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Mortgage Mistakes and Misconceptions

“How to Leverage Your Home Equity For More Wealth”

Presented By:

Your NameMortgage PlannerCompany NamePhone Number

Your NameFinancial PlannerCompany NamePhone NumberSAMPLE. N

OT FOR USE BY A PLANNERc

Mortgage History QuizWhat was the Typical Cost of a New Home in 1920?

Answer: $5,000

What was the Typical Annual Income in 1920?Answer: $1,434

What Provision was in Loans that Motivated all People to Pay their House off as Quickly as Possible?

Answer: Banks had the Option to Demand Balance Repayment at anytime

What happened on October 29,1929?Answer: Stock Market Crash

SAMPLE. NOT FOR USE BY A PLANNERc

Why People Pay Off Their MortgageStock Market Crash 1929

Margin Calls ($10 to Borrow $100)

Run on the Bank

Banks Called Loans

Mortgage Holders Lost HomesSAMPLE. NOT FOR USE BY A PLANNERc

Why People Should Not Fear Mortgages

Consumers can No Longer Purchase Stock with 10% Down

Banks are no longer underwriting stock Banks can no longer cancel mortgages FDIC was created to protect consumers Banks now have access to unlimited cash

through the secondary market


Material presented regarding use of home equity and additional mortgage obligations are not appropriate for everyone. Loan proceeds used for direct investment purposes should be used only when clearly suitable. Discuss all investment opportunities with your financial planner based on your risk tolerance. Only borrow an amount that you can afford to pay from funds you have available to invest.

Important Information- Disclosure


Why do Consumers Buy Homes?Top 3 Reasons that consumers cited for buying a

home?

*2003 National Housing Survey – Fannie Mae – page 4

#1 Long Term Financial Investment 84%

#2 Feeling of Ownership 74%

#3 Neighborhood I Like 67%


What Other Reasons Do People Own Homes?

It provides for Basic Human Needs Shelter, Comfort, Security, and Privacy

In Addition to Potential Tax Savings Potential Leveraged Asset Growth Inflation Protection with Locked in Payments Establishes Credit History Forced Savings


American's Assets

67% of American Home Owners have more Equity in their Home, than in all other investmentsSAMPLE. N


What makes up a Quality Investment?

Investments are compared using these simple criteria:

Rate of Return- What do You Earn? Safety – Potential to lose your principal? Liquidity- Ability to use and control your

Investment? Tax Free or Tax Advantage- Ability to realize

gains on your investment without paying taxes?


What makes up a Quality Investment? (continued)

Investments are compared using these simple criteria:

Retirement Income- Ability to Generate more Income when you Need It?

Legacy For Family- Can You Provide for Them After You are Gone?

Diversified- Are all Your Eggs in One Basket?


Important Asset QuestionWhat percent of your assets would You

typically invest in something that is:

Potentially Unsafe Partially to Totally Illiquid Guarantees a 0% Annual Return Can’t Provide Income Is Not Diversified


Surprise Answer This investment is your home equity!


Safety DefinitionBasic Definition of Safety

Guaranteed, Insured, or totally protected from Volatility.

More Flexible DefinitionMinimizing Risk or Potential for loss


How Safe is Your House?

These are 3 ways you can lose the value of the equity in your home:

Reduction in value due to economic or business changes

Foreclosure for failure to make mortgage or tax payments

Lawsuit where your personal assets are attached


How Safe is Your House?

While a home is considered a Safe Asset a“Market Bubble” or change in local economic outlook could

reduce or eliminate:

Price Appreciation (main source of equity growth) Current Equity (can’t borrow if the equity is not there) Source of Down Payment (for future purchase)

This loss occurs if you sold the house during a depreciated market


Diversification You should never have all your EGGS in one

basket!! Too much equity in your home doesn’t allow you to

be properly diversified!!

QUESTION:How important is it to you to protect your wealth in your home?Have you considered the safety of the wealth in your home before today?


How Liquid are Your Assets?

How quickly can you access your money?Cash

Same day accessBonds/Stocks/Mutual Funds

Same day accessHome Equity

Refinance: 30-90 days (assuming that you qualify)Sell the Home: 60 – 180+ days


Home Equity Liquidity Home equity is typically the least liquid

investment you have and the only investment that requires you to qualify to access your wealth.

To get your money, you have to prove that you DON’T need it!

Credit, employment, current debt load and closing costs all affect your ability to get to your equity.


