First, THOUSANDS of those in Katrina who THOUGHT they were covered received nothing but noise, headaches, and frustration from their insurance companies! Come on dude, didn’t you hear about the whole “wind vs. flood” debate?? Where were you??

Just do a simple Google search on “katrina insurance not paying” and you’ll see:

NY Times 9.3.2007: Insurers Bear Brunt of Anger In New Orleans

From an ABCNEWS.com article in 2005 it recounts how one investor owned 15 homes that were destroyed or damaged. “The insurance industry — facing $40 billion to $60 billion dollars in losses — isn’t budging, saying state-approved homeowner policy language is very specific and doesn’t include flood coverage.” …SO, last time I checked, REAL ESTATE was supposed to be one of those “safe” investments! Let me ask you, do you think this individual would’ve rather had ALL his homes paid off (seems logical to most, greater cash flow from the rents that way, right?)

OR would he have been better keeping them mortgaged to a point where:
1) he could handle the payments
2) the equity proceeds were positioned into safe, diversified investments (such DO exist)
3) the investments were liquid
4) the investments earned a rate of return greater than the after tax cost of the mortgages

The answer is OBVIOUS in hindsight, isn’t it!?

“If you have a mortgage and lose your job, then you lose the house or you pull out your cash to pay if off and lose that.”
Who says (1) you’ll EVEN be able to qualify for a loan (fat chance in today’s credit market – the No Doc loan doesn’t even exist anymore!) or (2) that one NEEDS to pay it all off anyway!? Assuming one had a Home Equity Line of Credit in place (and could still use it! Banks cut the strings of Katrina/Rita victims and will cut yours too in the event of a natural catastrophe – they can even take it away for other reasons too) or better yet, the equity already separated in a safe, liquid environment, they could just draw on it in small amounts to make their mortgage! No need to pay the whole thing off! That’d be like your mom telling you to finish your spinach on your plate and you begrudgingly eat it all PLUS what’s still left in the serving bowl!
“If you need to you can always sell the house to get your money out.”
As if the house was liquid! How long would it take you to sell your home in the current down market!? 3 months? 6? How about 18-24 in some markets across the midwest! But, if you “need” it, then I guess it’ll wait for you! ) Oh yeah, what about when you don’t have your house to sell anymore, only the land beneath it and the refuge from the hurricane on top of it? SURE, you COULD sell it, but not for as much or as quickly as you’d like to!
“If you are paying a 500$/month payment into an account @ 7.5% ..…in 5 years you will have over 36K in the bank — and still have equity in the house. If you lose your job you can still survive and with 30K cash”
First, where’s the $500 p/mo coming from? After the home is paid off? Good luck! I just hope you won’t need the cash in the event that life happens (i.e. some major issue occurs – divorce, medical issues, lawsuit, car accident, disability, prolonged job loss, etc) before you have your mortgage paid off! If while you still have a mortgage (1) most have difficulty saving period (2) of those who do have extra cash after the bills are paid they usually pay down that “evil mortgage” (3) and due to the way compound interest works, the one who separates $500 p/month of equity and invests the chunk will come out ahead ROI wise compared to the one who sends in small incremental payments.
The math: Take two investments over 10 & 20 years.
10% ROI
$500 monthly will produce: $103,276 in 10 yrs / $382,848 in 20 years
Taking out a loan for $500 p/mo at 7% (ignoring tax benefits) will yield $85,714 lump sum to invest which will produce:
$242,094 – $60K in loan payments = $182,094
$690,206 – $120K = $570,206 in 20 years
“DEBT IS JUST PLAIN STUPID.”
Mike — you miss the point, you don’t factor in LIQUIDITY! (let alone Rate of Return and furthermore – tax benefits). Debt properly structured and utilized is the tool of the wealthy. Douglas Andrew teaches how YOU can do what the banks do (take money given to them and invest to yield higher results than what they pay out). It is rather contrarian to the average Joe and IS RISKY to those who DON’T manage money well and couldn’t trust themselves with tens to hundreds of thousands of their own money (i.e. their equity) in a liquid investment. To those who fit this category – and let’s face it, based upon the “me too” gotta keep up with the Jones consumerism displayed by the majority of Americans, that’s probably many of those reading this blog – then don’t touch your home equity; unless you change your ways by starting to spend less than you make, start saving, and letting a professional help guide you with your investments, your home equity is all you’ll have left when you retire! (IF you can retire, which will also be doubtful given Uncle Sam’s unlikely to help out much)

