Your Mortgage: Liability or Asset?

by Florida's #1 Mortgage Planner on January 30, 2009

Your Mortgage: Liability or Asset? Most of you reading this would answer the above question quickly and label your mortgage as a liability.  After all, it is a debt, isn’t it?  But if there was more to it than that, or even if your mortgage could become one of your greatest assets.  You may think I am crazy, but think about the concept for a while, then read on.

Traditional thinking places the mortgage clearly as a liability, a debt that should be paid off.  Some even think that financial freedom cannot occur with a mortgage looming overhead, possibly because of the monthly payment required to maintain it.  Money Merge Account and other mortgage acceleration advocates, especially the agents that sell these products, will encourage this thought process.  In fact, they will entice you to join their clan even though their product only works as advertised if you use all of your discretionary income to pay off your mortgage as fast as possible, a belief that could actually do the opposite of what is intended, potentially sending you into foreclosure or bankruptcy, even both.

I am not going to give you the rundown as to why what I just mentioned is accurate, but you can click on MMA in the sidebar and review my posts on the subject and read where I have explained it before.  I want you to focus more on the reality of the benefits derived from using your mortgage as a financial tool, an asset that can prove extremely helpful in obtaining financial freedom even faster than any mortgage acceleration program can accomplish.

To understand why your mortgage can be one of your greatest assets, one does not need to look any further than the very bank that lent you the money or the one which holds your checking and savings accounts.  How so?  Simple.  Look at how they operate and learn how they earn money through employing money and you can see how you can use your mortgage to accomplish the very same thing.  Use it wisely, and you can amass wealth while avoiding a financial crisis at the same time, something focusing on paying off your mortgage cannot accomplish.  When I say wisely, it starts with planning even before you take on your mortgage.

OK, so how does a bank make money typically?  Well, they first must borrow money, whether it be from the Federal Reserve, or even from their customers in the forms of checking and savings accounts.  That’s right, the money you deposit in the bank is essentially a loan you are providing them as they can turn around and lend that money out to someone else.  You see, their goal is to borrow money for as little as possible and then lend it out for as much as possible, making their money on the spread, or difference in the interest rate at which they borrow and the rate at which they charge their borrowers.  It is that simple, and you can accomplish the very same thing.

If you decide to “employ” your home’s equity, meaning to take out a mortgage, you are doing so at a set rate.  Let’s say you take out a mortgage at 6% and since you are savvy, and for simple math purposes, you are in a 33% tax marginal tax bracket.  That means that the net “cost” of your mortgage is 4%.  The same thing can be said if you just took out a mortgage at 5% and were in a marginal tax bracket of 20%.  With a net cost of 4%, all you need to do is earn more than that after tax to make extra money.  And what is really cool, is that since your earnings are compounding and your mortgage interest expense is not, you actually don’t even need to earn 4%, just get close and you will make more money than it costs you.  Even in today’s economic troubles, this can be accomplished fairly easily if you do your research.

United First Financial (UFF) agents, the sellers of the Money Merge Account system, along with other mortgage acceleration advocates, will try to convince you that you need to minimize interest expense and that using their programs yields a guaranteed rate of return equivalent to your mortgage interest rate.  That is not exactly true as putting money into your home traps it there and is inaccessible without qualifying for a new mortgage.  Additionally, the yield is only equivalent to the net cost, not the actual interest rate, such as 4% from my example above and you will end up with a finite timeframe for that yield and no money in the bank (all trapped in your home) at the end.  Taking it a step further, one can see that from a financial freedom standpoint, it actually makes more sense to have a mortgage and plenty of liquidable assets versus no mortgage and not enough money in the bank to survive a financial crisis, something the MMA software will not tell you.

Are you starting to realize that your mortgage can be an asset and not just a liability?  If not, take a look at what the wealthy are really doing.  When surveyed, the majority of the affluent maintain their mortgages even though they could pay them off with the stroke of a pen.  Why?  Because they can make more money than what the mortgage costs and that is why it makes perfect sense to keep the mortgage instead. 

Are there risks involved?  Absolutely.  The reality is that everything carries risk, just as everything is financed 100%, something I hope you have already learned.  Even paying off your home carries risk, just look at some of the posts located here and you can see how.

The bottom line is that with proper planning and guidance, your mortgage could be your greatest asset for a long time to come, and may even be the key to your financial success.  While mortgage acceleration may be your desired goal, using your mortgage as a financial tool can actually put you in a position to pay off your mortgage even faster than any mortgage acceleration program out there.  But beware, once you see how beneficial it can be, you may decide to carry that mortgage forever.

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