Today, I received an email from a Florida financial advisor. Here were his questions:
"IS YOUR "SSOYA" PROGRAM TRULY APPROPRIATE FOR THESE TIMES?"
As awed as I am by the brilliant approach you have taken to maximizing home equity to produce future significant tax-free income by clever application of the proceeds of increased mortgage debt, I cannot help but wonder (1) if such debt can readily be created by approaching lenders in a current market already overcome with delinquency and home foreclosures that continue to grow; and (2) whether this is a time to consider debt reduction as a better alternative?
No matter how easily the plan can be (to put into place) in normal circumstances, why should today's prospects be thrilled to implement it when their future now seems so uncertain?"
Here was my response to this concerned advisor:
I just had a conversation with an insightful financial planner in San Diego. He said, "The recent decline in home values is further support for the STOP SITTING ON YOUR ASSETS strategy. Had folks harvested their equity while it was high and put it to work, it would now be seing them through any difficult times they may currently be encountering."
Those who did not take advantage of a conserative equity harvest to 70 or 80% LTV have simply lost those dollars. How sad. Where did they go? They just evaporated...
Homeowners who had a paid-off or paid-down million-dollar home and only $400K in insurance (most don't keep their homeowner's fire insurance in pace with appreciation) and went through the fires... now have a $400K insurance check. Where is their other $600K? "Gone with the Wind..." (or "up in smoke.")
Additionally, the idea of paying down debt may be appropriate for some (perhaps those who have a difficult time controling their spending), but why give the bank your current wealth instead of yourself.
If you pay down your mortgage, you give your present power to the bank. They'll be able to invest and compound that cash, at the sacrifice of your personal long-term wealth-building. And all for the sake of fear.
This is the C.O.F.F.E.E. Crisis... it eats away at the very foundation of your future security. You are not building wealth when you are eliminating your only major tax deduction and paying down your cheapest source of present cash.
For now? This mortgage and subprime crisis is very focused. It hits those who are and were subprime borrowers, highly leveraged homeowners and those who were placed in homes they should not have purchased using mortgages they should not have taken... possibly beyond their means.
If people lose their job and they have separated their equity, they have a secure SAFETY Fund to see them through tough times. If they used all their extra cashflow to pay down their mortgage, they have no ready cash and they still must continue to pay their mortgage payment. There is a much higher likelihood of foreclosure in a job loss when all your cash is dumped into your mortgage in this type of lending environment.
It's in the news that some lenders are freezing home equity lines to future access. Most major sources of home equity loans have ceased lending in second lien positions. If you have paid down your first mortgage with all your available cash, you could find yourself in a real fix in a job loss situation. Ready access to your cash and personal wealth will always give you power and control over your own fate.
For appropriate homeowners, those who spend less than they make, have a fair amount of equity and recognize the value of time and its affect on their wealth, this starategy is timeless.
In fact, if you wish to move up, there is no better time than when there is a major pull-back in real estate values. While your home may sell for less, so does that larger home you have your eye on. If you can move your own house, go ahead and start looking for that bigger dream home. Sell yours...get the biggest acquisition mortgage you can comfortably handle (to maximize your tax deductibility) and harvest your current equity into your SAFETY Fund. Over time, you simply cannot beat this continued strategy.
Remember, no single strategy is right for everyone. That is where a personal financial planner and mortgage planner reveal their value. Apply the HERO Solution or pay down your mortgage? Which is right for you?
Only a personal analysis of your financial assets and your emotional assets will tell...
You will be able to read more about your choices in my upcoming book: STOP SITTING ON YOUR ASSETS, FINDING YOUR END OF THE MONEY RAINBOW. Coming soon.
