Stop Thinking That Being Debt Free Is Good

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Spurred on by the banks, new investors mistakenly thought that becoming debt free was desirable. They owned homes that were sometimes worth millions and certainly hundreds of thousands of dollars but they had no disposable cash—making for an absurd situation.

They were the classic house-rich and cash-poor victims of the old school way of thinking about mortgages. And, to make matters worse, they have been making this mistake for years. In the early years, when there was something they could have done to improve their situation, no one explained to them how to invest their money more wisely.

That was really a shame. Because, in those early years they had the money and the earning power and thus could have saved money in a cash instrument.

But they got bad advice, and so they put their money into non-cash items, especially fixed term mortgage instruments. As they reach their golden years, these homeowners no longer qualify for mortgages that could ease them out of their house-rich and cash-poor dilemma. They could get cash, of course—by selling their property, or by doing a reverse mortgage—but these were hardly optimal solutions. (A reverse mortgage is a mortgage loan on which the debt of the borrower increases over time; but the debt does not have to be repaid until the borrower dies, or sells the house, or moves out permanently.)

If you want to build equity in your investments, how much better off you would be to build equity in a home without spending your own earnings to pay down the mortgage. How much better you would be if you could build equity simply by letting your investment appreciate in value

Enshrining a Sacred Value

The banks and financial institutions have enshrined as a sacred value the notion that everyone should be debt free. The only way to do that, they insist, is to pay down a mortgage as quickly as possible until the balance is zero. Only then, say the banks, does it make sense to seek to extract profit from a property. Oh how the banks love it when this strategy is followed.

Banks sometimes even offer a mortgage acceleration payment plan so that someone can make a payment twice a month, helping to knock a few years off the mortgage. Nothing makes a bank happier than if someone joins this plan.

The borrower weeps with joy—and why not? After all, the bank was merely helping the borrower to cut short the mortgage. The bank seemed to be doing a big favor. But it was not—because the borrower was paying down the mortgage with hard-earned dollars that could have been put to better use elsewhere.

The banks also convinced everyone that the most secure place for one's ''cash'' was in a mortgage program in a bank. Then the banks threw in that borrowers could be free and clear ofmortgage debt in a mere 15 years, making the idea sound most appealing. But being debt free doesn't help you build wealth. It just locks up your money in equity.

STRATEGY #6:

LET THE MONTHLY MORTGAGE PAYMENT DETERMINE YOUR CHOICE OF MORTGAGE, NOT INTEREST RATES.

Banks often take the narrow view that clients should be mostly concerned with which mortgages carry low interest rates. Banks act as if interest rates should be the only determining factor in selecting a mortgage, but that is not the way it should be.

Investors should think of the amount of the monthly mortgage payment as the key determinant and not the size of interest rates—because it's by making a small monthly payment that they will free up usable cash.

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