Mighty Bargain Hunter

By Karen on Aug 1, 2005 | Reply

Thanks for the warning - even for a beginner like myself his logic is obvious bs, judging by your review and inclusions of material.

By Rick on Sep 9, 2005 | Reply

I am one of those “financial planners” who have read and use Missed Fortune 101 as a base for my seminar and consulting. Some of the stuff he teaches I don’t sgree with, but I do think people need to be more “liquid” then what they are. I also believe that people MUST take advantage of there 401(K) especially when companies match! So from a “common sense” stand point, what interest rate would you pay to get a guaranteed 50% return on your investment? Would you borrow money from your home at 6% to put it in your 401(K) to get a guaranteed 50%, plus an extra tax deduction? I just don’t recommend using an insurance policy as an investment.

By Rick on Sep 9, 2005 | Reply

mbhunter:

I don’t recommend people (for the most part) refinance their home and take the equity out and invest it for a lot of reasons. I recommend “interest only” type mortgages. Let’s says that instead of paying a 5% fully amortized principal and interest only loan on a $200,000 loan (the payment would be $1073.64), on an interest only loan, your payment would be $833.33 per month, a difference of $240 per month. Now if you take that $240 per month, put it in your company’s 401(K) with a 50% match, you are now putting $360 per month into your 401(K) every month (Remember the company matches 50% on everything you put in),in 30 years that account would grow to over $250,000 assuming a 5% rate of return ($20,000 in 5 years). In 30 years you could take the $200,000 and pay off the mortgage and have $50,000 left. Now I don’t know if I would recommend taking the whole $200,000 out at one time and paying off the entire mortgage. I don’t have a crystal ball what things will be like in 30 years, so don’t know what tax consequense will be like (if any)! (We still haven’t even touched upon reverse mortgages and why people with their home paid off are refinancing!).

Are there tax consequences, probably, but I didn’t even mention $2,880 tax deduction you get every year for putting the money into the 401(K)! If you’re in the 34% tax bracket, you now have almost an additional $1,000 you could put into that account with still a 50% company match. Now in 30 years that account would grow to………almost $350,000! If yiu assume a 6% rate of return, that number goes up to nearly $420,000! With almost $30,000 available in 5 years! Now keep in mind, we don’t recommend people invest in company stock type investments. We are looking for something safe and conservative.

The point is this. Alan Greenspan (THE MONEY GUY) said in a speech MOST people should not be in 30 year FIXED mortgages, yet most are. Why are they when the average person will refinance or sell their home 3 times in a 7 years period of time? because our parents told us too! The same parents who retired from a company after working for them for 40 years and always lived in the same home! Americans do not have savings. When you make a 30 year commitment, you have no idea what is going to happen in that time from job security, to health, etc.

You could have $100,000 equity in your home, lose your job and I guarantee you are not getting a loan, won’t be able to refinance the house and get the money out, etc. Unless you do something “illegal,” or you can qualify for a loan just based on your spouses income.

By Rick on Sep 10, 2005 | Reply

1. You can get interest rate only mortgages that are fixed. You don’t end up owing anyone anymore interest, remember you are making interest only payments, not principal payments.

Let me ask you a question, would you invest $1,200 a month for the next 15 years (for a total of $216,000) to get $58,000????? That’s exactly what you get with a regular mortgage. After 15 years on a 30 year mortgage for a $200,000 mortgage @ 6.00%, you still owe more than $142,000 on that $200,000 mortgage!!!!!! Let me repeat that, after 15 years on a 30 year mortgage, you still owe 70% of what you borrowed! Depressing when you think about it isn’t it? The majority on the first 18. 5 years the payments are going to interest!

Now we can argue about I have to pay something to live there. Right, but why pay more for an “investment” that is losing money than you have to? People need to understand that their home is their asset, NOT their mortgage!

2. Every “high income, high net worth” person I know has an ARM, even though they could “afford” the 30 year fixed. Look at Donald Trump the most famous billionaire and how leveraged he is when he doesn’t.

3. Now your last statement about hopefully have other assets, you could sell the home and live off the $50,00-$70,000 left over. Why lose the $30,000 to $50,000. Why not have that $100,000 in something liquid so you don’t have to sell those first 15 years ????

The thing to remember here is that you are making a 30 year committment and there are a lot of things that are variable in those 30 years. Your home is the asset, not the mortgage!

By Rick on Sep 11, 2005 | Reply

ALL my clients say the same thing when they start out, but almost 70% “see the light.”

I have started reading the book and for someone who has an MBA in this stuff, it was still somewhat confusing to me, so I understand the negatism.

Scott Burns even wrote in an article: • Overstating tax benefits. Every illustration in the book is based on a 33 percent state and federal tax rate. In fact, few face such tax rates. Certainly, the Prudents, the $70,000-a-year couple on Page 161, don’t face a 33 percent tax rate. They face a 15 percent federal tax rate plus a possible state income tax.

Mr. Burns needs to check his tax tables! Because right from the IRS tax tables a married filing jointly has a 25% tax rate for income $58,101 - $117,250 and to assume an 8% state income tax rate on top of that, isn’t too far off.

I can go through thousands of scenarios, but everyone’s financial goals and situations are different. It boils down to peace of mind. But most people have credit card debt that they are paying double digit interest rates on and that will take 30+ years to pay off and non-deductible interest.

I am in an industry where people will be available 24/7 for customers, they will wash their cars to get their business, give them a tank of gas, etc. Me, I am only available during normal working hours and will only take on 10 new clients per month and the customer has to come to me! In addition, if they just decide not to show up for their appointment (without calling ahead of time to cancel), I respectfully tell them “I can’t help them.”

I leave you with this and wish you all the best. You talked about having $100,000 equity in home. Does the value of your home change whether or not you have $100,000 or $0 equity in your home (of course not). But take that $100,000 and buy an additional $500,000 to $1,000,000 in real estate with it and wouldn’t that change your financial situation?

By Don on Sep 23, 2005 | Reply

Unlike Mr.MBH,I have had an adjustable rate mortgage of one kind or another for the last 19 years. ( Yes, as per Mr. Greenspan, I have ( for the most part) paid below average rates and saved a small fortune in that time period. I believe the next 20 years to be much of the same.

And no, I don’t ever strive to pay down my mortgage. Why should I? Because you know who is going to pay off my mortgage for me in the end? That’s right. The life insurance company. That’s who.

No, I won’t be around to enjoy that, but my wife will. And in the meantime, I take dollars I would be paying to the mortgage company, and I invest them.
Is this sinking in yet?

Second, I have actually used Mr. Andrews advice, and my assets are growing like weeds, AND I get to sleep well at night because they are not subject to stock market volitity or even a crash like 1997, 2000, and of course the next one that will surely come at some point.

I say this because even though the tax benefits of a 401k are obvious, you live will the false notion that you are safe and secure in stock mutual funds as a form of investment for your 401k.
( Yes, I understand you probably have some bonds too, which can also lose money if rates rise)

What you have not lived through ( and what you have forgotten in your lame analysis)is that unless you have 25 years to withstand a stock market drop, ( yes, you might, but lots of people don’t) your portfolio is going to lose a lot of it’s value at some point in time.

Unless you have years to make that up, your portfolio is going to suffer lack luster returns at best.

Do you think someone in say their early 40’s can take a 20-25%% hit on a stock portfolio that took them 20+ years to accumulate? No they can’t. Not if they want to retire at 55 or better.

So maybe you should read Doug’s book again. His methods work. But sadly you don’t understand them because you fail to grasp how real life really works.

I don’t blame you really. You haven’t been through a stock market collapse, or you were never in danger of losing your home.(and thus giving up all those prepayments you made to the mortgage company.)

You need to re-read the book, and maybe, just maybe, you’ll see that after 30 years of doing this, the guy knows what he’s talking about.

