Book Recommendation

[Richard]

Over on CBN was a thread about mortgages and should one pay them off or keep them...

I'm reading a book that strongly touches this very topic and I repsponded to that thread. I thought I'd put it here too.

Repeat disclaimer: This is not soliciting the idea to anyone, but merely suggesting a book to read. My example commentary below is only a paraphrase of what's in the book.

<font color="red">Website </font>

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From CBN (in blue)

I'm not going to delve into much of the book but I'm in the middle of reading "Missed Fortune" by Douglas R. Andrew Missed Fortune website

I'm not affiliated with them.

A quick lowdown of what I've read so far...

Maximize !!! your mortgage, take the deduction. If you have built up equity, take it OUT

Put your equity into a Equity Indexed whole life policy. You can get immediate coverage that will exceed your mortgage (so immediate payoff if you pass away), you can get cash build up that later in life you can access tax free...

(again, I'm not pimping the idea, I'm just reading the book to better understand it)

He contends that (for example), he who OWNS his home free & clear is at more risk than he who has an 80% mortgage on it.

Example: Katrina. Take 2 $300K houses. Katrina blew them away. The guy who had his house fully paid for has lost everything. Yes we have insurance yada yada... BUT he's still fighting that fight probably.

Now the other guy who owned the house next door, also valued at $300K BUT had drawn 200K of his equity OUT and placed into an investment grade vehicle, not only still has access to that cash via equity value (unlike the first guy), he also probably also has insurance.

My (butchered) point that he's trying to say is by keeping the equity OUT of your house and under YOUR control, you can over time, substantially increase your liquidy AND net worth.

Example 2 and then I'm done (cause again, I'm not preaching FOR him, just trying to shake the thinking a bit)

#2 You own your house free & clear. It's worth $200,000. Markets go up 5% over next year. Your new net worth is now $210,000 fair?

Ok, what if you took $100K of that equity out and put it into an investment grade vehicle (which I'm now finding out is a equity indexed whole life policy).

Market goes up, your house STILL appraises for $210,000 right? so no change there. The house has no idea if you hav a mortgage on it, nor how much.

The $100K you withdrew & reinvested however, is now worth $105K.

So you add these back and your net GAIN, is $15,000 and not $10,000.

Before someone points out what might be obvious... he does clearly indicate you want to put your money into something that has ZERO downside risk so if the market DOES tank out, you won't be damaged.

Ok, disclaimer again, I'm not pimping the idea, nor them. I'm not affilated in any way.

I am simply reading the book and I must admit, it is really shaking some of the traditional concepts I'd had (ie, pay house off early)

It's FULL of examples and frankly, is easy/interesting reading.

I'm suggesting that if anyone cares about their financial future, go ahead & spend the $25 on the book and read it. Make up your own mind if some of the examples make sense. I didn't think I'd be swayed and I'm STILL going to look for some numbers to back the logic.

I'm about 1/2 way through the book and as boring as the book might sound, I can't wait to get back into reading it to see the rest of the ideas.

It's a VERY interesting book. Get it!</font>

 

[rox]

The thing is, those life insurance deals are usually NOT guaranteed a promised rate of return. They will show you their historical rates and give you projections but look to see if there is a guaranteed rate.

My husband and I only really started to acquire "wealth" (for lack of a better work and we are not mega rich or anything) once we paid off our home.

I know this, once you have a mortgage you have to pay the mortgage. If you get sick or want to change jobs, or even want to quit your job, now there you are with that big mortgage. Once you pay off your house, you can do what you want with your money.

You pay interest, you get an income tax deduction. The income tax deduction does not bring you back to zero. In other words paying interest on a house is not "Free" money, because of the income tax deduction. It's not net-net.

In the example of Katrina, the guy with the first house paid off, becasue he didn't have any mortgage payment has assetts other than his house, why? Becasue he has not been burdened by a mortgage payment. He has had the liberty to invest at will. The insurance companies are not going to give you any more nor any less depending on if you have a mortgage on it.

