Vincent Polisi, I hope you dont mind my posting this without asking you first. I know Im been having a hard time changing my financial thinking; I hope this can be a blessing to somebody on my friends list (especially someone who wants and needs to buy a house)! Why Equity, Down Payments and Principal Payments Are For The Financially Uneducated March 25, 2014 by Vincent Polisi Think equity, down payments and principal payments are a good idea? Are you like most Americans who’ve been brainwashed by the media propaganda paid for and perpetuated by the banks and think that unless you have a substantial down payment, you aren’t qualified to own a home? Do you honestly believe that it’s somehow “American” to put down money on a home and pay down a mortgage? Let’s examine reality….. Before we begin, tell me how much you’d like to invest in this wonderful investment: You get to pay a substantial amount in cash for the investment but don’t own anything Your money is 100% at risk of loss and there’s nothing you can do to prevent the loss (e.g., no stop loss order) Your money is illiquid Your money generates a negative rate of return (yes, negative which sort of disqualifies it as an investment) Your money is only accessible through a loan costing you several points and fees and subject to strict underwriting guidelines which do not allow you to access all of your money, or through divestiture of the underlying investment thereby subjecting you to taxable income Your money placed in the investment has cost you a tax deduction thereby increasing your taxes You get to continually add to this investment with forced financial contributions monthly that further expose you to financial risk, generate a negative rate of return and continually increase your tax liability What is this wonderful investment and where can you get one? It’s called a mortgage and you invest in it when you put down a down payment or when you pay down principal balance on a mortgage. In short, the banks have perpetuated the myth that a greater down payment better qualifies someone to own a home which is preposterous. A greater down payment is a greater insurance policy for the bank in the event you default and they have to foreclose. It has nothing to do with your qualifications or ability to repay a loan. It’s all about risk mitigation…… ……..for the banks, not for you. Likewise, when you pay down principal on a fully amortized mortgage, you’re steadily increasing the insurance policy of the bank, not increasing anything for your own benefit for all the reasons cited above. Paying down principal actually makes it take longer for you to pay off a mortgage because you lose the compounding effect the investment could yield in an interest or income bearing investment. In most instances, your equity isn’t asset protected or shielded thereby exposing you to loss via judgments and tax liens. The money you do pay down generates a negative rate of return. Assuming it appreciates, the property generates the exact same rate of return regardless of how much is owed. Beyond that, due to the Federal Reserve’s stated policy of continual devaluation of the dollar, the money used as a down payment or principal balance payment is losing value and buying power……..daily. You NEVER want to put money down or pay down a mortgage. It’s moronic and goes against the grain of every solid financial, wealth creation and asset protection plan. Rather than pay down the mortgage, it’s better to use the down payment and money you would have paid down in principal payments and place them in an interest or income bearing investment that has the ability to compound or precious metals if compounding is less important and insurance is of greater importance. As many Americans saw in states like California, Arizona, Nevada and Florida when the housing bubble burst, equity evaporated overnight. The degree of equity someone had and the number of consecutive on time monthly payments had zero impact on their loss of equity, property value or the banks desire or ability to foreclose. Many Americans learned the hard way that down payments, principal balance reduction and equity were for the financially uneducated. Equity, down payments and principal payments are diametrically opposed to wealth creation and actually inhibit your abilities for generating investment income. They limit or eliminate your cash reserves and thereby decrease or eliminate your ability to leverage OPM (Other People’s Money) for other investments. With each down payment or principal payment, you move one step closer to a default because you’re expending liquid capital that could be used in the event of an emergency or cash flow crunch. Why would you voluntarily slow or stop your ability to generate returns, invest in other properties and make yourself unnecessarily illiquid and risk default?keep-calm For the sake of equity? Hello, McFly? In the current market climate, conventional mortgages require a down payment for most loan products. The key here is to either arrange owner financing and avoid the down payment requirement altogether or minimize the down payment you’re required to put down if you absolutely must use conventional financing. So, it begets the logical question, what’s the benefit?
Posted on: Sat, 12 Jul 2014 18:12:28 +0000
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