By daniel on Sep 30, 2005 | Reply

Hey MBHunter, the fact is that with the type of logic you are talking about, you are basically running from debt instead of moving towards wealth. Noone says you have to pull all of your money out of your home and put it in a life insurance product that you are not comfortable with, but there are many things that can achieve goals for you that you would never even think of otherwise if you were to stop running from any sort of debt. There is good debt when other peoples money is used to put money into your pocket. Besides, last time I checked, there was risk in real estate as well… I think had a great example of a very conservative plan with the interest only savings being put into a 401K or whatnot. You still pay off your home in 30 years (although I would probably just throw a party and PRETEND I paid it off) and you have an extra 50 grand to do whatever you want with. Anyways, you are obviously a good guy, but I think there are alot more options out there for you that dont necessarily mean you have to place it all on black.

But I am not washing your car for business either…

By Erik Johannessen on Oct 6, 2005 | Reply

Those of you who dispise this book are severely missing the message. The book explains clearly why equity in a side fund is better than equity in your house. I can show you 10 out of ten times, how taking 200,000 in equity out of your house, will generate a higher retirement, than sending $1000.00/mo extra to your mortgage company just to pay it off early. Having a side fund gives you safety, so if you HAVE financial trouble, you won’t have the trouble of needing to access your equity and not be able to get it. And coming from an HR background, most companies only MATCH 401(k)s up to a percentage of contributions made. Those matching dollars, typically will end up paying the TAXES due on the 401k money when accessed in retirement, so its a wash anyway. The point is simple. Its not a BILLBOARD for the insurance and mortgage industry. Its about responsible retirement. SURE.. we’re going to pay interest on our mortgage forever.. if we want. But we always have the choice to pay it off with what we have invested. Its always better to keep that money safe, and set aside. And, the example of the 100,000 asset and the 100,000 mortgaged home.. its a WASH on DAY ONE ONLY.. once the cash and the home appreciate.. and the equity is continually moved to the side fund.. the assets grow much quicker.. due to compounding.. you are missing the real meat of the process. Give me an example of why you feel this info is BS, BOGUS.. whatever you want to call it.. and I’ll show you examples of how its the best idea out there for a safe secure retirement.. you still want your money in a 401K that can tank 40-60% like it did in 9/11???? How can you PLAN a retirement when you your money has no PLAN.

By Nate on Oct 25, 2005 | Reply

I believe several of Mr. Andrews points are well articulated; however, here are a few points to think about. The MF plan will work for most “disciplined” people. I am a mortgage planner and work with various financial planners who recommend this type of plan to their clients, and I’ve seen many homeowners build quite a bit of wealth using their equity to build up side funds and acquire more real estate. I’ve also seen many homeowners take cash out from their home and buy: (1) boats, (2) expensive cars, (3) luxury type personal goods, and other various depreciating assets. The MF plan will only have a chance to succeed for those people who are well disciplined with equity from their home. I have seen quite a few people squander equity from their homes on these types of items, thus defeating the purpose of this plan and putting them in a worse financial position.

By CJ on Oct 28, 2005 | Reply

I’d say that people who post stuff on sites like this have NO idea what they’re talking about. I will say, for an average American, you can’t take a book like this word for word either. Seek the advice of a QUALIFIED Financial Advisor. You wouldn’t try to do open heart surgery on yourself. Why would you think you can manage your finances at a high/efficient manner?

By George on Nov 5, 2005 | Reply

Having been both a Mortgage Planner and a Debt Elimination Specialist for the last 16 years I can see both sides of the story make sense.

On one side we have the argument that on a 100,000 @ 6.5% with monthly Principle and Interest Payments of 632 per month that you will pay a total of 127,520 in interest.

Also, the tax advantage for paying 6,467 (the first years interest)@ 15% tax bracket is only 970 in the difference in the amount of taxes and that 5497 is going to the lender’s pocket.

For years I have told clients of mine that it is much better to pay the 970 in taxes and keep invest the 5497. After all that makes perfect sense right?

Now let’s take a look at the other side of the coin…We have the same 100,000 and monthly payments of 632 per month.

We invest that 100,000 in something (it really doesn’t matter whether it is insurance or a 401K)that is either tax deferred or tax free earning 6%.

Now if you are saying that you cannot find an investment returning that then I would suggest doing some research online at different stocks or yes even insurance annuities you should be able to find some investment earning a 6% return on your money.

Let’s take a look at just one years interest would be…well it would be 6,000 now that seems like we are losing money but remember the tax savings of 970 and we have 6970.

No much in the earnings dept. but that is only one year each year the investment will grow and the interest paid will decline if you make regular principle and interest payments.

I don’t think it is the case of whether the concepts work, afterall, the concepts of using equity for building wealth has been around for awhile and as we can see from the posts here that it is working.

I think the key here is what is our risk tolerance. There is no right or wrong way to create wealth in this day and age it is really only a matter of choice.

By MF-Skeptick on Nov 19, 2005 | Reply

mbhunter-in your posts, “believe”,”think”,”hope”,”suffer”,”think”… how much of your analysis is fear/emotion based as oppossed to fact based.. I wonder

By James on Nov 24, 2005 | Reply

The 401k has to be the biggest boondoggle ever created by the US Congress. There are certain things for sure in life. Taxes, Death and that Taxes will go up not down over time. Never invest heavily into something that gives you tax advantage going in but not coming out such as the 401k’s and IRA’s, now the Roth? That’s an animal of another stripe, you pay taxes going in and free of taxes coming out. On average any tax savings you realize with 401’s and IRA’s will be given up within 2-3 years when you start taking funds out of these saving vehicles, something most so called Financial Advisors who are basically nothing but schills for the Securities Industry will not tell you.

I have my 6 License, it took two weeks people and it wasn’t that hard! Now my 7 License, it took 3-4 weeks of reading the books and practice test on the CD which is basically the test. Now the 7 license cost about 400 dollars and consumes 4 weeks, less if I devoted full time to it. Now comes the 63 and or 65. Not much harder and yes more time but really it’s a joke at best. Yet though I charge more for fees then I could of with just an Insurance License. Yet though, I don’t understand my brethen touting nothing more the a 7 or even a 65 License as being expert in anything other then knowing how to run a computer program and kicking out paperwork that means nothing!

Now I’m all in favor of the stragedy that Mr. Andrew suggest and with the new Roth 401 there is yet another vehicle you can use outside of a good heavily funded EIUL or a good particapting WL Policy. With the new Roth 401 you can dump 15 grand a year and grow and payout tax free which is quite powerful! Even though with MF, the insurance cost is nominal if you have it built correctly, something most Financial Advisors or even Insurance Agents really aren’t good at. Most Agents or Financial people peddle these contracts but rarely understand how they are built. If you invest in this theory it is of utmost importance to find an expeirence agent that knows how to put these EIUL’s or WL Policies together because if done wrong you could end up with a mess and greatly indebted to good ole Uncle Sam if these policies ever lapse or ends prematurely.

Happy Thanksgiving and to all a very Merry Xmas to everyone!

By Gman on Dec 20, 2005 | Reply

Noticed the thread. Food for thought for all of the people who disagree with Doug. How much $$ do you keep in your mattress? None right? No one does that, yet tons of people are in a hurry to get a quarter million in their walls. When you bought your house, did you care close the previous owner (if any) was to paying it off? Of course not. When you separate the hundred grand from your house, the situation hasn’t changed: you still have a roof over your head, you just happen to have 100 grand (or 117 months give or take) to pay your mortgage if you lose yur job, market tanks etc. It’s leverage, and it’s how money moves and how the rich get richer. Anytime you want to pay the house off, you simply liquidate the 100 grand from wherever it was (in Dougs case the policy) but why? Hope that helps. There is good discussion here. happy Holidayz

By cory on Jan 3, 2006 | Reply

One thing you might want to concider is this. If you were in Florida in a 800,000 home. The hurricane hit you, and you lost your job or your restauarant or whatever it is you do to produce income to pay your bills. Where would you rather be? With a home owned free and clear and a small side fund that you’ve accumulated over the years by “saving” each month? OR would you rather have an 800,000 home with an 800,000 mortgage AND 800,000 in the bank to help get you through the tides.

