While saving on interest is good advice, it is a far cry from the best advice.
Common mortgage advice promotes taking your extra cash flow and paying down your mortgage in order to save on the total amount of interest you’ll pay your lender.
Our belief is that houses are meant to house families, not cash. Sending extra principal payments to the mortgage company may actually be putting you in worse financial condition (see the Chicago Federal Reserve study)
If you were to pay extra money towards your mortgage and you suffered a job loss or health crisis and didn’t have income for an extended period of time, would you rather have access to cash with a simple phone call … or would you rather go through foreclosure? We call this liquidity and it is vital to weathering the financial storms of life. See Doug’s story for his personal account of what lack of liquidity cost him.
Every time you put excess cash into your property, you give up the ability to earn a rate of return on that money. Sure you may be increasing your equity, but equity always has the same rate of return: ZERO.
If you were without income and were behind on your mortgage, you’d be more likely to lose your home in foreclosure the more you’ve paid down your mortgage balance.
Imagine you’re paying 4% interest on your mortgage loan. Instead of putting extra principal payments toward your mortgage loan, what would happen if you put it in a conservative side fund earning a 5% to 10% historical average rate of return? The result could mean over $100,000 over a 10-year period, and over $700,000 over 30 years. Banks earn millions with this type of strategy. Depending on your situation, a properly structured, maximum-funded Indexed Universal Life policy, or what we call an IUL LASER Fund could be used as that side fund.
Instead of sending extra principal payments to the mortgage company, you can put your extra cash in a financial vehicle that can earn 5% to 10% historical average reate of return and isn’t subject to mark volatility. This not only increases your liquidity for emergencies but can also put you in a position to pay off your house more quickly than sending extra principal payments toward your mortgage.
Banks would rather keep homes occupied than empty. That’s why it’s not uncommon for banks to work with individuals with zero equity in their homes for months or even years before foreclosure.
By keeping your mortgage balance high, you may even reduce your risk of lawsuits. Who wants to sue somebody who has zero home equity? This can create a powerful layer of asset protection.
Our belief is that houses are meant to house families, not cash. Start today by stopping sending extra principal payments to the mortgage company. Instead deposit that money in a safe and conservative side fund earning competitive rates of return that provide safety of principal. In some cases, individuals may use advanced mortgage planning methods to put their idle equity to work for them, as well.
We have helped many highly successful people accumulate their money safely, earning predictable, tax-free rates of return, with historical annual average rates of 5–10%. What that means is, when they retire, every $1 million dollars they have accumulated can generate $70,000 – $100,000 per year of tax-free income (aka tax free retirement), without depleting the principal on their nest egg!