Problems With Extra Pre-Payments Assume your monthly payment is $3,000

You make an extra payment of $ 300 a month every month = $3,600

OR

You make a $300 deposit into the savings account each month = $3,600

After 5 years you have $18,000 in equity or savingsSAMPLE. N


You Become Disabled or UnemployedDoes the Bank care that you’ve been making

extra payments for 3 years?

NO, the Bank only cares about you making the next month’s payment!! You STILL need to

come up with $3,000!

Had you saved the money instead of building equity, you could make payments for over 6

monthsSAMPLE. N


LiquidityQUESTION:

How important is use and control of the wealth in your home?

Have you considered liquidity of the wealth in your home before today?


Rate of Return What if you learned that a portion of your wealth

was earning an annual rate of return of 0% and wouldn’t be changing throughout your lifetime?

Would that be a major concern? Would you make an investment that guaranteed

you a 0% return?


Equity in your Home The equity in your home always appreciates at a

rate of 0%. Equity in your Home only increases through:

Principal Repayment Property Appreciation


One Asset vs. Two AssetsOne Asset (Traditional Method)

Home Value $200,000Appreciation by Year* 5%Home Value in 10 years $325,778Value of Current Equity in Home $100,000Rate of Return on that Equity 0%Value of that Equity in 10 years $100,000


One Asset vs. Two AssetsTwo Assets

Home Value $200,000Appreciation by Year* 5%Home Value in 10 years $325,778Conservative Equity Growth Account

$100,000

Rate of Return 5%Value of Equity in 10 years $162,889


One Asset vs. Two Asset ComparisonOne Asset

Home Value $200,000Appreciation by Year*

5%

Home Value $325,778Value of the Equity in Home

$100,000

Rate of Return 0%Value of Equity in 10 years

$100,000

Total Net Worth $425,778

Two AssetsHome Value $200,000Appreciation by Year*

5%

Home Value $325,778Conservative Growth Account

$100,000

Rate of Return 5%Value of Equity in 10 years

$162,889

Total Net Worth $488,664SAMPLE. NOT FOR USE BY A PLANNERc

Immediately Double your Accumulating Assets

Asset-Home $200,000No Mortgage

- Or -

Asset-Home Asset- Safe Investment $200,000 $200,000

MortgagedSAMPLE. N


How Will This Impact Your Growth?

Asset-Home1 Asset- Safe Investment2

$200,000 $200,000 + 7% Appreciation + 7% Growth

$214,000 $214,000

Increase in Assets $28,000

1 Home is worth $200,000, with no mortgage2 Borrow the $200,000, invest it at 7%


What About the Payment?$200,000 Interest-Only Mortgage at 7%

$14,000 yearly interest28% tax bracket$3,920 taxes saved$10,080 net interest cost

End of Year ResultsHome Appreciates 7% $14,000Safe Investment earns 7% $14,000Assets Increased total of $28,000Less net interest cost $10,080Profit by Investing Home Equity $17,920


Important Question If the government said they would pay up to 35%

of your monthly mortgage payment, would you take full advantage of it?


Tax Break Mortgage interest on first mortgages is

deductible on loans up to $1,000,000 and on a second mortgage or home equity line of credit up to $100,000.

You can create tax savings on a combined total of $374,000 in a 34% tax bracket.


Free Government Money $1,500 Monthly Mortgage Payment You Really Pay $1,080 Government Pays $420*

You Receive $5,040 a Year From the IRS (assuming payment is interest)!!

$151,200 over 30 years

*Assuming 28% tax bracket


Does your Home Equity Pass the Test?

Test Results7 No’s1 Yes

Score- Poor Investment

Liquidity No

Safety (No Risk to Principal) No

Earn Interest Every Year No

Tax-Free or Tax-Advantaged Yes

Retirement Income for Life No

Maximum net Retirement Income (after taxes paid) No

Upon Death- Money for Beneficiaries No

Diversified No


Benefits of Separating Your Equity from Your Home

Increase Liquidity – Have access to the money Enhance the Safety – No longer affected by any

“housing bubble”, or by loss of equity from foreclosure. Protect Yourself from Disability and Unemployment

– You have cash to make the payments if you need it. Become More Diversified – Put your eggs into more

than one basket. Increase Your Rate of Return – Equity has a 0%

return. Maximize Your Tax Deductions – Payments on the

investment are tax-deductible.SAMPLE. N


Is Your Home Creating Wealth? Currently in the US, 30% of US homes have no

mortgage, with 65% of those homes are owned by Seniors over the age of 65.

