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Friday, July 03, 2020
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Thoughts that go through my head while I sleep: Are you looking for a home? Are you looking for a mortgage? Do you have a home? Do you have a mortgage? Will you live forever? Well, we all know the answer to that one. A low mortgage rate does not equal the future ability to make payments. There’s a difference between being a “Debbie downer” and a realist who plans for the future in order to protect oneself and one’s family.

I was trained as a CPA and really use that skill set in an advisory capacity in many different ways, one of them being as a mortgage banker/broker. Bookkeeping is the starting point and the foundation for all financial reporting, and the basic concept of recording transactions begins with debits and credits. Basically, there are two sides to recording (describing) a transaction. For example, if you sell something for $1000 you would receive cash (keeping it simple). If you were to record this in your record-keeping books, it would look like this:

Debit

Cash $1,000.00

Credit

Sales Revenue $1,000

This example shows that the money you received went into your bank account (the debit) and the reason you received the money (the credit). Two sides.

Now let’s say you borrowed $1000. How would that be recorded?

Debit

Cash $1,000.00

Credit

Loan payable to lender $1,000

This example shows that the money you received went into your bank account (the debit) and the reason you received the money (the credit). Two sides.

You may be thinking “Hey, Mr. Mortgage man, where are you going with this?”

I’m getting there. When you buy a home assuming that you will occupy it, and it’s not for investment purposes, how would you record the transaction in your personal general ledger? It may go something like this. Assuming you took out a mortgage, put 20% down and paid $400,000:

Debit

House $400,000

Credit

Cash $80,000

Mortgage payable $320,000

This tells you that you have a home asset for $400,000, and you took $80,000 from your savings account (you now have $80,000 less in savings) and that you owe $320,000.

If you were married and have kids, well I’m not getting into all the debits and credits on that one, but the question is, if God forbid something happened to you, and you left this earth, how would that $320,000 be paid? How would the other family expenses and obligations be paid? What would that look like in debits and credits?

Option 1: You have liquid savings and use it to pay off your mortgage:

Debit

Mortgage payable $320,000 (this means being paid off)

Credit

Cash $320,000 (this means you have $320,000 less cash from savings)

You are left with a house that has no debt and less cash, which you may be getting a decent return on investments. You would still have all the other family expenses and obligations.

Option 2: You have no liquid savings:

Debit

Home asset Value $400,000

Credit

Mortgage payable $320,000

You are left with a house that has debt. You will still have a mortgage payment, and you would still have all the other family expenses and obligations.

Option 3: You have no liquid savings, or may have some savings, but you have a life insurance policy for $1 million that was carefully structured, taking into consideration your household budget, that takes into consideration the earnings potential of the main wage earner:

Debit

  1. a) Cash $680,000

Mortgage payable $320,000

Credit

Life insurance proceeds $1,000,000

OR

Debit

  1. b) Cash $1,000,000

Credit

Life insurance proceeds $1,000,000

You can choose to pay off the mortgage or keep the cash. You can eliminate the mortgage payment, or invest the total sum received. You will still have all the other family expenses and obligations. You have options.

If you have liquid savings, and you have invested well and have a buffer of cash, you may be just fine. The question is what if you don’t? Well now you have an asset that you bought for $400,000 and if it maintains value or increases, you can always sell it and pay the loan back, but where do you go now to live? Chances are it would probably be the same amount of money on a monthly basis to live anywhere else unless you moved in with family.

But the home is not the only thing that has to be paid. If two people are working and both make enough to support a family and one of the spouses should leave this earth that’s one thing, but someone would still have to be home to take care of the kids in order to enable the other parent to work.

There would have to be enough money to pay for schools, food, utilities, camp, clothing and travel, and the federal government still needs to get their piece.

We have all been going through very trying times, and the world has changed, but the one thing that has not changed is that one day we will all leave this earth, and the question begets another question, which is when we do leave this earth how easy or hard do we make it on those we left behind?

Insurance comes in many different forms: Savings and investments, Trusts and estates, Endowments, Insurances, Prayer with the caveat that God helps those who help themselves.

The name of the article should’ve been “Mortgage Protection Plus” because you’re not only protecting the mortgage—you should consider protecting your family’s lifestyle and future as well.

When you are younger, it’s natural to feel immortal. That you’ll live forever. No guarantee though, so that being said, how does one plan for that inevitable day of leaving this earth and leaving behind a financial parachute? First thing is evaluating the resources you have to work with. Savings, family inheritance, current insurance, any debt, tuition and household expenses and present and future earning ability.

In today’s world, no matter how much you earn it seems like it’s never enough. We have our general expected expenses and those expenses that pop up that we never planned for and never anticipated and so we hammer away trying to keep our heads above the water. You say to yourself where do I get the extra money to pay for enough insurance protection? It is certainly a legitimate question. It starts with sitting down and freeing up cash by cutting other expenses and reducing other debts. To free up a couple of hundred dollars one can do the following:

Cut programming on cable.

Refinance any student loan debt.

Refinance the current mortgage. This may be a situation where even though the rate is not much better than what you have, you may have paid the loan down enough to refinance and lower your payment to free up some cash, and that can be used to pay for family and mortgage protection, which one day may be invaluable.

Eat out less

Make your own list as it’s a very personal thing.

Planning is the best medicine to reduce ruminating about the future. If you’re not a ruminator, lucky you, but you know what? Planning is the best medicine so you don’t become one.


Carl E. Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp, NMLS# 5668. He is a real estate mortgage banker and business-financing expert with over 30 years’ experience. He currently has 185 five-star reviews on Zillow. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! Visit www.greenbackcapital.com  or email [email protected]

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