11 Reasons to Carry a Big Long Mortgage - Reason 7

This article has been around since I was originating loans and it was recently updated on Ric's site. I thought I'd take each one of his comments as a single post and share a few comments for those of you not familiar with this article or Ric's original claims about keeping the biggest and longest mortgage you can afford.

"His words in Blue", my words in white. I'll deconstruct his key points.

SHOULD I PAY OFF MY MORTGAGE?

11 great reasons to carry a big, long mortgage.

Ric Edelman – Edelman Financial Services

REASON #7: MORTGAGES ALLOW YOU TO SELL WITHOUT SELLING.

Chances are, if you own a home, it is worth much more than it was 10 years ago. But what if you’re worried that your home’s value will fall? Should you sell the house before that happens? That’s not an ideal solution. It’s your home, after all. You have roots in the community. And where would you move? No, selling may not be a practical idea.

TOTALLY AGREE: There are times when accessing the wealth in the house is critical to accomplish a personal financial goal (want) or overcome a financial obstacle (need). I think the premise here is that you should know as a home owners (that owns a real estate asset) that the value of that asset will go up and down, AND you can borrow against the asset to access wealth and still maintain use and control of the asset, IF YOU QUALIFY.

If you’re worried that your home’s equity is at risk, you can protect it without having to sell. Simply get a new mortgage and pull the equity out of the house. It’s the same concept as selling, except that you don’t actually have to sell.

Here’s how the idea works: Say you bought a house for $200,000 with no money down (meaning you owe the bank $200,000). Further say that prices have skyrocketed and houses in your neighborhood have been selling for $500,000. You fear that prices will fall, dropping your home’s value to $400,000.

If you sell now for $500,000 (assuming that you can, and ignoring real estate commissions and other selling expenses, and pretending that you still owe the bank the full amount of the original $200,000 loan), you’d pocket $300,000. But you don’t want to sell your home, so instead refinance and get a new loan for $500,000. You now have the $300,000 in hand – just as if you had sold the house.

Obviously, this is an extreme example simply to prove a point. But the real point is that you have options. Do you still think, “I should pay off my mortgage?” Let’s consider the wealth creation side of this decision.

PARTIALLY AGREE: The example again is dated, and omits many key considerations, but it seems he's trying to do here is make sure the with an idea that your house equity can be protected by better managing the location, location, location of that equity.

I agree that the house is essentially a bank for the owner if intentionally managed around a key understanding: the wealth in the house is safe (but not guaranteed), and liquid (but illiquid compared to most other investments).

In his example of accessing wealth, liquidity is the most important consideration. There are only two reasons to borrow (Need - I can't pay cash, and Want - I have better things to do with this money). Anyone that can pay cash and chooses to borrow does so out of a 'want'. Otherwise borrowing is based on a need.

Why is this critical?

In Ric's example of accessing wealth in the house - if you WANT to borrow, then we can assume there is an ability to borrow. The problem is most people who NEED to borrow tp access that wealth can't quality at the time to access that wealth. (see example below)

Below are examples when you NEED to borrow, and the typical best way to borrow in these NEED situations is to have that liquidity IN ADVANCE of the NEED. Proper planning allows for true liability management.

Source: Borrow Smart Repay Smart - Page 180

Again, the idea that the house is a tool and can be accessed up to some % of the value of the house is valid - but there is liability planning needed to understand the key dynamics of NEED and WANT that occur for most house owners. Sell without selling is 'borrowing' and borrowing requires eligibility in the form of qualifying - otherwise selling is the only other option when borrowing is not possible.

TIP: If you WANT to borrow, we assume again that you can quality to do that, and there are many financial reasons to do that. EPR can help you navigate the best way to do that.