How the Affluent Manage
Home Equity
to Safely and Conservatively Build
Wealth
Wealth
By: Eric R. Union - President, Union West Financial
UNION WEST
Steven Marshal - Founder & CEO, Strategic Equity Financial
Are you Brother “A” or Brother “B”?
A Tale Of Two Brothers
A Tale Of Two Brothers Ric Edelman and I have educated our
Adapted from the book The New Rules of Money.
Our story begins with two brothers, each earning $120,000 clients for years on the benefits of
a year. They each have $100,000 in savings and both are
integrating their mortgage into their
buying $500,000 homes.
overall financial plan. In his book, The
Brother “A” Brother “B” New Rules of Money, Ric tells the
Believes in “The Old Way” - Believes in “The New Way” -
paying off the mortgage as carrying a big, long story of two brothers, each of whom
soon as possible mortgage
secures a mortgage to own a $500,000
15-YEAR MORTGAGE AT 5.875% APR 30-YEAR MORTGAGE AT 6.375% APR (A HIGHER RATE) home. As you go through this tale, line
$100,000 BIG DOWN PAYENT - $0 LEFT TO INVEST $25,000 SMALL DOWN PAYENT - $75,000 REMAINING TO INVEST by line, you will see a remarkable
$3,348 MONTHLY PAYMENT (57% IS TAX DEDUCTIBLE FIRST YEAR/33% AVERAGE) $2,523 MONTHLY PAYMENT (100% IS TAX DEDUCTIBLE)
paradigm shift occur in your depth of
$2,983 AVERAGE MONTHLY NET AFTER-TAX COST 2
$1,690 MONTHLY NET AFTER-TAX COST 2
SENDS IN $200 EXTRA EACH MONTH WITH MORTGAGE PAYMENT IN AN ADDS $200 MONTHLY TO INVESTMENTS, PLUS $1,293 SAVED FROM
understanding of how to build wealth
3
EFFORT TO PAY MORTGAGE OFF SOONER LOWER MORTGAGE, EARNING 6.0% (MORTGAGE RATE IS HIGHER)
safely and conservatively – making
Results After 5 Years
your money work harder, instead of
RECEIVED $33,796 IN TAX SAVINGS 2 RECEIVED $44,955 IN TAX SAVINGS 2
HAS $0 IN SAVINGS AND INVESTMENTS HAS $205,330 IN SAVINGS AND INVESTMENTS 2
you working harder. These concepts
What if both brothers suddenly lost their jobs?
also apply to homeowners well after
HAS NO SAVINGS TO GET THROUGH THE CRISES HAS $205,330 TO TIDE HIM OVER purchasing their home, especially with
CAN’T GET A LOAN - EVEN THOUGH HE HAS $185,562 MORE IN HOME DOESN’T NEED A LOAN the home’s value appreciating.
EQUITY - BECAUSE HE HAS NO JOB
MUST SELL HIS HOME OR FACE FORECLOSURE BECAUSE HE CAN’T CAN EASILY MAKE HIS MORTGAGE PAYMENTS EVEN IF HE’S UNEMPLOYED
MAKE PAYMENTS FOR YEARS
AT THIS POINT HE MUST SELL QUICKLY, POSSIBLY AT A DISCOUNT, THEN HAS NO REASON TO PANIC SINCE HE’S STILL IN CONTROL - REMEMBER...
PAY REAL ESTATE COMMISSIONS (6-7%) CASH IS KING!
Results After 15 Years
RECEIVED $60,517 IN TAX SAVINGS 2 RECEIVED $149,866 IN TAX SAVINGS 2
HAS $51,832 IN SAVINGS AND INVESTMENTS 3 (PAID OFF EARLY HAS $618,249 IN SAVINGS AND INVESTMENTS 3
WITH EXTRA PAYMENTS
OWNS HOME OUTRIGHT HE HAS ENOUGH SAVINGS TO PAY OFF $475,000, MORTGAGE AND
STILL HAVE $143,249 LEFT OVER
Results After 30 Years
RECEIVED $60,517 IN TAX SAVINGS 2 RECEIVED $299,732 IN TAX SAVINGS 2
HAS $1,052,877 IN SAVINGS AND INVESTMENTS 3 HAS $1,951,434 IN SAVINGS AND INVESTMENTS 3
OWNS HOME OUTRIGHT NEVER PLANS TO PAY HIS HOME OFF - HE ENJOYS THE LIQUIDITY, TAX
SAVINGS, AND INVESTMENT RETURNS TOO MUCH!