I can see the con’s to Doug’s methods, however, the key to any prudent investment includes “liquidity” and “saftey”. Do you think the banks are just flying by giving mortgages to everyone in Florida to help them out of their finanical troubles? If you try to tear apart saftey in the “market”, then you might want to try to look at the saftey in the home. Katrina and other disasters like medial emergencies prove that you can essentially “lose” all those savings in your home if you can’t access them.

My Two Cents

By Paul on Jan 13, 2006 | Reply

Hello,

I just attended a Seminar on “Missed Fourtune 101″ and I think that some of the post’s are missing one important thing. When you take 100K out of your home worth 100K, They wash out when Assets an Liabilities are combined but they don’t when you look at your total wealth. You actually have 100K worth of cach and a home that is in your name worth 100K. This is a clear distinctioni between the pure accounting model. The fact that the home appreciates while your “Holding it” is pretty important because you get the appreciation. On the investment vehilce side of the equasion, you can find Life Insurance Policies that provide floors and ceilings that can be pretty attractive. If you got one that had a 1% floor and a 17% ceiling tied to the S&P, wouldn’t that be enough? Yeah, it’s not like the .COM returns but who really expects to do that consistently? the S&P average is about 9.5% over the long haul. That is a pretty good rate considering the housing market is a few percentage points lower than that. The tax free status of the proceeds looks attractive also. I would agree though that this is not for the non-committed or the weak at heart. You need to be diciplined to make this work but you can’t argue the numbers…

By lee eakin on Feb 21, 2006 | Reply

Owning my home free and clear, frees up current earnings to save and invest.
Becoming truly debt free and living within my means, is the best feeling of freedom I can think of.
Lee Eakin

By John on Feb 23, 2006 | Reply

James got it right. 401K/ IRA’s are a crock. Defer a few pennies now and oh by the way, defer the tax calculation also. Do you think it will be lower? Doubt it.
I’m all for living within my means, as long as I can do what ever I want with out restrcitions.
Lastly, ask Senator Lott if it was a good idea to have a 800K home, paid off of course. Katrina came along and he loast half his equity. I don’t know about you, but I feel if he had the cash in a side fund, he would be in a much better position. Even a bargining position. Heck, Maybe the banks would have helped him fight the Insurance companies that were suppose to protect his investment, I mean home.

By Brian on Mar 3, 2006 | Reply

Interesting thread. I am a mortgage broker and have just started learning about the MF concepts.

Thanks for posing the questions and challenging the theories.

It seems to me the MF camp is winning the debate here.

I haven’t seen a proof on owning the home free and clear yet other than “it Feels right, I sleep well at night knowing its paid for.”

By pxl on Mar 7, 2006 | Reply

$100,000
(i’m going to greatly simplify the numbers, exact to the penny means nothing when doing a 30 yr projection)

30 yr amortized –> after 30 years, you have a)paid up house, b)no house payment, and c)about $200k ($100,000 original loan, and about 100k in interest, assuming about 6%) paid out over that 30 year period.

30 yr interest only –> $500/mo interest payment, $100 in an interest bearing account (money you would’ve paid to principle in a 30yr amortized at 6%). at 30 years, you will have paid a total of $180,000, and your growth account will, at 6%, will be at $100k. Take your 100k, annuitize it, and you’ll end up with roughly 8000/year in income. Use $1000/year to buy a 100k life insurance policy.

So let’s compare the two:

30 yr amortized: $200k cost out of your pocket. $33k in tax savings for a 33% tax bracket. Paid up house. No Income. Property Tax u’ll still have to pay (and you’ll lose your house if you cna’t pay your property tax). You’ll have no home loan, therefore no tax deduction (for example for your 401k income)

30yr interest only: $6000/year mortgage payment, $100k life insurance policy, $60k tax savings, $6000/year tax writeoff, $7000/year life income. If u’ve got a 401k, then that 6k/year alone will represent a 2k/year tax savings over the 30yr amortized schedule.

there are better ways to do it, but this is a pretty middle of the road method.

also, during the 30 years of an amortized schedule, or the 30 yrs of interest only and invest the difference, your financial outlay is EXACTLY THE SAME. Under a 30yr amortized, u pay about $600/month to the lender. Under the 30yr interest only and invest difference, u pay $500 to the lender, and $100 to an interest bearing account.

Money out of your pocket, exactly the same.

As for tax savings, you’re getting a deduction on just $100k over 30 years with the amortized schedule while you can deduct $180k over 30 years in an interest only situation.

As for making the payments, you’ve now got a life annuity that’ll pay for the house and property tax, and a life insurance policy that will also pay for the house, and a deduction on your 401k income during retirement.

For both, if you miss enough payments, you’ll be in the same boat: no house.

Also, 401k’s are for pre-tax dollars and i agree they are one of the worst things to be brought upon americans. if you think about it…. the government is allowing u to put away money tax deferred so that they can then collect tax on a larger balance… and let you, the american tax payer, do all the work, and bear all the risk. To add insult to injury, if you think u can outsmart uncle sam and just not withdraw money, then at age 70 and a half, you’ll be force to or face a penalty. Also, irregardless of need, if at anytime before age 65 that u were to touch any of it, u’ll lose about half (33% tax bracket, 10% federal penalty, 6% state penalty). They tease you by saying you can take 50k out for a house. What they don’t tell u is that that 50k has to be paid back in 5 years or else it’ll be taxed and fined. Also, if u so happen to get enough social security, then there’s also the very real possibility of those social security checks bumping u up to a higher tax bracket. Or even put u in a spot where u’ll pay taxes on the 401k income AND the social security money.

whatever you do with your money is at your discretion. And do whatever suites you. i think that the main point illustrated here in this blog and these comments is that here in the US, we’ve got so many options as to keep all of you guys up at night. And that in itself is both a wonderful and horrible thing. :o)

By pxl on Mar 7, 2006 | Reply

hi mbh

ya, i get what you say about sax savings. but the above still holds true even if you take the tax deduction out of there. just one less item in the lists.

and you have to agree that inaction due to fear for what’s coming tomorrow only breads and leads to procrastination. so we all have to do the best we can with what we’ve got to work with… not much different from changing your 401k fund allotments… you use whatever information you have now and do the best you can.

i will give you that the 401k match is a great thing, when compared to anything else conventional out there. But this matching comes at the price of liquidity. You can’t touch it until you hit age 65. and at that point, you have to pay taxes on that.

So let’s say you have $500k saved up in your 401k… if we assume an average of 6%, over 30 years, then that means about a $250/mo contribution and a 100% company match. Then, at age 65, you retire, and you want to preserve your principle… what’s the point of saving for 30 years if you’re going to lose it all… and the general concensus amongst financial institutions is that a withdrawal rate of 4-5% will give you about a 90% of never running out of money during retirement. so 5% of 500k equals $25,000/year. In a 15% tax bracket, that nets you $21,250/year in income.

alternatively (i’m not promoting the MF principals, just looking at it objectively) doing the same thing with, say, an appropriately designed life insurance policy to minimize insurance and maximize cash value, will get you to about $250,000… using the same assumptions of $250/mo contribution, 6% interest, 30 years (a little lower due to cost of insurance). Now, take a loan or withdrawal from the policy, which has tax free treatment, and that $250k in cash value will generate about $30,000 in income. And on top of that, you’ll have about $150k of the life insurance’s face value.

so choosing to accept the free money will net you a $22k/year income and no liquidity. Doing it with techniques described in chapter 11 of MF will net you $30k/year, 90% liquidity, and $150k in life insurance. That’s a 36% increase in net spendable income.

and how is contributing to a 401k for the spectre of a company match not increasing commitments? Having a 401k commits you to put away money and not touch it until age 65.

By pxl on Mar 7, 2006 | Reply

yup, u sure are charged interest on the loan, say 6% on the 30k. but you’re making that same 6% on 250k, so in this case, the interest is a wash.

By Eric Nghiem on Mar 7, 2006 | Reply

Let’s face the facts; this is an emotional topic on both sides of the fence. You got Mr MBHunter, joe average consumer, and other folks who have either implimented the program or are a financial planner that is implimenting the program. Wanting to pay off the house and wanting to separate equity for liquidity and safety are both emotional decisions that may or not be based on logic and fact.