For those that are starting to see that light – that paying down the mortgage will actually put give you less liquidity, less money to invest and let compound interest work it’s magic, and less of a tax write off every year – then go ahead, read one of Douglas Andrew’s books. Check out Ric Edelman’s “The Truth About Money” or “Ordinary People, Extraordinary Wealth” or check out the blog by Kendall Todd, author of Borrow Smart, Retire Rich at http://toddballenger.typepad.com/

As a mortgage planner I see far too many people headed toward retirement years with far too little saved and without drastic change, they’ll sadly be unable to even maintain their lifestyle much less enjoy retirement perks such as traveling, golfing, or living in a retirement community. I’ve posted a paper on Equity Management discussing more of the pros and cons at http://www.yourpersonalmortgageplanner.com/EquityManagement

As a Certifide Mortgage Planning Specialist – the only designation officially recognized by the Financial Planning Association – I analyze my clients’ unique situation and life goals to create a plan for them which provides the clarity and road map necessary to achieve true financial independence.

I welcome your questions. Furthermore, I know several other mortgage planners all across the country who could serve you locally if you’d like a qualified referral.

Lastly, if you’d like to understand more about the current credit crunch and liquidity crisis which has plagued the US mortgage industry and affected the financial markets, I’ve posted a great paper at my blog http://www.MortgageMarketMeltdown.com and will be posting more material and podcasts there in the future.

Sincerely,
Sean Rafferty, CMPS
sean@yourpersonalmortgageplanner.com

Want to know more about CMPS mortgage planners, go to: http://www.cmpsinstitute.org/public/why_you_need

Here is a link to the upcoming dates and times that Doug will be out speaking – http://www.regonline.com/CalendarNET/EventCalendar.aspx?EventID=118708&view=Month

Feel free to drop me an email nate@missedfortune.com if these dates and times don’t fit your schedule and I can let you know of other cities that Doug will be speaking in.

Nathan

Sounds like you need to read the book so you can join in on the debate. Let me know when you have time to read the book and I will make sure you get another copy if you will blog about it later.

Nathan

You just have to factor risk into your calcs, that is where it’s missing. No one during Katrina, that had 30-40k+ in the bank and a paid off house, was standing on their roof looking for helicopter to save them. They also didn’t lose all their assets since the house was covered by insurance and their money was safely invested. Living elsewhere was easy since they didn’t have to worry about mortgages and had cash to live on. DEBT IS JUST PLAIN STUPID.

A. Safety! The equity you have in your home is NOT safe! The safest position for your home is fully mortgaged or free and clear. If you lose your job or have a medical crisis and have $100k of equity trapped in your home, you’re at risk of losing your home all together including the “equity” you built up. Think of the many Katrina victims.

B. Liquidity – “The ease with which an asset can be turned into cash.” If you pay off your house and start saving the money you were paying, the money you save is liquid, but what of the $100K still trapped in your house? If you had an emergency, is that equity readily available (liquid)? No! If you lose your job, will the bank loan you back your equity? Not likely, banks loan money based on your ability to repay the loan.

C. Rate of return. Those few previous comments completely ignore the power of compounding interest compared to a regular amortized loan. For example, if you took out a 30 year mortgage for $50K at 7.5% (NOT accounting for tax deductibility) you would end up paying $75,856 in interest alone. Sounds like a lot right? Now calculate the same $50K at the SAME 7.5% in a safe compounding interest investment (ie. not mutual funds) for 30 years. What’s it worth? $437,747.80 Those “few extra percentages points” or in this case NO extra percentages points, yields net gains of $312,747.80 And what about taxes? The book does not ignore “obvious taxes on invested earnings.” It actually explains how you can legally structure your investment so you can take your earnings tax free! Even if the scenario wasn’t tax free you still experience a very significant gain.

Don’t judge a book by its cover? How about don’t judge a book based on the comments of someone who has never read the book. I’m not interested in receiving the free book. I already have it. Thanks.

=^..^=

Count me in, if I win you can ship it to Canada, we’ll be there in September for a wedding. First one on my Wife’s side.