The above hypothetical examples are for illustrative purposes only. Plans vary based on the needs and wants of the customer. 1 Assumes Brother
B refinanced at year 15 into another 15 year interest only mortgage at 6.375%. 2 Assumes combined Federal/State income tax rate of 33%. 3
Assumes 6.0% rate of return on investments. Rate of return may vary based on type of investment.
For a free analysis to see how these concepts would apply to your specific situation, please contact
Eric R. Union at 858.454.5343 or via email at ericunion@unionwestfinancial.com.
If you had enough money to pay off your mortgage right now, would you? Many people would. In fact, the ‘American
Dream’ is to own your own home, and to own it outright, with no mortgage. If the American Dream is so wonderful,
how can we explain the fact that thousands of financially successful people, who have more than enough money to
pay off their mortgage, refuse to do so.
T he answer? Most of what we believe
about mortgages and home equity, which
we learned from our parents and grandparents,
playing chess. The good news is the strategies
used by the wealthy work for the rest of
America as well. Any home-owner can imple-
common clause in loan agreements gave banks
the right to demand full repayment of the loan
at any time. Since this was like asking for the
is outdated at best, wrong at worst. They ment the strategies of the wealthy to increase moon and the stars, no one worried about it.
taught us to make a big down payment, get a their net worth. When the stock market crashed on October
fixed rate mortgage, and make extra principle 29, 1929 millions of investors lost huge sums
payments in order to pay off your loan as early Ric Edelman, one of the top financial planners of money, much of it on margin. Back then,
as you can. Mortgages, they said, are a neces- in the country and a New York Times Best you could buy $10 of stock for a $1. Since the
sary evil. Selling author, summarizes in his book The value of the stocks dropped, few investors
Truth About Money, “Too often, people buy wanted to sell, so they had to go to the bank
The problem with this rationale is it has homes in a vacuum, without considering how and take out cash to cover their margin call. It
become outdated. The rules of money have that purchase is going to affect other aspects didn’t take long for the banks to run out of
changed. Unlike our grandparents, we will no of their lives. This can be a big mistake, and cash and start calling loans due from good
longer have the same job for 30 years. In many therefore you must recognize that owning a Americans who were faithfully making their
cases people will switch careers five or six home holds very important implications for mortgage payments every month. However,
times. Also, unlike our grandparents, we can no the rest of your financial plan. Although a fine there wasn’t any demand to buy these homes,
longer depend on our company’s pension plan goal, owning a home is not the ultimate so prices continued to drop. To cover the
for a secure retirement. A recent Gallup survey financial planning goal, and in fact how you margin calls, brokers were forced to sell stocks
showed that more than half of the nation’s handle issues of home ownership may well and once again there wasn’t a market for stocks
adults feel they do not have enough money for determine whether you achieve financial so the prices kept dropping. Ultimately, the
retirement. success.” Great Depression saw the stock market fall
more than 75% from its 1929 highs. More
Unlike our grandparents, we will no longer live than half the nation’s banks failed and millions
in the same home for 30 years. Statistics show Why People Fear Mortgages, of homeowners, unable to raise the cash they
that the average homeowner lives in their And Why You Shouldn’t needed to pay off their loans, lost their homes.
home for only seven years. And unlike our Out of this the American Mantra was born:
grandparents, we will no longer keep the same In order to discover how our parents and Always own your home outright. Never carry a
mortgage for 30 years. According to the grandparents got the idea that a mortgage was mortgage.
