In today’s economy, it’s important to understand how to position your mortgage and manage your home equity to work within your overall financial picture. 

By Brian DeLucia

Over the past decade, we’ve seen a paradigm shift in business and finance across the United States.  The changes required us to make changes in how we approach our finances and how we do business.  Those who changed have prospered and those who still function under the old money rules are struggling.  These new philosophies are also reflected within the mortgage industry with new ways to utilize your mortgage in a proactive, yet responsible manner. 

In the past generation, paying down a mortgage; owning your home free and clear was everyone’s ultimate goal in life.  Many homeowners used to make extra mortgage payments, apply big down payments, and utilize a 15-year mortgage.  Applying these strategies in today’s economy can expose a homeowner to devastating consequences. 

Today, it makes more sense to hold a bigger mortgage and separate equity from your equity to protect from losses and emergencies.  A mortgage is now a major part of an individual’s overall financial picture – in many situations the mortgage centers around everything else.  It is most people’s largest financial obligation and instrument.   In today’s economy, there are more job losses and job changes than ever.  Retirement plans are more volatile and in many situations – non-existent.  There are also a lot more monthly expenses that have stretched the dollar relentlessly. 

 
Is the 30-year fixed loan a dinosaur today?
It depends on the homeowner.  For those conservative about their finances or fail to consistently evaluate their finances, the 30-year fixed loan is probably the best loan and maybe only option to qualify.  Unfortunately, too many of these homeowners were positioned into aggressive loan products the past few years without a true understanding or ability to maximize their loan.  This led to a lot of trouble for homeowners. 

For many homeowners, I suggest an interest only loan with a focus on separating equity from the property.  Most homeowners refinance every 3-4 years in this generation and never pay down their principles very far.  Under this philosophy, a 30-year fixed makes very little sense since you may only hold the mortgage for a few years. 

 
Moving Equity vs. Paying Down Principal
I believe its best to position yourself proactively and not reactively in regards to your equity.  If an illness or job loss occurs, it’s essential to have access to your equity in the event of surviving a short-term financial crisis and hence in many situations today – avoid foreclosure.  If you lose your job or experience lost income, refinancing will not be an option and you won’t have access to your equity.  If you needed $20,000 to work through a short-term family crisis, would you prefer to have access to your money or have it trapped in your house without qualifying to cash out on a refinance? 

In today’s economy, it’s important to keep money moving at some rate of velocity.  If you have equity sitting in your property or you’re paying extra money to your lender – that is less money actually in your hands and working for you. 

 
Factors In Moving Equity
There are a few distinct factors that work in your favor if you separate equity from your home and allow it to work for you.  It’s important to have liquidity or access to liquidity today when needed for an emergency.  It’s also a tremendous advantage to have equity separated from a property during a down market cycle.  In some areas of the country, property values dropped substantially. Under those circumstances, if you left equity trapped in your property – it was lost and resulted in a lot bigger problems such as foreclosure for many homeowners who lost jobs.  For those homeowners who separated their equity from their property prior to the downturn in the market, their equity remains intact in a separate account with access to cover any short-term crisis such as a job loss or illness.  And at the same time, this equity is growing in a separate account, building long-term wealth for the client.  Equity that is separated from a property is generating a rate of return in an investment account instead of remaining idle or subject to loss if property values drop. 

The biggest factor I enjoy in paying higher interest with a bigger mortgage is the tax deductions.  Mortgage interest remains our biggest tax deduction today and it’s important to maximize it to work for you.  This strategy of paying a bigger mortgage actually saves most homeowners thousands of dollars, which in reality means you are paying a lower interest rate for your mortgage when you factor in your tax savings.  At the time, you will have a separate account with your equity growing at a healthy rate of return. 

For those who utilized a 15-year mortgage in the past or paid extra principal payments to payoff your mortgage early, this current generation philosophy still allows for the same opportunity, but with more options.  

If you utilize these new philosophies of separating equity and allowing it to grow in a separate account that earns interest, you most likely will have earned enough money to consider paying off your mortgage and will have saved thousands of dollars in tax deductions under this philosophy rather than with a 15-year mortgage.  But you also have more options, maybe the rate of return on your equity will cover college expenses or perhaps you want to continue maximizing your account for your retirement years.  These are the options you have available by utilizing the rules of money in today’s economy.  If you are continuing to play by yesterday’s rules, most likely you are either limited by having little retirement funds or find yourself house rich/cash poor without the resources to handle a financial crisis or build wealth for your family’s future. 
 

Options In Foreclosure
I speak with several homeowners in foreclosure.  Most of these homeowners experienced a temporary setback that prevents them from paying their mortgage for a few months.  By the time many of these homeowners workout plans to stay in their home, their credit rating suffers and they lose equity in their property due to legal fees, etc.  Some homeowners even lose their homes and all their equity. 

If a homeowner has proactively separated equity from the property in the past and had it positioned safely in a separate account, they would have access to this equity to cover any crisis without hurting their credit rating or losing any equity. 

It also is an advantage to carry a high mortgage if you are foreclosure.  A higher mortgage balance is a risk transfer to the lender.  The lender definitely has no interest in foreclosing on a property with little equity. 
 

Investment Philosophies
Most consider their home their largest asset or biggest investment.  This is one of the biggest myths in life today.  It’s the equity that is your asset, but only if the equity is in a safe place and working for you. 

It’s essential to understand that you must position your equity in a conservative investment that protects your money along with tax benefits.  You should never take any risks with your home equity in aggressive, volatile investments like securities. 

I often recommend different accounts that generate an 8-12 percent return on your money like an Oppenheimer or Vanguard Fund.  I also recommend placing some of your equity in a proper annuity plan.  One of the best investment vehicles you could choose with your home equity is an investment-grade life insurance contract.  There are tremendous living benefits to a properly funded life insurance contract in terms of tax benefits, safe returns, and access to your money if needed in emergencies.  Some homeowners also position their equity into a college fund for the long-term. 

Similar strategies can also be utilized for homeowners who don’t have much equity in their homes too.  If you simply position the monies you utilize for your monthly mortgage payment through these new philosophies, you can achieve the same benefits.  It may take longer, but you’ll have more choices and protection over the long-term while practicing more effective financial habits.

Overall, a properly managed mortgage and long-term equity management integrated with your overall financial plan can allow you to build long-term wealth, enjoy tax benefits, and protect yourself against losses.
 

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Brian DeLucia works with homeowners across the country to ensure they are positioned in the best mortgage product for their needs and properly manage their home financing within their overall financial objectives.  He can be reached here.  

Disclaimer:
Before you act on any financial or investment decisions, we always recommend that you consult with trusted financial, investment, and tax advisors.  The investment contents of this article should not be considered personal investment advice. 

Copyright 2008, The Maxxis Group
All rights reserved.  No part of this report may be reproduced or placed on any electronic outlet without written permission from The Maxxis Group.  Information provided in this report that is herein obtained from outside sources are believed to be accurate, but its accuracy cannot be guaranteed nor is The Maxxis Group responsible for any inaccuracies from these sources.