Homeownership is often the largest investment for many people. For Flagstaff homeowners, this is no different. Too often, people think of homeownership as something separate from financial investments. To be successful in planning for your retirement, or your children’s college educations, or simply to save to increase your fun in life, you should create an overall financial plan that includes consideration of your home as an asset and of your mortgage as leverage for your financial dreams. This is not to advocate taking equity from your home at all opportunities and spending it on boats, or cars, or the “toys” of life. Rather, what I’m suggesting is that you consider the two big ticket financial items in your life – your home and your mortgage – as you plan other investments.
In the book The New Rules of Money, financial guru Ric Edelman lays out numerous rules for financial planning. Here is Rule #21: "Carry a Big Mortgage and Never Pay it off." Does this sound like a crazy, risky idea? Consider the source and you may think it’s not so risky. The same advisor’s Rule #1 is this: Do not use a home equity line of credit as a substitute for cash reserves. Here is what Mr. Edelman says: “I am a firm believer in cash reserves. Once you determine how much you need for reserves, you must keep your reserves safe (meaning you cannot lose this money) and liquid (meaning you can get to it at any time without penalty). Only six places qualify: Your mattress, savings accounts, checking accounts, money market funds, U.S. Treasury bills, and short-term bank CDs.
When discussing Rule #21, Mr. Edelman uses a fable he calls A TALE OF TWO BROTHERS. Each brother secures a mortgage to buy a $200,000 home. Each brother earns $70,000 a year and has $40,000 in savings. The first brother, Brother A, believes a wise person always owns his home outright, never carrying a mortgage. The reasoning behind this familiar outlook was really quite simple: if the economy fell to pieces, at least you still had your home and the bank couldn't take it away from you. Maybe you couldn't put food on the table or pay your bills, but your home was secure. But the rules of mortgage lending have changed since the Great Depression. Banks can no longer call you up and say, “We're running a little short on cash and need you to pay off your loan in the next thirty days.” Additionally, the Fed is now quick to infuse money into the system if there is a run on the banks, as we saw in 1987 and Y2K. Also, the FDIC was created to insure banks. Still, it's no wonder the fear of losing their home became instilled in the hearts and minds of the American people, and they quickly grew to fear their mortgage. In the 1950's and 60's families would throw mortgage burning parties to celebrate paying off their home. And so, because of this fear of their mortgage, for nearly 75 years most people have overlooked the opportunities their mortgage provides to build financial security.
So now days it could make sense to pay your mortgage when due, but not before. It makes sense if you have the discipline to save and invest elsewhere what you would have paid the mortgage company in an effort to “burn your mortgage.” Take a look at the comparison in outcome between the Brother A and Brother B, who started at the same point financially, and ended quite differently. (See image)
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