Homeowner Wealth Strategy 101:
Step #1

Create a cash cushion....this is money on hand and readily accessible for life's little unbudgeted emergencies. For an average family of four, with an annual income of say $60k to $80k per year, $3,000 to $5,000 should do it.

If the individual is self employed, or paid on a commission basis the figure should be higher, to account for irregular monthly income. Having this cash on hand will allow you to develop a good habit of using cash instead of credit, for these purposes.


Step #2

Get debt free....the idea here is to eliminate all non-preferred debt. To clarify, this is all debt that isn't your mortgage. Implementing this step will free up monthly cash flow, to allow you the opportunity to form the habit of saving money and earning interest, instead of paying interest on bad debt.


Step #3

Establish liquidity....we're talking "big bucks" here. Ideally, 1 years salary saved should about do it. This money is not for your retirement; it's for two primary reasons...GOOD & BAD.

An example of the good, would be business or investment opportunities. The majority of the time, when you're presented with an opportunity there's an upfront cash/capital requirement. If you have the money, you at least have the option of taking advantage of the opportunity.

An example of the bad, would be major interruptions of your income. This would include health issues, job layoffs, or any economic downturn that's outside of your control.


Step #4

Pay off your house....when it comes down to this step, there's more than just one way to accomplish it. Sure you can have a traditional "mortgage burning party" however, paying off your home can be accomplished from a balance sheet perspective, without giving up your mortgage interest tax deductions, and the ability to "farm" tax-free equity out of your home.

Think about it...if you have a

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$300k mortgage on your personal residence, and have a combination of real estate & stock assets totaling $300k you would, at least from a balance sheet perspective, have your home paid off, at the same time retaining the financial benefits of having a mortgage.


Step #5

Be committed....you must be committed to managing your equity! The effective management of home equity (having control of where your money goes) along with consistent long-term financial discipline (conserving not consuming the money) is the key to financial independence.


If you are in the position of not having enough cash on hand to implement these sound strategies, as a homeowner you have the option of utilizing "Wealth Builder Mortgages"....to help increase monthly cashflow.

Now there's allot of debate & controversy over various "abuses" in the lending industry as of recent, however I venture to say that loan products....are just that....loan products. They are tools, & if used improperly (for the wrong application) disastrous results are sure to follow.

With that said...I feel, when it comes down to helping homeowners increase their monthly cashflow (for proper use of the funds) there is no better mortgage than the Payment Option Arm. This is due to the option homeowners have available; to only make a minimum required mortgage payment. This option gives homeowners a "jump start" on creating wealth, by providing more money for them to invest with, much sooner.

The Payment Option ARM is an adjustable rate mortgage that gives homeowners the unique benefit of having four payment options each month.

We'll be focusing primarily on the 1st payment option, the minimum required payment.

With a Payment Option ARM, interest accrues at the fully indexed rate. If you choose to make the minimum required payment, you are making payments at a much lesser rate.

The amount of deferred interest in any given month, is just the difference between the interest only payment and the minimum required payment. For example, if the interest only payment is $1,600.00 per month and the minimum required payment is only $1,000.00 there would be $600.00 in differed interest, generated if you only make the minimum required payment for the month.

Most Lenders add the differed interest back on to the principal loan balance, thus creating negative amortization.

Now before you fall out of your chair.... stop and think for a minute. If you look at the whole picture logically, there's no reason to be afraid of negative amortization.

When homeowners refinance and roll their closing costs into the loan, or "cash out" some equity, their loan balance increases. This has the same effect as negative amortization.

On average, 6 out of 10 homeowners, (here in South Florida) refinance every three to five years to access the equity they have gained because of appreciation; this is in fact negative amortization taking place, just in larger amounts.

If homeowners are refinancing every three to five years, to pull out equity. What's the point in having an amortizing loan in the first place?? Think about it... Why pay down a loan only to take back out the principal paid down, three to five years later?

It is my belief that homeowners take better advantage of the time value of money (remember the old saying "a dollar today is worth more than a dollar tomorrow") when they make minimum required payments on their Payment Option ARM loan and invest the difference between it and their 15 year fully amortizing mortgage payment.

Most investment strategists agree, that using other peoples money (OPM) is the best way to create wealth, and it's what leverage is all about. The most common way to utilize leverage is to invest in real estate through mortgages that help maximize cash flow.

Financially savvy, clients can manage their equity and cash flow by refinancing every three to five years with cashflow friendly mortgages (such as Payment Option ARMs) and invest the monthly savings to create wealth and prepare for retirement.

So the bottom line is... Don't fall prey to the hype in the media...there is no "real estate/mortgage meltdown" the sky isn't falling....the lending market is simply correcting itself…borrowers were pressing lenders for lower monthly payments & as a result, were signing up for loans they shouldn’t have been enrolled in, just to take advantage of lower payments for an introductory period. Borrowers then took the extra monthly cash savings & racked up more debt, & didn’t save or even invest a penny of the money.

As a savvy homeowner you still have wonderful options available (thru sound professional advise & guidance) to help you gain financial independence thru the elimination of non-preferred debt & proper saving & investment of extra monthly cashflow.

Author Resource: Jeboria McGowan is a Senior Mortgage Planner who specializes in helping Florida homeowners achieve financial independence through proper management of their home equity. Please feel free to email her, or to visit: http://www.america1mortgagegroup.com for further informative reading.




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