1)…there is a difference between compounded interest and straight interest. A bank account earning and compounding at 5% will greatly outpace a note costing 5% over a long term. A 5% bill at 100,000 note will always be $5000, where a 5% investment on your 100,000 will only be $5000 first year and grow beyond that from there.

2)….you can get a 30 year fixed interest only mortgage. These are FHA standard loans…nothing fancy.. This eliminates the objection of if the fed increases the rate down the road on my ARM

3)…The IRS can do anything they want with taxes and deductions. If we consider them eliminating the mortgage writeoff to cover government debt, we also need to consider increasing the tax brackets as well, reintroduction of estate taxes, re-establishing the “success tax” of the eighties etc. The IRS is a variable that we cannot really consider into the equation other then the fact that we will always pay taxes. That and the fact that the write-off on the mortgage is really just icing on the cake for the strategy.

3)…There are full disclosure insurance products that have below industry fees and expenses, extreme liquidity and allow you to borrow funds out of a policy at what’s called a zero spread loan….where it’s contractual that they will charge you 6 and credit you 6% for the IRS purposes of showing a loan.

In the end, it’s all a big emotional decision to go one-way or the other. However, emotion aside, separating home equity for savings or to at least just set up a HELOC for a rainy day reserve is a financially prudent thing to do.

Mb hunter, if you don’t agree with the strategies, at least recognize the importance of liquidity and safety with your building of home equity.

BTW, as a disclaimer, I am a bit biased being a financial professional myself, however, looking at it from a consumer, in the end, it all comes down to comfort level and emotion…nothing else.

By Eric Nghiem on Mar 9, 2006 | Reply

Hey MB. I appreciate the comments. Liquidity and safety are key. Building a cash savings account is of course the prudent thing to do, but the majority of Americans do not have this luxury..many do, however, have a significant equity position in their real estate.

There is a baloon payment, but the hope is one of 2 things, either the person refinances before that point in time, or the person has saved the diffrence in their mortgage payment that will cover the cost of their mortgage ballance.

LOL, Doug does tend to focus a bit on the tax writeoff, but looking objectively at the other points without the tax writeoff, the strategy is still very sound.

By madmoney on Mar 10, 2006 | Reply

This is a great debate. For all of the people that think they need to pay of their mortgage. I recently met a friend of mine who’s father is 65 and very wealthy and retired. I finally had the courage to ask him how he became so rich and this was before the Missed Fortune books!

His answer “I never paid off my mortgages on my properties. Why would I want to pay off my properties? There is no way I would have the wealth that I have now. The equity that my properties have is dead money if I don’t use it” He then asks/tells me “Have you ever tried refinancing or taking equity out of your home when you aren’t working?” I said “No”. He tells me “Believe me when I tell you won’t be able to get at the money when you really need it” Now this is the Reader’s Digest Version and notice I used plurals in his answer.

Here’s what he did - Had I/O mortgages before they were fashionable. Took the money he was making and invested in 401K’s, stocks, mutual funds, life insurance, and other real estate. Everytime his properties (again plural) went up in value he would refinance and add to his positions and also do 1031 exchanges on his properties (which is a whole another discussion and not even included in Missed Fortune) He kept repeating the process for over 30 years. He did would not tell me his net worth, but he did tell me he is liquid for $10 Million. Liquid folks…not assets! Liquid. All starting from one little house he never paid off…

Now mbh or anyone else that believes paying the house off is the way to go, I have $10 million other reasons why that is not the route I will be
taking…

By Kulot on Mar 19, 2006 | Reply

Great you paid off your home, congratulations! What if something unforseen happens like earthquake, fire, tsunami,landslide, mudslide etc…Do you think you can still have all your equity or sell your home for the full price? Great example of being “asset rich, cash poor”. If you had the side fund like they have mentioned, aren’t you in a better position? Examples are homeowners who are still suffering because of “Katrina”, multi-million $ homes in Malibu, etc (mudslide), San Diego, Chatswoth fire in California…where is their so called EQUITY???

By tom mcglade on Mar 25, 2006 | Reply

mr MB HUNter’s analysis does not find its target. You spend to much time taking single sentences or groups of sentences out of the context of the original thought. Perhaps you should spend a bit more time carefully reading all the pages of this book to fully grasp the power of the arguments. Be aware: the concepts in Missed Fortune 101 are not for dilletants. One must think carefully about all facets of the topics expressed.

By Novus "D" on Apr 2, 2006 | Reply

This is probably one of the greatest blogs I have read on the subject of personal finance. While both sides make well aimed arguments I have only really seen one person make as close as possible a draw between the two methods, although it seemed a bit more biased towards MF side. I believe we have all really missed the point that science and study can help! For instance, why not make a hypothetical person or family with certain variables about them like income and years left to retire…etc., and put both lines of thought to the extreme tests, both enduring the worst of situations, and the best of situations to see which really fares better in both at the end of 30 years. Im sure that through this method you will find that no matter what method you choose youll always be right, others will be wrong, and youll be happy with the results. But also a point in mind is that for any of these wonderful concepts to work there is still one underlying factor for anything to succeed and that is “discipline” to stick by your plan to the end, like a diet…or money diet I suppose.

P.S. another great way to find extra money to invest that I believe both lines of thought will agree with is that if you use your side fund…whether it be a savings account or a WL policy is to have that earning interest and raise your health and auto insurance deductables so that way your premeums will be smaller thereby having more dollars going towards retirement.

By ElieA on Apr 4, 2006 | Reply

a) IRS currently disallows mortgage interest deductions for loans used to fund single premium annuities or single premium life insurance policies, folks. OK so they don’t check too closely *except* in an audit. Want to rerun the calculations including back taxes and penalties owed upon audit? Or count on having paid premiums in over a few years so it won’t *look* like a single premium intent? Hmmmmmm indeed! This scheme fails on the “Z” factor… being able to sleep at night. Sorry, but my clients are old fashioned… they prefer their nights sleep, and so do I!

b) One of the great investment tests is, “If things go south, how bad is it?” Life insurance is marvelous at what it does, but being an investment is not one of those things. If things go south in the early years, one could cash in the policy to pay off the additional mortgage, more or less. In the middle (accumulation) years, cashing in the policy is accompanied by an income tax bill on the gain. In the later years… don’t even think about it; the only prudent way out of the total policy loan interest due is to die so the death benefit makes you whole… which works, if your life in 30 years fits what you plan today.

c) How many of us could have predicted our circumstancees today, 30 years ago? Better not make that bet with your house!

By ElieA on Apr 6, 2006 | Reply

Update on item (a) above… I called the IRS… interest on a loan used to purchase single premium life, endowment or annuity contracts is NOT deductible as investment expense. But home mortgage interest (the money used for practically *ANY* purpose) IS deductible, within the $100,000 of “equity debt” loan limitation.

So I stand corrected! Thought I’d better report.

By K on Apr 13, 2006 | Reply

I am a real estate professional located in a high profile area of California. Lately, I have had two insurance agents, both young men, try and sell me on this idea and book. They were hoping to form an alliance with me. Oops, I have a B.S. degree in Finance and an MBA with an emphasis in Finance, this from a decent school.

Therefore, It was all up hill for them. If one follows their concept, a person looses a minimum of $76,000 over 30 years, and this is at an 8.5% monthly compounded rate of return on the invested portion. If I use the 1.5% amount that I was told was the “guaranteed” return, well now I am $166,000 short of paying off $200,000 interest only house with the invested portion, not to mention the extra interest paid to the bank. In all, at 1.5%, it costs $317,755 more over the 30 year period to do what is suggested.

And, of course, we all can assume that the guaranteed amount will most likely be the average return. Wow, is the insurance company making money, some of the best commissions paid are from annuities, by the way.

I would never advise any of my clients to do this. Never!