As for the second example of a $200,000 house that you mortgage $100,000 on. IF you were not paying the mortgage payments on $100,000 you surely could have socked away the extra $5,000 yourself because you didn't have amonthly mortgage. So you would still be ahead $5,000 with the added benefit of not having a debt.

Teh best thing you can ever do is pay off debt. We all have goals and jsut plain 'ole wants, but the best thing to do is to stay debt free. To me there is no secret in accumulating "wealth" again for lack of a better word.

Spend less than you make, save money, eliminate debt. Sure save money in different ways, diversify, but still save money. And dont' save money by borrowing money. Much much better is to pay off debt, have more money in your pocket and invest at will. My .02 centimes...

 

[farmerpsv]

Hey Richard,
Am one of those guys that owns his own house(ie, no mortgage), and worked very hard to get here. i've heard the arguments made in this book, and have for a number of years. seems like those arguments have become traditional thinking. when i was under a mortgage, a 30 year loan paid out over the course of 30 years just about equaled 3 times the original loan. not sure the value of the property has gone up 3 times in that same period, if it does, i guess you break even. i've turned several houses in the last 15 years (7) and the last 2 i doubled my return on investment in a 2 year period (okay, that doesn't count my sweat equity, but it's better than my stock market investments). my main problem is the speculative nature of all this, why rent from the bank for 30 years, or lets say 20 years because that seems to be how much goes to interest. given the current value of my house, i'd be making $2000/month payments, instead i can now invest that money as i wish without risking my home. the katrina argument he gives seems weak to me...that's why we have insurance (and that's why the bank insists you carry insurance, to make sure they cover their risk). when you see how mortgage loans are written, all the interest up front and the pricipal on the back end, it all seems very lop sided...very expensive money to be investing.
paul

 

[sneaky_pete]

Yeah, I saw the post there too.

My opinion: Do all the math you want, but in my book no debt = peace of mind and low stress.

 

[EddieWalker]

Richard,

So many people are taking out the equity in their homes that I'm worried about a houseing bubble. Just about everyone I know in California is cashing in on the value of the equity in their homes to the point they need that money to make their mortgage payments now.

I read a study that said people who pay off their credit cars with equity money just max out their cards again right away.

Of those who take out the equity in their homes, most spend it foolishly. Very few invest it, and those who do invest it rarely have the disipline to maximise their return.

I'm 40 years old, my land and home are paid for. No mortgage. If my house is wiped out, I can always get a loan to rebuild if I had to.

If I had a mortgage and was maxed out on a home loan, losing my house would just about make it impossible to rebuild with what insurance doesn't cover.

I think the damage done to the homes by Katrina will prove this out. Eventually most will rebuild, but it wil be a very long, uphill battle that will result in every one of them being in greater debt than before the huricane.

Having no mortgage allows me to work when I want, and in a worse case scenerio, I can get a minimum wage job and have more cash in my pocket than somebody making allot of monyey, but having huge debt.

I think human nature to spend what we don't have makes this argument moot. People rarely change their stripes, and those in debt tend to stay that way. Extra cash is just something to through away and get in debt again.

Remember, most lottery winners file bankruptcy.

Eddie

 

[Richard]

All I can say is I'm not arguing ANYTHING that anyone is saying /forums/images/graemlins/grin.gif I'm only saying Im' reading the book and it's definatly creating some thought that runs contra to my own way of thinking (I myself am near paying off my house for the VERY reasons expressed above)

So I'm not 'fighting' or arguing anyone, I'm only saying read the book and read the detailed examples that's FAR more detailed than I can express here.

Now, with that said, hopefully you won't take this as me defending myself nor the book but rather, showing a point the book exactly makes

"So many people are taking out the equity in their homes that I'm worried about a houseing bubble"

(this is a point of HIS in the book, not mine...but it made me think)

If your house is 100% paid for and the housing 'bubble' indeed exists, lets say housing drops by what? 20% 50%

then your $300,000 is now worth $240,000 or $150,000 right?

