Mortgages; The Misunderstood Financial Instrument February 12, 2008Posted by shaferfinancial in Uncategorized.
Tags: Finance, Mortgage, paradigm shift, Wealth
The next financial strategy is equity management of home equity. Or getting the largest mortgage you can afford in order to seperate home equity and put it to work for you. Now your alarm bells should be really ringing. Isn’t paying off your mortgage the #1 financial goal? Don’t people do all sorts of fancy things to get that mortgage paid off? But why?
No financial instrument has created more wealth for the middle class than mortgages. A bold statement but demonstrably true. Not stocks, not mutual funds, not annuities, nor bonds. But how can this be? How can debt create wealth? Very simply, mortgages allow for the middle class to purchase real estate, something they could not do without this financial instrument. Mortgages allow one to leverage their money into control of a larger asset. Mortgages are cheap money, made cheaper by the tax laws. This combination has allowed people to create more wealth in their homes than any other place.
The median amount of home equity in primary homes is $65,000 for all homeowners. The median total net worth for all families is $93,000. So, in short for Americans, much of their wealth is held inside their homes. So why if mortgages are so successful in building wealth for people are they in such a hurry to get rid of them? That is literally the million dollar question.
Unfortunately, people usually don’t understand how holding their wealth inside of their homes is a very risky position as well as a financially dumb place for holding their wealth. Now, you can’t argue that mortgages has allowed for the middle class to build more wealth than any other financial instrument. You are left with the emotional baggage of thinking all debt is bad. This is also demonstrably false.
So now we understand where the most wealth is for Americans, the question remains how to put that to work for you? See my post on equity management for details, but the bottom line is this strategy works because it takes a hidden asset (home equity) and puts it to work for you in a safe liquid environment. Most Americans (90%) have been unable to save more than a pittance anywhere outside of their homes. The success of this strategy is built on the fact people are successful (over 99% of conforming loans are paid back) in using mortgages to build wealth, while people are not successful in their other wealth building endeavors (ie retirement saving, stock ownership, mutual funds, etc.). Use what people are good at to build wealth…..what a concept!