What if I were to tell you that almost everything you have been told about what to do with your home has been absolutely wrong and that one of the worst ways to build wealth is through your Home? And what if I further went on to show you that anyone who perpetuates this myth probably is not your best source for accurate financial information?
Most of you right now are looking at the byline a couple of times to see if this article is REALLY being written by a mortgage person. Some of you have taken this as final, unequivocal proof that all mortgage people really do sit around a big table of tea cups wearing hats with fractions on them! No you are not in Wonderland but if you keep reading you might find many of you have been for a long time now.
One of the buzzwords or catch phrases floating around the financial circles is "wealth creation." This has gained prominence due to the ability of the planner or agent to broaden their focus on overall wealth with their clients instead of just return on a particular investment. While a holistic approach is a very good one, what wealth creation strategies often lack are a defined strategy for accomplishing well, wealth creation! These plans often fail or vastly under perform because they don't properly account for one of the biggest parts of the wealth picture and that's the Home!
WHAT DID HE SAY?
Now that's not a typo and I didn't contradict myself from the first paragraph. You see, most people believe their Home is something completely separate from the rest of their financial planning. It's this sacred cow that's over in the green grass munching away while everything else in their financial life is trying to figure out how to grow without the food it needs. The sooner people realize that EVERYTHING they do is an investment decision , the better off they will be. The implication of your decision is not simply what you obtain by your action but what opportunity you give up.
So, back to wealth creation and mortgage planning. In borrowing some thoughts from a great financial partner of mine, Brent Gilmore, we can summarize what we typically look for as far as characteristics of a good investment as:
- something that earns us a good return based on our risk
- is liquid if we need it
- is not subject to additional restriction to access it once we have it
- is not at risk of loss.
The reality is your home is absolutely not the definition of a good investment. The reasons are fairly clear if we break them down. What if I told you the MAXIMUM return you could make on the purchase of your Home was 0%?
Here's where we hit the rabbit hole.
First we must explain the difference between return of investment and return on investment. Return OF investment is simply getting back the money that you put in. Return ON investment is difference between the end value of your investment and the amount you invested.
Whether you pay cash for your home or pay nothing down, your Home mortgage will be worth the exact same in 1 year, 5 years, 10 years or 30 years. It is true that if values keep going up you will make a positive return ON investment but that is independent of the return OF your investment. Even that fact has some doubt clouding it, but that's another article.
PAGING CHICKEN LITTLE
Now let's step back from all of the sky is falling stuff and clear some things up. Your house may well continue to appreciate i
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