K

By Trying2RetireRich on Apr 27, 2006 | Reply

Interesting subject… I’m attending a seminar on this tomorrow, and am reading Mr. Andrew’s first book. I am near retirement age and have a large 401k, and my home is paid in full. However, I now pay both federal and state taxes because I have no mortgage!! I am in the 33% tax bracket. It seems that the arguments, all well meaning, are missing the point. Some folks are in situations where Mr. Andrew’s program works while others (younger, no large 401/IRA’s, owe mortgages) can’t make his program work in their circumstances.
What’s wrong with me using 401k money to pay my new loan mortgage and give me a tax break, plus have a million dollar life policy, plus I still own and live in my home, and finally I begin collecting $74,000 a year tax free in the sixth year? That’s what this program does for folks in my situation.

By John on Apr 27, 2006 | Reply

ElieA-

I think you had it right the first time. I’m not sure who/what capacity the person was you spoke to at the IRS, but the regulations clearly prohibit a mortgage interest deduction to purchase tax-exempt investments.

April 4th, 2006 at 3:08 pm
a) IRS currently disallows mortgage interest deductions for loans used to fund single premium annuities or single premium life insurance policies, folks

By John on May 5, 2006 | Reply

What facinates me is anyone who shoots down a concept based on flawed outdated data. Or does not understand the mechanics of the products described or believing all the products of the same type perform the same. You are no different than the same authors who write about annuities and do not differentiate between EIA and VUL. Lastly, most people are smart enough to read and make their own opinion. Not listen to some trashing fool. Like the book, love the concept and would advise anyone to read it.

By RealFinancialPlanner on May 23, 2006 | Reply

There is one thing that is missed by all with the tax value of interest deductions - with recent tax reform you need to have more than $10,300 dollars of writeoffs until you exceed the standard deduction of married filing joint - so when you have a $200,000 mortgage wit a 6% interest only mortgage you only receive $1700 of additional benefit over your your standard deduction (only 15% of $1700 = $255 of tax benfits) NOT 15% of 12000 = $1800 as most of the people would have you believe.

By "J" on May 25, 2006 | Reply

I was directed to your site by a friend. I, like “K” am in So CA and whereas she in Real Estate, I am a Financial Planner.
The thread is interesting, but like K, the majority of posts either are from the financially ignorant (8.5% return?, please) or from agents who are young (and well, less than bright).
I specialize in retirement planning and annuities… they must be carefully chosen and indeed, as K suggests, the insurance companies will always win and will never ever give away money without costs.
EIA UL is now touted as MF’s key…. since this thread started, the market lost 214 pts in one day and they have barely ret’d 4%/yr over the last 5-6 years and interest rates are approaching 7% for a second. Add’ly surrender charges and long terms create lock-ins but great commissions for the agents pushing this swill.. who rarely if ever have a home or cash.

The advice MBH gave was great…pay off your mortgage, max out your 401k/IRA/403b (couldn’t believe the lunacy quoted on withdrawls…it’s 59 1/2, with a 72t, 45-50 yrs old…On matchs, they are usually 50%, capped and remain nonvested until retirement.. do any of these people have a 401k?)
Additonally, 401ks are never liquidated as lump sum and are usually partially converted to annuity. To suggest a side investment based on home equity?… don’t lose your job or have a baby.

I am saddened to read so many people feel their life is a series of multiple payments.. house, VIsa, car, insurance, 4 more Visas etc… they will experience 4-5 job changes, possibly fired once or twice, relocate 3-4x and have 50/50 chance of divorce… sure read MF, then place it in the fireplace for its true use…

MBH, you are a wise man.

By MrAl on Jun 6, 2006 | Reply

I concur with MBH and “I”. I have been in the insurance business for over 22 years and seen just about all the “gimicks” used to sell life insurance. And MF is doing just that, using a gimick to sell large quanities of life insurance and earn large commissions. Check out Andrews website. He is charging $8000 per student to learn how to sell his concept. Then read Shane Johnson’s article, “Once we were lost.” Salt Lake City Weekly 29 December 2005. It would appear Mr. Andrew’s has refunded peoples premiums in full with interest. Why? To be a nice guy. No way!

Will increasing the mortgage interest payment really produce the same after-tax results as a deductible qualified plan contribution? In the book, the “indirect deductions” are used to purchase a life insurance policy with a $6,000 premium. If a person is making $150,000 per year and is that 33% tax bracket and has a 6% arm he will end up exactly the same dollars at the end as if he used that same $6000 for his 401K vs. had a $6,000 interest deduction for their home.

By BTQCO on Jun 14, 2006 | Reply

Wow!! Great discussion. Just a few things to say - why is everyone assuming a 30 year mortgage? How about a 10 or 15 year mortgage and buy a house you can really afford. If you have to move every couple of years you’ve built a lot more equity in the house. I know, I know what value is equity in the house? All I can say my friends is “it ain’t yours until you pay for it”.

By MarkC on Jun 19, 2006 | Reply

Wow. Don’t know where to start but the bottom line is “you don’t know what you don’t know”. If some of the folks who commented negatively about MF actually read the book and studied the concepts they would realize that they have simply been responding based upon their current biases. The bottom line is that if you separate equity from your home for liquidity, safety and rate of return you will be much better off in the long run. However, those that may spend, rather than conserve, their separated equity would be much better off with a 15 or 30 year amortizing loan. But for the majority of financially disciplined investors an interest only loan that maximizes tax savings, allows for increased liquidity, cash flow and asset accumulation is the way to go. It doesn’t take a genius to know that if you borrow at 7% on an interest only loan you only need to invest tax favored at 5% to do much better in the long run. So many people are simply misunderstanding these concepts.

By Kevin D on Jul 2, 2006 | Reply

If you don’t have a mortgage do you truly own your house? Don’t you always have a partner in the ownership of your house called the government who assesses taxes on your house every year. If you don’t pay those taxes they can still take your house even if it is mortgage free.
The point is take control of your own life. Do what you feel is best and when you need money try to sell your house when all the baby boomers are trying to do the same because they all thought that equity in your house is like money in the bank.
We are now in a soft real estate market. If you put your house on the market, your “equity” would be less today that it would have been 12-18 months ago. So did you lose money. If you were forced to sell would you lose more money or “equity”, your cash in the bank. The answer is probably YES! Take control of your assets and don’t do what you’ve always done. Change is good.

By A. Price on Jul 8, 2006 | Reply

We are currently in the middle of following the MF plan. But I can’t bring myself to complete the final step of a interest only mortgage. All of your discussions have made valid points. I’m still confused. We are only a few years (5-6) from paying off our home of 20 years. It has doubled in value during this time (which I didn’t notice anyone took into account when figuring the cost of the loan.) And everything that anyone owns depriciates the minute we take it out of the store or parking lot, except our homes, so is it really such a bad investment to have paid off? Does anyone out there have a definitive answer to help us decide what to do?

By Doogie on Jul 11, 2006 | Reply

This original thread goes back many months and I appreciate it still being relevant.

My wife and I just watched a one and a half hour DVD of a MF presentation that was very impressive. I wrote some notes and we discussed some of these same issues that are on this site. I Googled this site hoping to find something to help us make a good decision, and both sides have good points. We have 26 years left on our mortgage owing about $145K. We are about 10 years from a company funded retirement which I will take in a lump sum, and a 401(k) that matches dollar for dollar up on the 1st 3% of contributions, and hopefully some SS payments that will begin at age 66.

The concept of having the $100K home mortgage, and $100K equity taken out as “liquid” is understandable. The part that did not seem logical is that of the thinking that I now would have $200K in assets. In one pocket, I have the $100K, and in the other I have a contract to pay the bank $100K for the house (that they let me live in only if I keep making payments.) And if I decided to sell that “asset” for $100K, I take that $100 and give it to the bank to pay it off and that leaves me with…$100K.

I wish I could say that I was less confused about what to do. I think that I need to see more best and worst case scenarios layed out in black and white in order to figure this all out. Is there a non-profit group (with no axe to grind) who can help us?

