Who Is More Secure When You Park Your Wealth in the House?

To answer that question it is necessary to point out that there are three methods by which homeowners park their wealth in the house: 1) providing a down payment when they purchase a house, 2) making principal payments on their mortgage, and 3) market appreciation.

Handing-Over-CashThe first two methods are almost completely under the control of the homeowner. I say “almost completely” because at the time of this post, unless you are eligible for a VA loan, a lender will require a minimum down payment of 3% to 5% with a conventional loan or 3.5% with a FHA loan. Additionally, the majority of mortgage loans available today are amortized loans, which require the borrower to repay a portion of the principal loan with each monthly payment.

Homeowners park additional wealth in the house any time they provide down payments that are larger than required by the lender and/or when they include with their monthly payment a principal amount larger than is required by the existing mortgage terms.

Mortgage Paid in FullNow, I know that you don’t want a mortgage. What you want is a house. But, for most people, to get the house, they must obtain a mortgage. If you’re like most people, you want to get rid of that mortgage as quickly as possible, so you send every extra dollar that you can to accomplish that very goal. If you don’t send every extra dollar because your financial circumstances prevent you from doing so, you more than likely wish you could.

The problem is that, for most people, they go about paying their mortgage off to the exclusion of every other financial priority in their lives. They reason that they will really be able to save money when the mortgage payment is gone, but they fail to give any consideration to the time value of money and the opportunity cost of that decision. What they don’t realize is that with each additional dollar of wealth they park in the house they are subjecting that wealth to unnecessary risk and are becoming less and less secure.

Many homeowners who scrape up every bit of extra money they can to provide a large down payment or apply against the principal balance of the mortgage often find themselves with little or no liquidity. When tough times come, and they will, they find themselves scrambling to make their mortgage payments.

Trapped EquityIf you suddenly experienced difficult financial times, would you rather have $25,000 of cash to help you make your mortgage payments, or an additional $25,000 of equity trapped in your house?

What many homeowners don’t realize is that even if they’ve been consistently making double mortgage payments for five years in a row, the lender will have no leniency. If suddenly they experience a financial setback the lender will not care. Regardless of how much of your wealth is parked in the house, next month’s mortgage payment is still due in its entirety, no matter what, until the mortgage is paid in full.

Additional wealth invested to pay down a mortgage provides additional security to the lender, NOT TO THE HOMEOWNER. You feel more secure, but you are, in fact, less secure. Your house and whatever wealth you have stored in it are less safe.

Don’t believe me? Consider the following: Assume YOU are a mortgage banker looking at your portfolio of mortgage loans and you have 100 loans that are ALL delinquent. All of the loans are for houses valued at $300,000. Some of the loan balances are $150,000 and some are $250,000. Suddenly, there is a downturn in the market and all of those houses are now worth $200,000. Which houses do YOU, AS THE BANKER, foreclose on FIRST?

Remember, YOU are the banker, the mortgage company. You can take back houses with loan balances of $250,000 that you are guaranteed to lose $50,000 plus foreclosure and sales expenses, or you can take back houses with loan balances of $150,000 that you will get back your investment less foreclosure and sales expenses. As a business owner that is owed money you would take back the houses that you could recover your investment and try to work with the rest hoping that they get back on their feet.

Risk TightropeAs homeowners pay down their mortgage, they are unknowingly transferring the risk from the bank to themselves. When the mortgage balance is high, the bank carries the most risk. When the mortgage balance is low, the homeowner bears the risk right up until the day the mortgage is paid in full.

The safest position for a homeowner is to have their house mortgaged to the hilt or owned free and clear. Anywhere in between subjects the homeowner to unnecessary risk.

Almost every person who has ever lost their home to foreclosure would have been better off if they had their wealth separated from their house and stored in a safe, liquid, conservative side fund that could be used to make the mortgage payments during their time of need.

If you’re interested in learning more about the safest, quickest, and most efficient method for paying your mortgage off contact us to schedule a time to talk about your specific circumstances.

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