SHOULD YOU LEVERAGE YOUR HOME?
Should You Leverage Your Home or
Pay It Down Rapidly?
By David Witt, CEO / Mortgage Planner
Concept Lending Group
Phoenix-AZ – There is a great debate within the inner-mortgage circles these days. Should we, as loan professionals, encourage clients to borrow as much money as possible? Or would consumers benefit more if we helped them to understand the advantages of 15-year amortization schedules and pre-paying principal? Let's examine the pros and cons of both strategies.
Leveraging Your Property. In order to understand why you'd want to borrow as much as possible for your home purchase, you must first grasp the concept that equity has a zero rate of return. Here's an example:
If Consumer "A" buys a home for $300,000, and puts 20% down, then they have $60,000 in equity. Over the next 5 years, the property appreciates $100,000 in value. Consumer "A" now has $160,000 in equity.
Consumer "B" buys a home for $300,000, and puts no money down. At the end of 5 years, that same home is now worth $400,000. Consumer "B" has $100,000 in equity, which is the same appreciation as Consumer "A", a net $100,000.
As you can see, your down payment has nothing to do with your rate of return. What becomes important is how you choose to manage the $60,000 you didn't use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest rate.
However, if you were to invest the $60,000 in a vehicle that can out-earn the cost of that debt, then this could be a formula for success. This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest. This principle has been applied for many years in the life insurance game. The old saying goes, "Buy term and invest the rest." The key component is taking the money you would have used as a down payment and creating an asset accumulation account. This account should earn a significant enough rate of return to enable you to pay your mortgage off entirely and achieve the ultimate goal of being debt-free.
Paying Your Home Down Rapidly. There are very few times over the course of my career that I have seen a client with zero debt and no financial difficulties. Choosing to pay off all of your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage or a bi-weekly payment strategy provides structure. It can also put you on track to have your mortgage paid off within a set timeframe. Simply put, it contains built-in discipline.
It's important, however, to understand that regardless of how rapidly you pay your home off, you're not getting any greater rate of return on your investment than if you paid it off slowly.
Conclusion. So how does one determine which scenario is best? The choice depends entirely upon the individual. Savvy consumers who are disciplined, and are comfortable taking chances from an investment perspective, would do well with the first scenario. Over the course of time, it's been proven that your rate of return over the long-haul will be far greater than the rate you'd pay for a mortgage in today's rate environment. It's important to seek the advice of a skilled investment advisor to ensure success with this strategy.
The second scenario is best for those who have a difficult time managing their money or who'll sleep easier at night knowing they have a plan in place to pay their loan off more rapidly. Be sure that your budget can handle accelerated payments. When consumers "bite off more than they can chew" with a 15-year mortgage, they frequently end up having to refinance back into a 30-year schedule.
If you find this subject intriguing and would like to know more, I recommend that you read a book titled, Missed Fortune 101, by Douglas Andrew. It's an outstanding read that is very simplistic and goes into far greater detail than I can cover in this column. Douglas is a financial planner who advises safe-structured investments such as whole life policies and tax-free fixed income instruments.
. If you would like to obtain a FREE CD Interview with financial planning expert and best-selling author, Douglas Andrew, please David J Witt at 800-628-8868 #15
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David J Witt
Concept Lending Corp.
To contact David Witt
There are numerous opportunities for recreation in the deserts of Arizona. Travel on foot or in a vehicle can be an exciting and rewarding experience. No one plans on getting lost, breaking down, or experiencing other mishaps. Being prepared will keep you safe and make for a memorable trip.
Always be sure that someone knows where you are going and when you expect to return.
Never travel alone on foot or by vehicle. Flash floods do occur. Avoid camping in washes when there is a threat of rain. Do not attempt to cross them if they have water in them. It is probably deeper and faster than you think.
DEHYDRATION: The only way to avoid dehydration is to drink water. Don't rely on your thirst to determine when to drink. Make a habit of drinking water at frequent intervals. Don't ration your water.
One gallon of water or more per person per day is the minimum amount of water you should carry. In hot weather, two gallons or more is strongly recommended. The amount of water someone needs varies from person to person. Remember, it is better to carry too much water, than to run out.
Make sure to wear clothing that is light in color and loose fitting. A wide brimmed hat, long sleeved shirt, and long pants will hold perspiration rather than exposing it to the dry desert air. Conserve sweat, not water.
LOST/STRANDED: If you become stranded or lost in a vehicle, stay there. It is easier to find a vehicle than a person in the desert. Find or make shade. Ground temperatures can be up to 30 degrees hotter than the air 12" above. Signals will increase your chances of being found. Any type of flare, signal mirror or smoke signal will help make your location known. The universal distress signal is anything occurring in threes. An example would be three blasts of a whistle or a horn.
If you are on foot and must travel, do so when it is cool. Otherwise, seek shelter from the sun. Mark your path with stones, notes, etc. If you leave notes, include the date, time, and your direction of travel.
MINES: Abandoned mines exist throughout the deserts of Arizona. Entering mines is dangerous. Poison air and cave-ins can and do occur. Several species of wildlife make their homes in mines. Do not enter mines or disturb the wildlife inside.
ANIMALS: All animals, whether poisonous or not, should be respected. Respect their boundaries by enjoying them from a distance. If you are sleeping outdoors, use a cot. This will keep desert creatures from trying to move in with you at night.
BEES: Unfortunately, Africanized "killer" bees have established themselves in desert areas of Arizona. If you encounter a large number, swarm, or hive of bees, leave the area immediately.
Here are a few essentials to bring with you when visiting the desert on foot:
__food and water (bring extra)
__whistle and signal mirror
__sunglasses and sunscreen
__pocket knife or multiplier tool
__first aid kit (and the knowledge to use it)
Along with the items listed above, if you are traveling by vehicle or off-highway vehicle (OHV), remember the following:
__tool kit (wrenches, screw drivers, etc.)
__extra parts (spark plugs, belts, hoses, chain master link, etc.)
__extra fluids for vehicle (oil, coolant, gas, etc.)
__high lift jack
__spare tire or tire sealant/repair kit and air pump
__signal devices (mirror, flares, etc.)
__duct and electrical tape
__radiator stop leak
__fifty feet of parachute cord
__$6.00 - a $5.00 bill and change for a pay phone