By John on Jul 16, 2006 | Reply

ARGH!!!
Pulling out equity from your house in order to buy life insurance products? Sounds like a wonderful book thanks for the warning.

By Dan on Jul 25, 2006 | Reply

I attended a financial seminar recently and several advisors mentioned Missed Fortune to me. Now that I have read the book I am very interested in reading your comments.I’ve been in the financial service industry for over 35 years and have seen many different financial concepts that help people create wealth. There is always an element of risk when you invest and this concept may not be suitable for everyone.But for the family that has equity,the cash flow to handle the increase in mortgage payments and the time to allow their investments to grow I think this may be a great idea. The truth is that most people have under saved for retirement and they have done a poor job of investing their own money. Just look at the returns of the S&P500 over the last 5 years! I have a bit more reading to do but in the meantime I’m keeping an open mind.

By Gman on Aug 3, 2006 | Reply

I have a twist for you (yes I am a fan of MF but for different reasons) Instead of risking equity pullout and subjecting it to the markets fluctuations, why not take the equity and put into a perm WL policy PUA account. Then, either hurry up and pay off that heloc or wait for the house value to catch up with the loan and refi, all while keeping the tax deduction. I’ll take 5-6% tax free, liquid, and a DB in my left hand while paying 4% (after tax) mortgage and enjoying the deduction. Check out nelson nash’s book. I think most of what MF says is cool, but I like everything guaranteed. don’t take policy loans- build up comfortable cash amounts (whatever that is to you) and take THAT out, then repay yourself a little more than what you would have paid on a normal policy loan. That works EVERY time. No surprises, and everything is absolutely in stone at all times. If we start concerning ourselves with law changes, try owning a home that you worked to pay off early and someone serve you eminant domain or a friendly lawsuit because they slipped on your property. Now you lost everything- unless that is, you worked your insurance options properly:)! Great thread and everyone keep it up, as the opinions are always educational.

Gman

By Gman on Aug 3, 2006 | Reply

One more thing-
I think saying when you take out 100K of Equity on a 100K house gives you 200K is a stretch, but when you think about practicality vs. emotion, you now have 100K (albeit with a payment, but 600 bucks out of 100K is small over the long term) and you’re still sleepin’ in that house, eating dinner there, etc. So your life didn’t change whether you own it or not. You just now have 100 G’s to work with. Very, very carefully.

By Andy on Aug 11, 2006 | Reply

Has anyone ever heard of the Home Ownership Accelerator from CMG Mortgage?

It seems this home loan would serve both sides of the fence on this discussion. It is a 1st lien line of credit that incorporates a full service checking account from GMAC Bank. Why this is important is that any funds you have sitting in checking, savings or any other accounts that yield less than the mortgage rate, you can park in this new checking account which reduces the principle on your home loan instantly. The loan recasts every time money is debited or deposited to the account so any funds in the account have effectivly reduced your princilple balance therefor saving you interest based on the new principle balance. At the same time you have full access to the funds anytime you need them via ATM Visa, checks and online billpay. It pays the home loan in half the time as a fixed rate while at the same time allows you to have instant access to those funds.

Check it out at http://www.cmghome.com Pretty cool.

By Jomama on Aug 11, 2006 | Reply

Wow! This concept is a boondoggle for the mortgage industry looking for ways to help dried up revenues!

This book and concept is primarily being driven on a speaking circuit in the mortgage industry with the purpose of having mortgage brokers partner or open investment branches to push MF’s investment vehicle or “tool”, universal life.

Why? 1)The mortgage companies and brokers want you to refinance with them with huge loans and increase their revenue.2)They want to make more money on these loans by convincing you that “interest is your friend” and you should not worry about your interest rate because you are going to be rewarded by even higher interest rates on your “bucket” 3) make huge commissions on the sales or referal fees to the poor folks who go down the hall and buy their $200K UVL policy. Does anyone know what first year commissions are on one of these babies? Huge!

Another important and very dangerous assumption made by MF is that these policies return on average between 8 and 9%. What!! Not even close.
Thus your arbitrage as MF describes is really non existant. I work in the 9th largest mutual insurance company in the US and our internal safe investment return is currenlty below 6 and crediting below 4% I don’t think the big boys allow the agents to do illustration on anything above 6%!

MF says it’s time for us individuals to make money like the banks and CUs have done for years;”Borrow at a low rate ind invest at a high rate”. Well one thing I have noticed is that usually the banks, CUs and Life companies loan at higher rates than which you can safely borrow….that’s how THEY make money. Where does your loan come from? Gee a bank.
Also,There is not as much liquidity in these things as one thinks and huge penelties for early termination (thus the huge commissions).

Finally, If I was a mortgage broker looking to build an investment arm to my business and follow MF’s strategy, I would make sure I buy plenty of insurace…Professional Liability Insurance! Because in 5 years the class action suits will be rampant from those who were financially hurt with the promise of artificially high returns on a UVL policy. Look to the guarantee…that’s closer to what you will get.

I do believe we all should have a side fund for emergancy needs to get us through market downturns or personal hardships. Hopefully someone with the means to have paid off their mortgae will have built a side fund alraedy. If I had no extra money and lived paycheck to paycheck and had no mortgage, I might think about a HE loan and put in a versy safe place and get the tax benefit and modest return incase I need to “peel” some from this fund to get me through a tough time. But any safe investment is usually not going to pay higher than what the bank just loaned you at. Is that a crazy thought?

By Mark C on Aug 15, 2006 | Reply

Jomama- If you borrow at 6.5% on an interest only loan the return on the life insurance contract only needs to be 4.5%-5% for the concept to work. If you are in the industry I am surprised that you don’t know interest on a mortgage loan is tax deductible and the insurance cash value grows tax fee. I would much rather have my equity seperated growing and compounding tax free at 4.5% -8% tax free than buried in my home earning a 0% rate of return. Obviously you only skimmed the book.

By Jomama on Aug 17, 2006 | Reply

Marc C. What do you think the real credited rate will be AFTER Mortality costs and fees in the long run on these policies? You are all dreaming if you think it is close to what MF represents in all his illustration (between 7 and 8 after 1 % mortality (insurance) and fees) Please!!! The tax savings has limits depending on income and how much one can deduct each year. Also what about Alternative Minimum Tax consequences. The only way he addresses this is a small part that says “talk to your tax consultant”.

By Markc on Aug 20, 2006 | Reply

Jomama,
I have run the numbers and, if structured correctly, (the least amount of insurance allowed for the max contribution) the numbers are accurate (F&G has a good EIUL product). I am in the 33% federal and state tax bracket and I have an interest only loan at 5.375%…my after tax cost of my mortgage is only 3.6%. Even if I hit the Alt. min. tax the numbers still work fine.

By MJ on Aug 24, 2006 | Reply

MBH - Thanks for taking on this “seemingly” controversial topic; It provided me an interesting discourse and investigation into Mr. Andrew’s book (I was recently solicited by a “mortgage consultant” to use Andrew’s concepts with my financial planning clients). I would encourage all who are condidering the adoption of Mr. Andrew’s strategies to read IRS Publication 17, specifically the parts concerning deduction of mortgage interest and life insurance proceeds, and then obtain a good book to learn the guts of permanent life insurance. Those who take the time to understand what he is suggesting and the IRS rules that govern might decide to rethink his proposed strategy. If you take two things away from this post, please let them be this:

1. The lending and the insurance industries are highly profitable sectors, especially when the capital markets are good.
2. Risk and Return are indeed related.

By David Shafer on Aug 28, 2006 | Reply

Hey MJ, On point #1, yes but so is the financial planning industry. On point #2 yes, which is precisely why a fixed rate insurance product might be the way to use this strategy. The point is of course that you don’t have to chase higher returns if you get the acumulation and the distibution tax free. Having read the relevant IRS rules, I fail to see your point. Yes, you are limited to $100,000 over basis + any money spent on fixing up your house or adding to it for the mortgage interest deduction. Don’t see any limitations on life insurance though especially, one that is funded using the 7-pay rule. So you are going to have to be more specific on your issues with this strategy to be helpful.

