Philosophy

"Pay the least ....and invest the rest." Our philosophy about mortgage financing is much more than a slogan. It is a game plan for managing your mortgage as a financial planning tool to maximize the tax advantages and wealth building potential of your home. The concept is elegantly simple, yet powerful, and governed by two economic realities that control wealth building: Tax consequences and the power of compound growth.
  • Tax Consequences. Your home provides the vehicle for the most powerful tax shelter available to the average American. Mortgage interest payments are tax deductible to the extent of your marginal tax rate. That typically cuts the effective interest cost of your mortgage by 28% or more. Additionally, the tax code allows you to pay no capital gains tax upon the sale of your home on gains up to $250,000 for a single homeowner or $500,000 for a married couple who have resided in their home for at least two of the last five years (Please consult with your tax professional for full details.). No other tax considerations available to the average tax payer approach the power and impact of the favorable tax treatment afforded to home owners.
  • The Power of Compound Growth. Compound growth is the process of reinvesting the income from an investment over time. It is the wealth building tool of banks, financial institutions, and great family fortunes. Compounding relies on time and consistent reinvestment of returns to work its magic. Unfortunately, most people never gain an appreciation of the power of compounding investment returns and never make a commitment to an investment program that capitalizes on the compounding process. While twenty or thirty years seems like a long time to wait for an investment payoff, those years will pass whether you commit to an investment program or not. If your objective is making money grow over the long term, then committing to a program to compound your investment returns is the answer.
The Process. In the context of the economic realties of taxes and compound growth, we recommend that homeowners and prospective home buyers consider implementing the philosophy with the following rules-based strategy:
  • Make the smallest down payment possible when purchasing your home. Your objective is to maximize the interest deduction available to you from carrying a larger mortgage while increasing your total net wealth by investing the "down payment" funds in a conservative compound growth investment. Our philosophy is: "Pay the least ...and invest the rest."
  • Never pay more than interest only on your mortgage. Interest payments are tax deductible ...principle payments are not. Principal payments represent lost opportunities to save, invest and grow your capital. As stated previously, our philosophy is: "Pay the least and invest the rest."
  • Always invest the principle portion of your monthly loan payment for compound growth in a conservative investment account. Every dollar you pay back to the bank in principle is a dollar you can not invest and compound! Principle payments are opportunity costs as are down payments when purchasing property. We incur opportunity costs whenever we make a large down payment, make principle payments, or let equity sit idle in our home where it generates zero return.
  • Never pay down debt at an interest rate higher than your mortgage! This includes all credit cards, revolving credit, car payments, and installment loans. Roll these debts into your mortgage. The cheapest money you can borrow is the equity in your home. Always roll higher interest debts into your mortgage where your interest carrying costs are substantially lower and tax deductible in most instances (Consult with your tax professional for full details.).
  • Cash out home equity into an investment account whenever practical. Home equity has no rate of return. So you want your home equity separated from your home and working for you in a compound growth investment that is liquid and secure. Refinance and cash out equity to invest for higher returns than your mortgage. If your home appreciates in value over time, it will do so irrespective of the amount of equity you hold in your home. The compound investment growth of your separated equity will result in a greater net wealth effect than had you left the equity earning zero return in your home.
  • Cash is always king. Liquidity means that your money can be easily converted to cash and is quickly accessible in time of need. Home equity is not considered liquid since it can only be accessed by selling your home or by borrowing ...both of which take time. Depending on economic circumstances, neither of these choices may be available options. Because liquidity dries up in difficult economic times, you should be prudent and separate your equity from your home. Stay liquid and safe by moving your home equity into a conservative investment account where it can continue to compound and grow and remains readily available in time of need. Cash is always king.