Dear Homeowner: Are You Maximizing Your Mortgage Investment?

Dear Homeowner: Are You Maximizing Your Mortgage Investment?

Dear Samuel,

My wife and I are very concerned about the effect of the recession on the value of our home. We are planning on using our home’s equity to support our
retirement income, but our home has dropped in value from about $450,000 to $275,000 presently.

We have been paying $300 per month extra toward our principal, so we owe only about $80,000 more on it. As a personal finance expert, what advice can you offer the average homeowner? What can we be doing to secure our investment in our home without damaging our future retirements?

We would greatly appreciate your response.

Jim and Mary Allison

In the interest of full disclosure, this is a real letter from an actual couple, but I have changed their names before sharing this CRITICAL query and my response with you. The couple has given me their permission to do so.

My Response to Jim & Mary

Hello, Jim and Mary –

Thanks so much for writing and trusting me to offer a response. I’m pretty sure tens of millions of homeowners share the exact same concerns. I am pleased to share my thoughts with you.

Over my years as a financial strategist, I have always maintained and helped my clients understand that home equity is a great way to augment retirement income. But – and this is a BIG BUT – the manner in which this is accomplished is extremely critical. The majority of homeowners, like you, tend to follow conventional wisdom which, sadly, is outdated and wrong.

You see, striving to quickly eliminate your mortgage and building equity IN your home tends NOT to be financially savvy in most instances I have encountered. I understand the rationale that paying off your mortgage quickly might “save” you on interest payments. But consider what you could potentially “earn” by saving those extra dollars in a conservative side fund, instead of paying off your mortgage directly.

There are two intertwined truths in finance called Opportunity Cost and Arbitrage that suggest that there is a cost and benefit to all financial decisions. And whenever the benefit outweighs the cost, that is the more savvy option – because it will improve your net worth.

Over the years, I have recommended that our homeowner clients SEPARATE their home’s equity, to the extent it is financially prudent. The rationale behind my approach is the fact that home equity is not a safe investment when it is left to accumulate idle in a house.

As you mentioned in your letter, you and your wife have watched helplessly as $175,000 (the depreciation in your home’s value from $450,000 to $275,000) of your equity and retirement funding has vanished – never to be restored. I say that because if and when the value of your home recovers, it will be new money that returns, so to speak, as you would have made those gains in addition to the $175,000 lost investment if you had followed the approach I recommend.

On the other hand, say we had determined that your mortgage could be increased to $300,000, without any change in your overall spending outlay. So instead of paying that extra $300 per month toward your principle, you had paid it toward an increased mortgage payment, without your total monthly spending having changed by even a cent. So instead of holding $370,000 of equity (your home’s value of $450,000 minus your $80,000 mortgage) you would have held $150,000 ($450,000 minus a new $300,000 mortgage) inside the brick and mortar of your home thereby clearly reducing your risk exposure.

If that scenario had played out, even after the drop in the value of your home from $450,000 to $275,000, you and your wife would NOT have lost a penny of the $220,000 ($300,000 minus $80,000) that was separated from your house and placed in a conservative side fund – obviously, because it was SEPARATED.

Notice that your home’s value would have plummeted either way – with or without the equity in it. But your retirements would not have been compromised if you had employed the strategy I teach.

It would be a self-defeating strategy to separate your home’s equity – up to a financially sensible level, bearing in mind opportunity cost and arbitrage – and then exposing it to market risk. I must also point out that I recommend a conservative investment strategy for my clients. They do not lose a dime of their investment portfolios’ values when the stock market tumbles, because we simply link their portfolios to the market as opposed to having them invested directly in the market.

I hope this helps you and Mary understand, in a general sense, my recommendation. Unfortunately for the two of you, as I mentioned earlier, we can do nothing to regain your lost investment. We can merely hope to make up some of the loss sooner than later. I would be glad to meet with you to help you assess your situation in detail and make specific recommendations to help you safely, securely – and, quite frankly, sensibly – achieve your dream retirement.

Please call our office at (301) 949-4449 or visit http://www.laserfg.com/ to schedule your free consultation.

Best Regards,

Samuel
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Dear Readers:

This offer is not limited to Jim and Mary. I am extending the same offer to each of you. Isn’t it time you took control over YOUR financial future? Call today to schedule your free consultation.

Sincerely –

Samuel