If it was FULLY paid for, you just took a MAJOR bite in the assets /forums/images/graemlins/blush.gif /forums/images/graemlins/wink.gif /forums/images/graemlins/grin.gif

If on the otherhand, you withdrew all the equity you could (let's just say 50% on a fully owned home) THEN you would have effecively saved THAT amount from the bubble burst.

Again, I'm not expousing the theorys, just suggesting that the book might instill some thinking in you that you otherwise might find non traditional.

Let me put it this way, (and again, remember I'm NOT affiliated with them at all, am not DOING this myself... (yet anyway), all I'm doing is reading it myself and analyzing my OWN conventional thoughts which happen to parallel most expressed above)

Ok, with that said, if you buy the book and it's trash, you're out $25. If on the other hand, you read it and you find merit in it's logic you could easily make that $25 back.

I'm not saying it's the answer to all, I'm not saying it FITS all. I'm ONLY saying it's interesting reading and might make you rethink your traditional ways of thinking.

The concept is NOT to use the equity to pay off debts, the concept is NOT to invest the equity into the stock market. The concept is to NOT have the money at any market risk. The basic concept is to keep your money liquid, SAFE, growing tax deferred/free AND in the event of your untimely demise, the death benefit would not only pay off the mortgage if need be, but more than likely have extra cash left over to boot.

You can liken this to me finding a restauraunt & suggesting you to check it out. Doesn't mean I like everything on it's menu.


/forums/images/graemlins/smile.gif

 

[rox]

Richard,
I heard you loud and clear that you are not espousing everything in the book, that it is merely making you think.

I thought about your example of the housing bust. The way I look at it, if your house goes down in value it goes down in value. Doesn't matter if you own it free and clear or if you owe on it. It went down in value, period.

Taking $100,000 out on a house going up in value ro going down in value still means you have to pay back $100,000, and your hosue is still going down in value.

If you are really hot to get into an investment like the life insureance then simply leave the house alone and take out a policy. To me if a house is declining in value then get out of the house. Sell it, move on to a property that is increasing in value. No sense at all to hang onto a house that is declining.

We had one like that when we were young and we sold it to the tennants.

Borrowing $$$ against a house going down in value doesn't make sense to me, sell the property and move on. Re-invest in something going up.

You did create a very intersting topic, thanks.

 

[EddieWalker]

Thanks Richard,

It's an interesting theory, but for me, it's based on ideals that aren't practical in the real world.

The problem that I have is the person who takes out the equity on their home is supposed to invest it in a save investment that will continue to appreciate in value. The only way to do this is with bonds at a few points per year.

Home values in California are apreaciating in some case over ten percent a year, and in some places, allot faster.

Being able to determing when the values on these homes will crash and taking out your money would be a great trick. I don't think most people can do this, so if they take out their money and their homes increase in value faster than they earn in a safe invelstment, than they are losing money. Theyare also still paying interest on this money and that takes a big chunk out of their return.

When your home is paid for and it increases in value, that's money in the bank.

What happens when you take out that cash and your home drops in value. You still owe the mortgage for the amount you borrowed with interest, and the cash is either earning a small return or it's already been spent.

I saw this happen once. Every year this couple refinanced their home and spent the winter skiing in Tahoe and eating lobster. They lived life big until the money ran out. Than they struggled to make the payments until they coudl do it again. And yes, they went to Tahoe and spent like rich fold all over again.

In the early 90's, home values diped and they owed more than the house was worth. Allot more. They also couldn't make the mortgage anymore and ended up losing the house. I honestly think thay are the norm, more than the exeption based on how many people are doing this exact same thing.

I've read a few books like that too. It's just never added up for me in my way of thinking, but I know that there are people allot smarter than me who can make it work and do well. I'm just an average guy that relies on keeping things simple.

Eddie

 

[rox]

I have a good book for you, it's called, "The millionair next door" I am sure you can get it at your library, there is a good read. I read it years and years ago and I still remember it.

 

[sneaky_pete]

</font><font color="blue" class="small">( I have a good book for you, it's called, "The millionaire next door" I am sure you can get it at your library, there is a good read. I read it years and years ago and I still remember it. )</font>

An excellent book I have bought multiple copies of to give to my children, relatives, and friends.