Federal National Mortgage Association, or a necessary evil at best, we must go back in
Fannie Mae, the average American mortgage time to the Great Depression. In the 1920’s a The reasoning behind America’s new mantra
lasts 4.2 years. People are refinancing their was really quite simple: if the economy fell to
homes every 4.2 years to improve their interest pieces, at least you still had your home and the
rate, restructure their debt, remodel their bank couldn’t take it away from you. Maybe
home, or to pull out money for investing, Common Home Equity you couldn’t put food on the table or pay your
education or other expenses. Given these
statistics, it’s difficult to understand why so Misconceptions bills, but your home was secure. Since the
Great Depression laws have been introduced
many Americans continue to pay a high Many Americans believe the following that make it illegal for banks to call your loan
interest rate premium for a 30-year fixed rate statements to be true, but in reality they are due. The bank can no longer call you up and
mortgage, when they are likely to only use the myths, or misconceptions: say, “We’re running a little short on cash and
first 4.2 years of the mortgage. We can only need you to pay off your loan in the next thirty
Your home equity is a prudent
conclude they are operating on outdated days.”
investment.
knowledge from previous generations when
there were few options other than the 30 year FALSE
Additionally, the Fed is now quick to infuse
fixed mortgage. Wealthy Americans, those with Extra principal payments on your money into the system if there is a high cash
the ability to pay off their mortgage but refuse mortgage saves you money. demand on the banks, as we saw in 1987 and
to do so, understand how to make thier Y2K. Also, the FDIC was created to insure
mortgage work for them. FALSE
banks. Still, it’s no wonder the fear of losing
Mortgage interest should be their home became instilled in the hearts and
They go against many of the beliefs of eliminated as soon as possible. minds of the American people, and they
traditional thinking. They put very little money FALSE quickly grew to fear their mortgage. In the
down, they keep their mortgage balance as 1950’s and 60’s families would throw mortgage
high as possible, they choose adjustable rate Substantial equity in your home burning parties to celebrate paying off their
interest-only mortgages, and most importantly enhances your net worth. home. And so, because of this fear of their
they integrate their mortgage into their overall FALSE mortgage, for nearly 75 years most people have
financial plan to continually increase their over¬looked the opportunities their mortgage
wealth. This is how the rich get richer. The Home Equity has a rate of return. provides to build financial security.
game board is the same, but while most Ameri- FALSE
cans are playing checkers, the affluent are (continued on back)
Why People Hate Their Mortgage, And Why You Shouldn’t
Many people hate their mortgage because they know over the life of a 30 year loan, they will spend more in interest than the house cost them in
the first place. To save money it becomes very tempting to make a bigger down payment, or make extra principal payments. Unfortunately, saving
money is not the same as making money. Or, put another way, paying off debt is not the same as accumulating assets. By tackling the mortgage
pay-off first, and the savings goal second, many fail to consider the important role a mortgage can and should play in our savings effort. Every
dollar we give the bank is a dollar we did not invest. While paying off the mortgage saves us interest, it denies us the opportunity to earn interest
with that money.
Why People Should Not Use This Strategy
People who consume instead of conserve should not use this strategy. Paying down mortgage principal is a habit and so is paying into an
investment plan. However, if you fail to pay a mortgage payment you will lose your house but if you miss an investment payment will you
suffer a similar fate? If you have not established a habit of saving then you should not try to start one with this strategy, unless you have an
extremely compelling reason to do so.
Most people have developed a habit of conserving by feeding their 401k, IRA and/or savings account. Tithing also demonstrates the habit of
saying, “No,” to your desire to consume. Financially successful people tend to have a well defined investment system to feed and a strong
advisor to guide them.
Eric Union is the President of Union West Financial, a boutique mortgage planning practice. While most
mortgage companies are transaction-focused, in contrast Union West Financial is a 100% referral based business
which looks at a customer’s entire financial picture and then gives specific advice to optimize the entire debt side of
the balance sheet.
All of this great financial advice comes from a very centered place: Eric is living a purpose-driven life with the
specific goal of helping reduce the financial stress in people’s lives which is a leading cause of marital failure and
family breakdown. His mission is to help people become financially bullet-proof and on a wealth growth path
leading to true financial independence. Staffed by professionals averaging over 15 years each in the financial
industry, Union West creates a unique multi-year financial plan for each of the hundreds of clients served.
Address Other Offices
1200 Prospect St., Suite 425 Rancho Stanta Fe
La Jolla, CA 92037 Mammoth Lakes
Tel: 858.454.5343
Fax: 858.454.6771 UNION WEST
ericunion@unionwestfinancial.com
www.unionwestfinancial.com
Financial