WHY DO I NEED A MORTGAGE PLAN?

A Tale of Two Friends

Ric Edelman, one of the top financial planners in the country and a New York Times bestselling author, has educated his clients for years on the benefits of integrating their mortgage into their overall financial plan. In his book, The New Rules of Money, he tells the story of two brothers, each of whom secures a mortgage to buy a $200,000 home. Each brother earns $70,000 a year and has $40,000 in savings.

Friend A believes in the traditional way of paying off a mortgage as soon as possible. He bites the bullet and secures a 15-year mortgage at 6.38% APR and shells out all $40,000 of his savings as a 20% down payment, leaving him zero dollars to invest. This leaves him with a monthly payment of $1,383. Since he has a combined federal and state income tax rate of 32%, he is left with an average monthly net after-tax cost of $1,227. Also, in an effort to eliminate his mortgage sooner, Brother A sends an extra $100 to his lender every month.

Friend B, in contrast, subscribes to the new way of mortgage planning, choosing instead to carry a big, long-term mortgage. He secures a 30- year, interest-only loan at 7.42% APR. He outlays a small 5% down payment of $10,000 and invests the remaining $30,000 in a safe, moneymaking side account that earns an 8% rate of return. His monthly payment is $1,175, 100% of which is tax deductible over the first 15 years, and 64% over the life of the loan, leaving him a monthly net after-tax cost of $799. Every month he adds $100 to his investments (the same $100 Friend A sent to his lender), plus the $428 he has saved from his lower mortgage payment.

Which friend made the right decision? After only five years, friend A has received $14,216 in tax savings; however, he made zero dollars in savings and investments. Friend B, on the other hand, has received $22,557 in tax savings, and his savings and investment account has grown to $83,513. Now, what if both friends suddenly lost their jobs? Even though friend A has $74,320 of equity in his home, he can’t get a loan because he doesn’t have a job. He can’t make his monthly payments and has to sell his home to avoid foreclosure. Unfortunately, at this point it’s a fire sale so he must sell at a discount, and then pay real estate commissions. Friend B, however, has $83,513 in savings to tide him over. He doesn’t need a loan and can easily make his monthly payments, even if he remains unemployed for years.

Let’s suppose neither friend lost his job and evaluate the results of their financing strategies 15 years after they purchased their homes. Friend A has now received $25,080 in tax savings, has $30,421 in savings and investments (once his home was paid off he started saving the equivalent of his mortgage payment each month), and owns his home outright. Not too bad, right? Friend B has received $67,670 in tax savings and has $282,019 in savings and investments. If he chooses to, he can pay off the mortgage balance of $190,000 and still have $92,019 left over in savings, free and clear. Finally, let’s assume that friend B decides to ride out the whole 30 years of the loan’s life. While friend A has still received only $25,080 in tax savings, his savings and investments have grown to $613,858, and he owns his home outright. Friend B, on the other hand, has received a whopping $107,826 in tax savings, has accumulated an incredible $1,115,425 in savings and investments, and also owns his home outright. He can start over fresh and enjoy the same benefits once again.

Unfortunately, the majority of Americans follow the same path as friend A as it’s the only path they know. However, once the path of friend B is revealed, they realize it enables them to pay their homes off sooner (if they choose to), while significantly increasing their net worth and maintaining the added benefits of liquidity and safety the entire way. And that is just one strategy used by the wealthy that will work for the rest of America as well.

Finally, in the after math of Hurricane Rita, Port Arthur's Mayor was interview after hearing news that his house had burned to the ground. His comment spoke volumes about leaving all your equity tied to brick and mortar. When asked how he felt about the tragedy, his response was “the sad thing is we had just paid it off".

Something to think about...

The question, then, is who do you want to be "Friend A" or "Friend B"?  Do you take the easy route and listen to the uninformed media or your friends and family who have no financing experience or knowledge or worst yet take the advice of an inexperienced uniformed loan consultant who simply quotes you an interest rate and who's only job is to sell you a loan and therefore become "Friend A" and realize no or mediocre financial results along with limited security? Or do you decide that it is time to take control of your future and your finances and try something different.  If you want to increase your wealth and your level of financial security and become "Friend B" then you need to take action; you need to think outside the box; and, you need to work with an experienced "Mortgage Planning Professional." Terrence Tormey and his Team at Benchmark Lending are experienced "Mortgage Planners."  We have the knowledge along with the latest software technology to evaluate your present financial position and make recommendations that will increase your sense and level of personal and financial security. We will create and design a "Mortgage Plan," using your mortgage as the centerpiece of your overall financial plan, designed to increase your wealth and liquidity and thereby provide security against life's ups and downs.  All you have to do is implement the Plan.  A relevant quote here comes from Albert Einstein who when asked what is "Insanity" responded that "Insanity" is doing the same things and expecting different results."  Applying this reasoning who then is "Insane", "Friend A" or "Friend B," you decide.

College Planning:

Within the concept of "Mortgage Planning" is planning for college and other life events.  Few people realize that through proper planning of what type of mortgage to take and when to take it you can actually fully fund a "College Fund."  Many people simply fail to plan for college until the last moment when their child is applying to colleges and now the pressure is on to come up with the tuition money.  But where is the money to come from; a second mortgage on the house (at 12.5% if you can even find it); a Home Equity Line of Credit (if you can find a bank willing to extend you such credit); your savings, family, or you'll just find a way to come up with it.  With a little planning in advance all of this worry can be eliminated.  When you work with us we will show you how to use your mortgage to leverage your equity in your home to create and fund a "College Fund" that will grow in value over time to meet the future tuition requirement.  Imagine, no stress and the money there when you need it.  It just takes a little planning.  We are specialists in "Mortgage Planning" and "College Planning" and can help you successfully navigate these life events.   In most cases your mortgage payment will either be the same or less than what you are currently paying.  It's all about learning how to see and to use your Home Mortgage Loan as a financial tool to help you achieve your financial goals.  Give us a call and let's get started "planning your future."

Call and speak with one of Benchmark Lending's "Professional Mortgage Planners" today. 

Recommended College Planning Resource:

College Money Planning (click on the link):

http://www.bigleagueplayersclub.com/3clicks/published/96740/384681/