By Mortguy on Aug 29, 2006 | Reply

To ‘K’: With and MBA in finance, I hope you can explain(provide numbers)your proposition that you lose on an 8.5% return over 30yrs…What start #s were you using?
Additionally, (I agree with the likely lower rate of return) what would be a good guaranteed floor rate ROR?
Responding to what “J” Says. The 401/IRA question seems to be resolved–unless you have a way out of getting taxed on those withdrawals at the end…?
Plus, if you lose your job or have a baby, how does home equity help? If it’s out of the home somewhere safe, earning even a modest return where you can get to it, aren’t you ’safer’?
Just trying to figure it all out…

By Wallace Smith on Sep 4, 2006 | Reply

I have tried to located the article [Once we were lost.” Salt Lake City Weekly 29 December 2005]mentioned in these posts but have not been able to find it. If anyone has a link, I would appreciate it.

By Saint on Sep 5, 2006 | Reply

http://www.slweekly.com/article.cfm/oncewerelost

By David Shafer on Sep 8, 2006 | Reply

Thanks Saint for the link to the article.
Points out the limitations of this strategy although lacked any factual dimension. The investment side of the strategy must be tailored to the individual. If the insurance rating is low then the cost of the insurance becomes the main issue. If you don’t wan’t or need the insurance then put the money into an annuity or other investment vehicle. The mortgage deduction has its limits, but it is only the icing on the cake so to speak. Nothing in the article invalidates the strategy only points out that the consumer needs to understand what they are doing. After a 4 hour seminar and a personal consultation if you don’t understand what you are doing then don’t do it.

By Saint on Sep 9, 2006 | Reply

Exactly!…I posted the link not to bash the MF concept or even the similar IBC…I just wanted to show people the article of what happens when people dont do thier due diligence and see current tax laws…I firmly believe that this concept is great in that it provides leverage and protection of equity. Many examples of this can be seen with the recent katrina losses….and just to let most people know that just because you dont live near a hurricane area or even tornado or earthquake area…you can still get flooded, especially with the changing climate that has been producing rain in some areas, those areas with inadequate drainage like folks in El Paso, TX they have had thier homes flooded not once…twice…but over three times due to rain. Some people have lost everything…thier policies didnt cover flooding. Roofs will not get replaced for one year due to back ups with so many damaged homes!
Also if you want to see more of Murphys law in effect…read the September 2006 issue of Money magazine with the article called “After The Flood”…which talks of a poor couple salvaging what they have left…drops in salaries, not much federal assistance($4,358 from FEMA for emergency relief and rental assistance)they even had insurance which ammounted to $240,000…which they had to jump through hoops to get, rather than one stop to an insurance agency for a check…if you ask me I would have done the MF plan and had side flood insurance as well…so you could get the best of both sides!

By Bugsy on Sep 22, 2006 | Reply

Favorite tools: Financial calculator and spreadsheet software with graphics, it has the knack of taking emotions and fears out of the equation.
Then you can address Fear#1 with scenario#1, fear#2 with scenario#2 etc and see where you fit and can sleep at night.
Why “life insurance products”? because they’re the only ones who give guarantees (Brokers, isn’t the ONLY time you can use the term guarantee associated with “life insurance”? (besides lame CD’s aka certificates of dissapointment…)
Furthermore, amongst life insurance products, only a specific one works.
Additionally, how about the magic of compound interest on a lump sum in a tax free vehicle as opposed to the use of after tax dollars paid in order to get a portion of the mortgage payment back 15 to 4 months later (if you file at the last minute like me). The clock starts all over again every year in the taxable world while it’s suspended in the tax free vehicle.
By illustrating how far one is from their goal of retiring, let’s say ten years, do the math…
IF the client had the discipline to keep a budget and not spend the extra “cash” freed from going from a fixed loan to an interest only. then do the math: mortgage costs, projected tax free value of the vehicle chosen, when is the break even point? Sooner than you think given today’s rates.
Hopefully this works for you (usually when 10-15 years from retirement, has enough equity to make it worth it, good credit for great mortgage rate and good life product, want to catch up and stay on track)

By AtFirstGlance on Sep 26, 2006 | Reply

I have read every single comment posted here. I am new to this thinking and in the infancy of knowledge and research. My impression after reading this site is that I have absolutly no idea which way to is better. I have found no clarity only more murkiness. I am just a guy trying to learn and do what is best for my family. I have been looking into this concept for several months, admittedly not real hard until, well this week. I first heard about the concepts from a group that promotes the “Bank on Yourself” plan. I have found the concept to be extremely interesting and have been looking into the interest only mortages to free money to contribute to the plans I have seen. I do not want more monthly debt, but plan on keeping my out of pocket the same and investing the difference. Can anyone tell me more about “Bank On Yourself” and the products they use? Can anyone talk as simple as possible for those of us who have never been in this environment before, but want to learn and make good decisions.

This thread has been great, and even though I have not seen a absolute right or wrong, I feel I am learning. There probably is no absolute wrong or right for every individual, but those of us who are less educated need more road signs and ways of consuming the knowledge you all seem to have. Thanks for all the info, I will keep reading and glean as much as I can.
Thanks again,

AFG

By Toby Ferguson on Sep 29, 2006 | Reply

I didn’t make it down to the end of this thread, because it would’ve taken me forever. But after reading the 1st 10-12 replies to the original post about Missed Fortune 101 being “Horrible Advice”, I had to chime in. I’m a Real Estate Equity Advisor, like a financial advisor, I help families reach their investment portfolio dreams through equity re-positioning, but I do not do it through stocks/bonds/mutual funds, I do it through Real Estate. The people who have posted about this advice of leveraging your home, and taking the equity out as being “horrible advice” I promise you will NEVER reach financial freedom through a 401k/pension plan investing.

Most people (non wealthy) focus on paying off debt….30yr fix mortgages for example, so they wont have a mortgage pmt at retirment. Reason? Their 401k/pension plan wont be nearly enough to reach their retirement goals, so THOSE people need to have their mortgage paid off. If you have a net worth of 6mil at retirement through proper equity management strategies, will you care if you still have a mortgage of 500k? No! But if your “follow everyone else” retirement planning strategies are only going to leave you with a marginal acct (200-500k), then a mortgage pmt would eat up most of your income. 96% of retiring Americans depend on Govt., family, friends, charity, or continuing to still work to support themselves, NINETY SIX PERCENT!! So go ahead, keep following your parents, neighbors, and co-workers advice of equity management strategies….I’d rather learn from the wealthy people on how to create wealth. And wealthy people use Leverage as much a possible.

Lets look at an example. Joe Knowsitall has a 30yr fixed mortgage at 6% for 250k ($1500/mo pmt), on a house valued at $500k. He contributes $500/mo + $250 from his company for 30yrs to his retirement plan, earning him 8%. At the end of 30yrs, his house is paid for, and he has $1.1mil. If hes in a 30% tax bracket, that will produce $61k/yr income forever, assuming its still earning 8% and Joe just withdraws only the interest. And this is even assuming Joe never re-fi’d, never moved, and never had an emergency that he needed that money trapped in his house….very UNLIKELY!

Mike Wealthymindset too has a house valued at $500k, and owes $250k. But Mike pulls $150K out with a I/O loan @ 6%, so now his $400k loan pmt is $2000/mo. Notice both Mikes’ & Joe’s pmts for retirement & mortgage are the same, $2000/mo. To remain somewhat liquid, Mike puts $50k in a safe side acct. and makes a modest 6%/yr. The other 100k he uses to put 10% down on real estate, allowing him to purchase 1mil worth of real estate, also earning 6%. In 30yrs, he would still owe $400k on his home, but his side acct of $50k would now be worth $287k. And his real estate would be worth $5.743K. His total portfolio is worth 6mil, but he still owes $1.4 on his home & investment properties. So his net worth is $4.6mil, versus Joe who has $1.1mil, even though they paid the same $2000/mo and Joe even had his employer help him.

