

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What About the Payment?

• 200,000 Interest-Only Mortgage at 7
• 14,000 yearly interest
• 28 tax bracket
• 3,920 taxes saved
• 10,080 net interest cost
• End of Year Results
• Home Appreciates 7 14,000
• Safe Investment earns 7 14,000
• Assets Increased total of 28,000
• Less net interest cost 10,080
• Profit by Investing Home Equity 17,920

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Important Question

• If the government said they would pay up to 35
  of your monthly mortgage payment, would you take
  full advantage of it?

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Tax Break

• Mortgage interest on first mortgages is
  deductible on loans up to 1,000,000 and on a
  second mortgage or home equity line of credit up
  to 100,000.
• You can create tax savings on a combined total of
  374,000 in a 34 tax bracket.

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Free Government Money

• 1,500 Monthly Mortgage Payment
• You Really Pay 1,080
• Government Pays 420
• You Receive 5,040 a Year From the IRS (assuming
  payment is interest)!!
• 151,200 over 30 years

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Assuming 28 tax bracket
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Does your Home Equity Pass the Test?

• Test Results
• 7 Nos
• 1 Yes
• Score- Poor Investment

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Benefits of Separating Your Equity from Your Home

• Increase Liquidity Have access to the money
• Enhance the Safety No longer affected by any
  housing bubble, or by loss of equity from
  foreclosure.
• Protect Yourself from Disability and Unemployment
  You have cash to make the payments if you need
  it.
• Become More Diversified Put your eggs into more
  than one basket.
• Increase Your Rate of Return Equity has a 0
  return.
• Maximize Your Tax Deductions Payments on the
  investment are tax-deductible.

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Is Your Home Creating Wealth?

• Currently in the US, 30 of US homes have no
  mortgage, with 65 of those homes are owned by
  Seniors over the age of 65.
• The average Senior in the US today has combined
  household income of 21,450 per year.
• Theyve accomplished the goal of having the home
  paid for, but at what price?

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Why is This Important?

• The average retirement age in the U.S. moved from
  66.9 to 62.7 between 1990 and 2000, dropping an
  average of 5 months per year
• The average life expectancy in the U.S. is
  currently increasing by an average of 4 months
  per year since 1970.
• Have you even considered outliving your
  retirement savings?

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Where Do You Find the Money?

• The longer you can put money to work for you the
  more dramatically it can compound.
• The difficulty often comes in finding additional
  money to save, and maintaining the discipline to
  continue saving.
• By consolidating long-term debts in a new
  mortgage, you can often find the money to cover
  the payments on your equity investment.

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Retirement Account Fallacies

• IRAs and 401(k)s are NOT Financially Beneficial
  to Your Retirement
• Example
• Save 4,000 per year for 30 years 120,000
• Income Tax Bracket 34
• Annual Taxes Deferred 1,360
• 30 Year Tax Savings 40,800
• 4,000 / year _at_ 10/yr for 30 years 723,774
• Withdrawal 10 per year 72,000
• Subtract 34 taxes 24,000
• From age 65 to 85, 500,000 in taxes are paid vs.
  40,800 saved during your contribution years.

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Retirement Account Fallacies

• In the FIRST two years of retirement, every
  dollar of taxes saved is paid back.
• A person living a normal life expectancy will pay
  over 10 times the taxes on a qualified retirement
  plan during their retirement years than the taxes
  saved during their contribution years
• Whose retirement are we planning? Ours or Uncle
  Sams?

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Predictability Game

• Pick a number between 1 and 10.
• Double it.
• Add 8 to the total.
• Divide it by 2.
• Subtract your original number.
• If 1A, 2B, 3C, 4D, 5E, 6F, 7G, 8H, 9I
  and 10J, think of a country that begins with the
  letter next to the number you are left with.
• Take the next letter in the alphabet and think of
  an animal that begins with that letter.
• Now think of a color that is usually associated
  with that animal.

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Predictability Game

• You have selected a
• Grey Elephant from Denmark!
• This is an example of predictability. The
  government can predict how much money we will be
  paying in taxes in our retirement years. We need
  a way to out-smart them!

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Reverse Tax Planning

• Common Advice from Financial Planners
• PAY OFF YOUR HOME AS QUICK AS POSSIBLE
• Extra Payments
• Bi-weekly Payments
• Maximize IRA contributions
• Are they really helping you plan for retirement?