The average Senior in the US today has combined household income of $21,450 per year.

They’ve accomplished the goal of having the home paid for, but at what price?


Why is This Important? The average retirement age in the U.S. moved

from 66.9 to 62.7 between 1990 and 2000, dropping an average of 5 months per year

The average life expectancy in the U.S. is currently increasing by an average of 4 months per year since 1970.

Have you even considered outliving your retirement savings?


Where Do You Find the Money? The longer you can put money to work for you

the more dramatically it can compound.

The difficulty often comes in finding additional money to save, and maintaining the discipline to continue saving.

By consolidating long-term debts in a new mortgage, you can often find the money to cover the payments on your equity investment.


Retirement Account Fallacies IRA’s and 401(k)’s are NOT Financially

Beneficial to Your RetirementExample:Save $4,000 per year for 30 years: $120,000Income Tax Bracket: 34%Annual Taxes Deferred: $1,36030 Year Tax Savings: $40,800$4,000 / year @ 10%/yr for 30 years: $723,774Withdrawal 10% per year: $72,000Subtract 34% taxes: $24,000From age 65 to 85, $500,000 in taxes are paid vs. $40,800 saved

during your contribution years.SAMPLE. NOT FOR USE BY A PLANNERc

Retirement Account Fallacies In the FIRST two years of retirement, every

dollar of taxes saved is paid back. A person living a normal life expectancy will pay

over 10 times the taxes on a qualified retirement plan during their retirement years than the taxes saved during their contribution years

Whose retirement are we planning? Ours or Uncle Sam’s?


Predictability Game Pick a number between 1 and 10. Double it. Add 8 to the total. Divide it by 2. Subtract your original number. If 1=A, 2=B, 3=C, 4=D, 5=E, 6=F, 7=G, 8=H, 9=I and

10=J, think of a country that begins with the letter next to the number you are left with.

Take the next letter in the alphabet and think of an animal that begins with that letter.

Now think of a color that is usually associated with that animal.SAMPLE. N


Predictability GameYou have selected a

Grey Elephant from Denmark!

This is an example of predictability. The government can predict how much money we will be paying in taxes in our retirement years. We need a way to out-smart them!


Reverse Tax Planning Common Advice from Financial Planners

PAY OFF YOUR HOME AS QUICK AS POSSIBLE Extra Payments Bi-weekly Payments

Maximize IRA contributions

Are they really helping you plan for retirement?


Reverse Tax Planning Let’s say you follow that advice, what happens

during your retirement years? By paying off your mortgage, you have eliminated

your biggest tax deduction, mortgage interest Now, all of your income from your qualified plan is

100% taxable

You have created a tax situation that is the absolute least favorable situation!! 100% taxable income, no deductions


Retirement Wealth

Your Mortgage Can Be Your Best Ally in Creating Maximum Wealth for Your

Retirement!


Use Your Mortgage to Make a Million Dollars

Borrowing at 7.5%(tax-deductible*)Year

$160,000 in Equity

1

5

10

15

20

25

30

$7,920

$39,600

$79,200

$118,800

$158,400

$198,000

$237,600

Investing at 7.5%(compounding tax free)

$12,000

$69,701

$169,765

$313,420

$519,656

$815,734

$1,240,793

Difference

$4,080

$30,101

$90,565

$194,620

$361,256

$617,734

$1,003,193*Assuming 34% tax bracket


Benefits of Investing Your Equity

Year Borrowed Equity

Interest Payment

Portfolio Value Home Value LTV Investment

GainInvest the

Cash Net Gain

1 $60,000 $3,024 $65,100 $210,000 76% $5,100 $3,148 $1,9522 $60,000 $3,024 $70,796 $220,500 73% $10,796 $6,583 $4,2133 $60,000 $3,024 $76,991 $231,525 69% $16,991 $10,331 $6,6604 $90,000 $4,536 $116,353 $243,101 78% $26,353 $15,995 $10,3585 $90,000 $4,536 $126,533 $255,256 74% $36,533 $22,174 $14,3596 $90,000 $4,536 $137,605 $268,019 71% $47,605 $28,917 $18,6887 $125,000 $6,300 $187,708 $281,420 80% $62,708 $38,110 $24,5988 $125,000 $6,300 $204,133 $295,491 76% $79,133 $48,140 $30,9929 $125,000 $6,300 $221,994 $310,266 73% $96,994 $59,085 $37,910