So go ahead, payoff your house like everyone else is, and depend on your 401k like the other 96% of Americans. If Im worth 6mil, I dont care if I have a $400k mortgage, it depends on what you choose to focus on…Debt or Wealth? That’s what we do for our clients everyday!! Thanks!

Toby

By Vicky on Sep 29, 2006 | Reply

I am wondering why it is you think people should try and pay off their mortgage when they are on average moving every 5-7 years in an economy where you don’t keep a job for 30 years any more. I also don’t understand why you wouldn’t use insuranced backed investments? Your 401k being tied directly to the stock market takes dives right along with the market. There are insurance based investment products out there that are tied to the stock market but grow when the market is going up but stay at zero(don’t go up or down)when the market is dropping. Doesn’t it make sense to invest in these type of products since if you have all your money in your 401k or mutual fund and the market takes a dive then when it starts going back up it may take years to get back to even. With my Equity Indexed Annuity I have been earning 9%+ over the last few years and it only moves up not down like a 401k. I also don’t understand why I wouldn’t want to get into a mortgage product that would allow me the lowest possible payment freeing up additional dollars to drive into my investments that is going to compound interest for me rather than lining the pockets of the lender with my principle balance, so that they can sell that money to make more money and have it compound interest for them? Also, if I did take say 20-50K out of the equity of my home maybe leaving myself with a mortgage at 80-90% of the value of my home and then took that money and put it as a lump sum investment to maximize how fast my dollars compound along with the additional money I am driving into my investments monthly with the lower mortgage payment using interest only and other similar mortgage products? Doesn’t an insurance based investment tied to a stock index compounding interest. I am thinking of also buying some Equity Indexed Universal Life Insurance so I have a policy with a face value of 500k and at the same time it has another feature tied to an investment vehicle. You telling people not to buy the book Missed Fortune 101 is one thing, but you telling them that all of the concepts are ridiculous I believe is incredulous on your part. I would rather have my money compounding interest for me out side the walls of the house where if I need to I can get my hands on it rather than be a victim if it burns or gets blown down or washed away, rather than try to get the money out of it when I am already in trouble. Why can’t I at some point in the future if I want to just write a check for the mortgage balance after the money has been compounding interest for me for years rather than be at the mercy of a lender if I want to get 10k out at some point in the future to remodel my kitchen and have to pay what ever interest rate the lender might allow me? I think you are missin’ the boat on a lot.

By Toby Ferguson on Sep 29, 2006 | Reply

I couldn’t of said it better myself Vicky, although I tried in my post right above yours. Why are people still trying to use 40-50yr old techniques for retirement, that didnt even work that well 50yrs ago? Look at the state of retirees these days!

If you are so hard up on paying off your house, let me give you a better way. Say you owe $200k on a house worth $400k. On a 6% 30yr fixed mortgage, your pmt is $1200/mo. If you make you reg. pmts. you’d pay off that house in 30yrs…great! Meanwhile your neighbor has the same mortgage, but decides to takes out $100K, so he now has a $300k mortgage. He gets a 1% Option Arm loan, so his pmt is only $965. Thats $835 less then a fully amoritized 6% loan would cost him a month. To offset the negative amoritization, he puts that $835 savings every month in a safe side acct. earning 6%, along with the lump sum of 100k. This liquid acct can be accessed at any time for emergencies (health, loss of job, divorce, death, etc.). With this loan, he’d add apprx $10k to the balance of his loan every yr. So after 14yrs, he’d owe $440k, but his side acct would have accumulated $449k. He’d pay off his home, if he wanted, 16yrs FASTER then the 1st example. At 8%, he’d have $457k in just 12yrs, 18yrs faster then paying a 30yr mortgage.

Toby Ferguson
Real Estate Equity Advisor
http://www.trilliumcapitalgroup.com

By David Shafer on Oct 2, 2006 | Reply

I dissagree with the mortgage products that some here and DA suggests. Here’s why. Interest only loans and option arms carry a higher interest rates.The strategy suggests refinancing every few year (3-5 depending on amount of appreciation). The first 3 to 5 years of an amortizing loan is mostly interest. So you are able to get a lower rate on either a fixed rate loan or a variable (fixed for 5 years)rate loan by around .5% and still the majority of the loan payments are interest. The lower rate makes the arbitrage earn you more. As for the option arms they only allow the lower payment till your loan amount has gone up 10% which usually takes only a couple of years. And remember even though your payment is lower your underlying interest rate is higher so you are actually paying more money for the loan for the ability to increase your cash flow. And when you reach 110% of loan value you are forced into a amortizing situation with a higher interest rate. It seems to me that rates do matter and the lower rate on a amortizing loan makes more sense. Remember one of the best things about this strategy is the ability to not have to chase huge rate of returns on your side fund and have that added risk. The lower you can get the mortgage rate the less you have to worry about rate of return on your side fund.

By Gman on Oct 6, 2006 | Reply

Hey at first glance-
Vicky and Toby would be most correct. To answer your question however, you only need to understand one concept. No matter who says it or how they say it, owning your home outright is strictly an emotional goal. There’s not a number you can run where keeping equity out of your house and moving that money (discipline is the key word here) where it has a chance to move faster than the historical growth of a house. Where you put it is the big question. Some people like the market. Doug like VUL. Being conservative I happen to prefer straight WL and have already built my bank via the Heloc (I post here because I know it works- I’ll got 24-36 months with no income right now. i can’t say that for 401(k) homeowners). I hope that helps. But remember, paying off your house is an emotional thing, not a good financial choice no matter how you slice it.

-GMan

By Gman on Oct 6, 2006 | Reply

Addendum to above:
Keeping equity out of your house and moving that money (discipline is the key word here) where it has a chance to move faster than the historical growth of a house value will ALWAYS afford you the opportunity to make more money in the long run. Adjusting the risk of the side account is where the opinions vary.

Sorry about the incomplete thought!!

By Toby Ferguson on Oct 7, 2006 | Reply

Well to prove my point even further, the Fed Reserve Bank just published a 47pg. report on equity re-positioning. They too now agree that equity re-positioning is a viable option to a numerous amount of US home owners. Below is just a few key points:

The Fed is finally coming around. They conducted a study to determine whether it’s better to payoff your mortgage or instead invest your money in a tax deferred retirement account. The answer will not surprise you, as you’ve heard us talk about the benefits of integrating the mortgage into a client’s financial plan for quite some time.

* We show that a significant number of households can perform a tax arbitrage by cutting back on their additional mortgage payments and increasing their contributions to tax-deferred accounts (TDA).

* We show that about 38% of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice. For these households, reallocating their savings can yield a mean benefit of 11 to 17 cents per dollar, depending on the choice of investment assets.

* In aggregate, these mis-allocated savings are costing U.S. households as much as 1.5 billion dollars per year.

If you would like to actually read this detailed report, please be sure to email me. Thanks!

Toby Ferguson
RE Equity Advisor
toby@trilliumcapitalgroup.com

By Craig on Oct 14, 2006 | Reply

Hello

I recently moved to the Bay Area from Canada and have been trying to figure out the market here.

Here are my observations so far:

If I bought a home when I moved here 6 months ago with a 20% down I currently would be out 90% of my investment. So to me it looks like owning a home or Enron stock is about the same.

Right now my “downpayment money” is invested and throwing off enough income to pay my rent in the same house that I would have bought. Rent is between 25% and 50% of the total cost of ownership of the same house. Even if I bought a house and paid it off in 30 years I would still have to pay 1.25% in property taxes (currently about $1100/month) so it would be impossible to be in the same position I am in now even with a paid off house that got free maintenance.

When my dad was in the same position as me mortgages were 2-3 times annual income (and people still took 20 years to pay them off), now I am looking at 8 times annual income so a good deal for him is a bad deal for me.

The housing market seems screwed up locally, homes built around elementary schools should be designed and priced for first time buyers (the people having babies) instead they are building executive family homes that only emtpy nesters can afford. Whats up with that? I suppose if I said yes to the drive through bank teller when she asked if I want to supersize my mortgage I could swing it but it would tie up all my cash flow and 50% of my portfolio into one illiquid high