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Reverse Tax Planning

• Lets say you follow that advice, what happens
  during your retirement years?
• By paying off your mortgage, you have eliminated
  your biggest tax deduction, mortgage interest
• Now, all of your income from your qualified plan
  is 100 taxable
• You have created a tax situation that is the
  absolute least favorable situation!!
• 100 taxable income, no deductions

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Retirement Wealth

• Your Mortgage Can Be Your Best Ally in Creating
  Maximum Wealth for Your Retirement!

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Use Your Mortgage to Make a Million Dollars
160,000 in Equity
Difference

• Borrowing at 7.5
• (tax-deductible)

Investing at 7.5 (compounding tax free)
Year
4,080
1
7,920
12,000
5
39,600
30,101
69,701
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10
79,200
90,565
169,765
15
118,800
194,620
313,420
20
158,400
361,256
519,656
25
198,000
617,734
815,734
30
237,600
1,003,193
1,240,793
Assuming 34 tax bracket
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Benefits of Investing Your Equity
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Assumptions Initial Home Value - 200,000
Initial Mortgage Balance 100,000 Max LTV
80 Mortgage Interest Rate 7 Investment Rate
8.75 Tax Bracket 28 Home Appreciation
Rate 5 Interest Payment is after-tax payment.
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Benefits of Investing Your Equity (continued)

• Notes from the Previous Chart
• Equity up to 80 is pulled out from the house,
  valued at 200,000. This keeps the interest cost
  as low as possible.
• The outstanding mortgage balance is subtracted
  from the amount available to invest.
• The funds are invested in a tax-advantaged
  account earning an average of 8.75 / year.
• Every three years, accumulated equity is pulled
  out and added to the portfolio.
• The Investment Gain is the value of the portfolio
  less the outstanding borrowed money.
• The Invest the Cash column reflect the value of
  investing the after-tax monthly interest payments
  on the borrowed money instead of using the money
  to pay back the loan.
• The value of the home is presumed to go up 5 per
  year.
• The Net Gain column reflects the difference you
  earned by borrowing and investing your equity
  instead of investing the after-tax interest
  payments directly.
• On a 300,000 home with a 100,000 outstanding
  mortgage, the net gain after 20 years is 381,995
  instead of 208,299.

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Mortgage Basics

• 80 LTV Financing Down to a 500 Credit Score on a
  Refinance, 620 on a 2nd Mortgage
• 3 Yr, 5 Yr, and 10 Yr Fixed Interest Rates
• Self-Employed Borrowers Accepted
• Stated Income Programs Available
• Closing Costs Average 3 of the Loan Amount
• Debt Consolidation Program Can Save You Hundreds
  of Dollars Per Month
• This Money Can be Used for Your Investment Program

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Debt Consolidation Example

• Current Mortgage Balance 100,000
• Interest Rate 6
• Monthly Payment (P/I) 600
• Credit Card Debt 25,000
• Monthly Payment 750
• Tax Bracket 28
• New Mortgage 128,000
• New Monthly Payment _at_ 7, interest-only 747
• After-Tax Monthly Payment 538
• Monthly Savings 812
• Investment Equity This Supports 139,050 (_at_ 7,
  interest-only)

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Suitable Investments

• Investment Criteria
• Safety of principal (dont want to risk the
  money)
• Liquidity of funds (need access on short notice)
• Investment return (need above market return)
• Tax advantaged (let capital grow and be removed
  tax-free)
• Your financial planner can discuss suitable
  investments that will earn you significantly more
  than the tax-deductible mortgage interest cost.

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Benefits of Free Consultation

• Avoid Common Mortgage Mistakes
• Increase Your Tax Deductions, Safety, Liquidity
  and Return
• Protect Yourself from Disability or Unemployment
• The Fastest, Easiest and Smartest Way to become
  Mortgage Free
• How to Increase Your Net Worth
• How to Create Extraordinary Wealth
• Overview of Suitable Investments for Your Home
  Equity
• How to Create an Investment Account to Accumulate
  Money for Your Retirement Years
• Make Sure Your Retirement is on Course

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Get More Information

• The mortgage planner who you would be working
  with would like to email you a free report that
  better explains how you can create wealth from
  your home equity.
• You can also receive a free Excel spreadsheet
  file so you can work the numbers based on your
  homes value, current mortgage balance,
  appreciation rate, tax bracket and interest rates
• Simply send an email to JoeKamenar_at_aol.com or
  call Joseph Kamenar at 215-480-2737.

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