10 $160,000 $8,064 $279,481 $325,779 80% $119,481 $72,862 $46,61911 $160,000 $8,064 $303,936 $342,068 76% $143,936 $87,895 $56,04012 $160,000 $8,064 $330,530 $359,171 72% $170,530 $104,298 $66,23313 $180,000 $9,072 $381,202 $377,130 74% $201,202 $123,243 $77,95814 $180,000 $9,072 $414,557 $395,986 71% $234,557 $143,915 $90,64115 $180,000 $9,072 $450,830 $415,786 67% $270,830 $166,470 $104,36016 $250,000 $12,600 $566,403 $436,575 80% $316,403 $194,753 $121,65017 $250,000 $12,600 $615,963 $458,404 76% $365,963 $225,612 $140,35218 $250,000 $12,600 $669,860 $481,324 73% $419,860 $259,282 $160,57819 $280,000 $14,112 $761,098 $505,390 75% $481,098 $297,593 $183,50520 $280,000 $14,112 $827,694 $530,660 72% $547,694 $339,395 $208,299

Assumptions: Initial Home Value - $200,000 Initial Mortgage Balance: $100,000 Max LTV: 80%

Mortgage Interest Rate: 7% Investment Rate: 8.75% Tax Bracket: 28% Home Appreciation Rate: 5%

Interest Payment is after-tax payment. SAMPLE. NOT FOR USE BY A PLANNERc

Benefits of Investing Your Equity (continued)

Notes from the Previous Chart:

Equity up to 80% is pulled out from the house, valued at $200,000. This keeps the interest cost as low as possible.

The outstanding mortgage balance is subtracted from the amount available to invest.The funds are invested in a tax-advantaged account earning an average of 8.75% / year.Every three years, accumulated equity is pulled out and added to the portfolio.The Investment Gain is the value of the portfolio less the outstanding borrowed money.The Invest the Cash column reflect the value of investing the after-tax monthly interest

payments on the borrowed money instead of using the money to pay back the loan.The value of the home is presumed to go up 5% per year.The Net Gain column reflects the difference you earned by borrowing and investing your

equity instead of investing the after-tax interest payments directly.On a $300,000 home with a $100,000 outstanding mortgage, the net gain after 20 years

is $381,995 instead of $208,299.


Mortgage Basics 80% LTV Financing Down to a 500 Credit Score

on a Refinance, 620 on a 2nd Mortgage 3 Yr, 5 Yr, and 10 Yr Fixed Interest Rates Self-Employed Borrowers Accepted Stated Income Programs Available Closing Costs Average 3% of the Loan Amount Debt Consolidation Program Can Save You

Hundreds of Dollars Per Month This Money Can be Used for Your Investment

ProgramSAMPLE. NOT FOR USE BY A PLANNERc

Debt Consolidation Example Current Mortgage Balance: $100,000 Interest Rate: 6% Monthly Payment (P/I): $600 Credit Card Debt: $25,000 Monthly Payment: $750 Tax Bracket: 28% New Mortgage: $128,000 New Monthly Payment @ 7%, interest-only: $747 After-Tax Monthly Payment: $538 Monthly Savings: $812 Investment Equity This Supports: $139,050 (@ 7%,

interest-only)SAMPLE. NOT FOR USE BY A PLANNERc

Suitable Investments Investment Criteria: Safety of principal (don’t want to risk the money) Liquidity of funds (need access on short notice) Investment return (need above market return) Tax advantaged (let capital grow and be

removed tax-free)

Your financial planner can discuss suitable investments that will earn you significantly more than the tax-deductible mortgage interest cost.


Benefits of Free Consultation Avoid Common Mortgage Mistakes Increase Your Tax Deductions, Safety, Liquidity and Return Protect Yourself from Disability or Unemployment The Fastest, Easiest and Smartest Way to become Mortgage

Free How to Increase Your Net Worth How to Create Extraordinary Wealth Overview of Suitable Investments for Your Home Equity How to Create an Investment Account to Accumulate Money for

Your Retirement Years Make Sure Your Retirement is on Course


Get More Information The mortgage planner who you would be

working with would like to email you a free report that better explains how you can create wealth from your home equity.

You can also receive a free Excel spreadsheet file so you can work the numbers based on your home’s value, current mortgage balance, appreciation rate, tax bracket and interest rates

Simply send an email to: [email protected] or call Joseph Kamenar at 215-480-2737.


mailto:[email protected]

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