If you had enough money to pay off your mortgage right now, would you? I suspect most of you would do so without question. Isn't that the so called 'American Dream'? Why then do some of the most financially successful people in this country refuse to do so? In fact, these people have the wherewithal to pay off their mortgages many times over, yet carry the highest mortgages they possibly can and put virtually nothing toward paying down their mortgages. Sounds absurd, doesn't it? Not if you understood what they know!
Over the last several generations, Americans have been ingrained with the concept of paying off the mortgage as quickly as financially possible. Our parents and grandparents taught us this as an essential component of financial safety and freedom. They say, 'Get rid of those payments and you get rid of your worries.' The lending institutions have been more than happy to propagate this mentally as it benefits them too. Unfortunately, this perception is entirely outdated and in today's world, financially detrimental.
Wealthy individuals have come to understand and use the tactic of maximizing the benefits of a substantial mortgage. In some instances, they've have made some of their wealth with this concept but in all instances, they have increased their wealth because of it.
So, what am I speaking about specifically here?
It is commonly referred to as 'Equity Maximization.' It is the concept of using and 'harvesting' the idle equity in a home to substantially improve your financial condition by increasing liquidity, safety and equally important, receiving a rate of return on that money. Properly applied, this concept also offers significant benefits such as tax-free retirement income potential and substantial tax-free inheritances.
I realize that even considering taking out or 'cashing out' your precious equity from your home and retaining the highest mortgage possible flies in the face of traditional financial thinking. I also realize that many people have and are using equity lines of credit or refinanced for various purposes, including paying off other debt. Yet, conventional wisdom maintains that a large mortgage is an evil we must avoid at all cost. We have all be ingrained with the idea that our homes are our best investment and that our goal should be to pay it off as soon as we can, thus saving thousands of dollars in interest. This is simply a myth and a totally incorrect!!!
First, one must ask- how much is the equity in a home earning? The answer is zero! Second, by accelerating or paying off principal quicker we simply 'destroy' the biggest gift the government gives us- the mortgage interest deduction! As such, you are putting money into something that earns you absolutely nothing and as you do that you are giving away your biggest tax advantage available. Your house will appreciate whether you have 1% or 100% of equity in it, yet the equity itself earns nothing! In matter of fact, home equity fails in every aspect of a prudent investment! It is illiquid, it is not safe and it has no rate of return.
Let's take a look at recent events. Hurricane Katrina devastated the Gulf coast. Thousands lost not only their homes, but now have no job to go to and are entirely displaced in totally different states. How much is the equity worth in these people's homes? How easy is it for them to access that equity to sustain them until they get themselves back on their feet? Don't you think these people would have given anything to have immediate access to that equity tied up in those homes? I hope most of those loses were insured. But how long until they have an opportunity to use any of that money and what if the insurance company refuses to compensate the full loss?
I know that this is an extreme example, yet it has happened.
This concept, applied properly, is extraordinary and is entirely valid. It is one of the most unknown and unused financial strategies that can help you reach your financial goals much sooner and to a much greater degree imagined. It could mean tens-of-thousands or even more of extra dollars in your pocket over the years and possibly millions to your heirs or beneficiaries- all income tax-free! I am speaking of monumental long-term benefits to your financial security! And guess what, you can do this, in most instances, without any additional outlays or financial burdens
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