How Homeowner’s Can Rebuild their Financial Situation in 3 Steps

Over the past several years, we have been educating consumers on how to effectively manage one of the greatest assets they own…their home equity. During the real estate boom, it was hard to get anyone’s attention. Nevertheless, the deceitfulness of wealth kept many people from hearing words of caution to protect this highly appreciated asset. It caused many to sit on the sidelines, admiring their home equity.

The financial and retirement plan that was at least in the mind of many Americans several years ago, is not working out the way they thought it would. Traditional financial education, or lack there of, has failed, forcing people to start all over again.

House Rich, Cash Poor

It is never wise to put everything into one stock, one bank, nor one business venture.

During the real estate boom, more people departed from the fundamentals of financial planning, allowing home equity to become 70-80% of their net worth. A financial planning model, called diversification, protected us by,  “not keeping all of our eggs in one basket.”

Due to a timeframe of easy accessibility to credit, some even took a home equity line of credit, (HELOC), to purchase investment properties.  This would enable an investor to place a minimum down payment to begin building their “real estate empire.” This created a chain reaction of chasing borrowed money.

The Ugly Truth

In 2004, the Federal Reserve Board’s Survey of Consumer Finances reported that a key shift in the growth of family net worth was due to the “substantial gain in the value of holdings for residential real estate.”

Failing to protect or diversify this gain in family net worth exposed us to losing it while each day passed.  As any good farmer would do, they would recognize when their crop is ready for a harvest.  Moving slowly and indecisively would cause a good harvest to rot and whither thereby wasting such great opportunity.

Due to the banking crisis and implosion of the mortgage market, the National Association of Realtors report Home Prices Fall in 77 U.S. Metro Areas, and faced the largest drop in values since the group began tracking values beginning in 1979.

For most retirees and Baby Boomers in their 50s, they may never see their home values recover again to what they once were.  Unfortunately, many are still in denial that their home values have not decreased, “that bad.”

What We Can Do Differently Going Forward

Facing these humbling times have strained us to release our own pride and stubbornness, to hopefully discover alternatives. Fundamentals of prudence, discipline, increasing knowledge, and even constant personal development have never been more evident to return to, especially in such a time as this.

Consider the following:

1. Embrace your mortgage, don’t reject it – Take a second look at how you view your mortgage and pay it off.  Yes, it is debt, but not all debt is created equal. Dave Muti, Attorney, mortgage expert, and author of, Mortgages: What You Need to Know, says, “You should look at your mortgage as a wealth creation tool, rather than a debt instrument.”

Mortgage debt is one of the very few consumer tax-deductible allowances we have left.  If you itemize your taxes, you can report how much mortgage interest you paid that year on Schedule A of your tax return.

Uncle Sam allows a portion of your mortgage payment to be deducted from your tax bill.  To eliminate our mortgage over time would also eliminate the only tax-deductible allowance in our retirement years—when we need our money the most.

Take time to look at this part of your financial picture, rethink and outsmart Uncle Sam.

2. Work with a mortgage professional, not just a loan officer – If a loan officer tells you that you can purchase or refinance your home simply because they have the best rates…RUN!  Obtaining a mortgage is not just purely who can offer to get you the best interest rate, who has the lowest closing costs, or how fast they can help you close this transaction.

Like everything, you get what you pay for.  Unfortunately, many loan officers are just there to process a transaction. This is the perfect time to make an educated, informed decision about your mortgage and how that decision will impact your overall financial plan.

Ask your loan officer how this mortgage transaction will help build your wealth, rather than just simply acquire a piece of real estate.

3. Stop sending extra principal payments to your mortgage company – Whoop there it is!  I said it.  Thinking that this is the best method to becoming financially independent is simply not true.  It is a good way, but there are optimal methods that are more flexible yet, lesser known and embraced.

For instance, the Federal Reserve Bank of Chicago released a report in 2006, co-authored by Chicago’s very own, Gene Amromin.  As a financial economist, Amromin, greatly helped the financial planning community to determine if sending extra payments to your mortgage company is prudent.  The results may shock you.

In his report, he states that, “Americans are making the wrong choice by pre-paying their mortgage. Instead they could be sending these additional payments to a tax-deferred retirement savings plan. This is costing Americans $1.5 billion every year.”

Amazing. We have our own personal stimulus plan without any government intervention.

It is All Up to You

Regardless of our situation, people still want their “American dream.” They do not want to worry or later run out of money.  They want to enjoy their golden years with their grandchildren, travel, and live life in dignity and independence.

At the end of the day, it is your money. You will be the one responsible to answer to your family. It is, after all, an era of personal responsibility.

If you thought you were doing everything right, then later found out you were wrong, when would you want to know?  Would you then do something about it?  Fundamentals and universal truths endure throughout the ages, but methods do not. This is a defining moment for us all, let us make that change, now.

Stay encouraged, my friends, in your never-ending pursuit of happiness…