For the history buff and obedient American patriot Independence Day means commemorating the adoption of the Declaration of Independence on July 4, 1776. For many, Independence Day means the start of summer season. Whether that is met with joy because the kids are being sent off to camp, or whether it’s cause for celebration because you get to relocate to a bungalow colony full of summer friends and memories; or whether you get a little bit of reprieve from your normal all year-round working schedule – it is certainly a time that is appreciated by many.. Independence is certainly something that everyone can appreciate.
It is also a milestone in the calendar where one can realize that half the year has gone by, and it’s a good time to revisit financial considerations that one might be trying to achieve. When it comes to finances however, there is no unanimous definition of what financial independence is. For some, financial independence is achieved when your passive income streams cover all your living expenses. For others, it means not having to work another day of their life. Some, won’t feel financially independent until they are completely free from the constraints of debts. For many, financial independence might simply mean having the ability to make life decisions with money not being a determining factor. As you can see, it means to different things to different people – and certainly becomes a moving target with the different stages of one’s life.
When it comes to homeownership, the resounding consensus that I hear from almost all my clients is that their goal of owning a home is to have no mortgage whatsoever. A lofty goal indeed. People assume that I am biased because I am in the mortgage business, but I quickly explain that I receive no financial benefit whether someone maintains or pays off their mortgage whatsoever. In fact, when I further discuss financial considerations, debts, income, cash flow analysis, retirement goals, life plans, investment strategies, reserve funds, and the like – most people are shocked to learn that a mortgage is perhaps the safest, cheapest, and most lucrative debt out there.
There are many examples that support this theory, but for the purposes of this short article I will touch on a few core items. First, the a very common misconception of “Building Equity.” Everyone wants to build equity, and that’s typically the main financial reason that drives renters to buy a new house. By definition, having a big mortgage is counter to the premise of building equity because the bigger the mortgage, the lower the equity. Ric Edelman, a financial advisor whose principals of finance I very much agree with and concur, has much to say on the topic of mortgage debt. Edelman is widely regarded as one of the nation’s top financial advisors, having been named in 2016 among the country’s Top 10 Wealth Advisors by many acclaimed publications and organizations.
Ric has a great illustration that speaks to the core misconception of equity building. Let’s say someone were to buy a house for $300,000, and get a $250,000 mortgage at 4% fixed over 30 years. By making regular mortgage payments, the loan’s balance in 20 years will be just $117,886. The theory is, that equity grows as you pay off the mortgage and thereby the faster you pay off the mortgage, the faster your equity will grow. But this logic fails to acknowledge that this is not the only way you will build equity in your house. That’s because your house is almost certain to grow in value through appreciation. If that house rises in value at a modest rate of 3% per year, it will be worth $541,833 in 20 years! You’ll have nearly a quarter million dollars in new equity even if your principal balance didn’t budge. That is the real objection as to why renting is a waste of money.
Another common misconception about the financial independence of mortgages is that borrowers are always looking to minimize “interest expenses.” Obviously no debt whatsoever is a remarkable goal for everybody, but not very likely for the average citizen. As many know, a mortgage interest is tax-deductible, and thereby “tax-favorable”, as Edelman likes to say. Specifically, if you’re in the 35% tax bracket, every dollar you pay in mortgage interest saves you 35 cents in federal income taxes. Many of the savings and deductions apply on state income taxes level as well. Say you’re in the 33% tax bracket and you get a 5% mortgage, the true interest rate on that loan is really 3.35% after taxes. To put that into a visual perspective, if you invest money and earn 5%, your profits are taxed at only 20%, and your after-tax profit is 4.00%. Thus, even if your investments earn no more than what you pay for your loan, you’re still making a profit!
It is very challenging to truly relate fully how a mortgage does not impact financial independence, and in fact will more often than not – if utilized properly will be able to assist someone to achieve their financial objectives much faster and more lucratively if utilized properly. I love watching people’s faces when I am able to show them how so – it truly brings great satisfaction to my work. It’s certainly worth a phone call. Special shout out to the Ciment Family!
By Shmuel Shayowitz
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience including licenses and certifications as certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].
