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#163: Home equity is a terrible investment - it is unsafe, illiquid, has zero ROI, makes your foreclosure risk greater, and it can leave your assets exposed to lawsuits. Some have called today's material shocking - a revelation. What you thought was black is white. What you thought was dark is light. Home equity can never go up in value, but might go down value. You must embrace mortgages. I collect mortgages every bit as much as I collect cash-flowing properties. I practice what I preach and only keep 15% equity in my primary residence, and minimum equity positions in investment properties. You would be better off burying money in your backyard than using it to pay down your mortgage. In the 1920s, a common clause in bank loan agreements stated that your loan could be called due at any time. That created fear which still resonates today. But it's no longer true; banks won't call your mortgage loan due anytime. 30-year vs. 15-year vs. interest-only mortgage loans are examined. Homes are not meant to store cash, they're meant to house families. Holding too much equity in any one property can kill your wealth potential. If you want wealth, you need to consider dispersing your home equity among many income-producing properties across different geographies. Want more wealth? 1) Grab my free E-book and Newsletter at: GetRichEducation.com/Book 2) Actionable turnkey real estate investing opportunity: GREturnkey.com 3) Read my new, best-selling paperback: getbook.at/7moneymyths Listen to this week's show and learn: 01:37 Eliminating debt often postpones your financial freedom. 04:05 In the 1920s, a common clause in bank loan agreements stated that your loan could be called due at any time. That's no longer true. 07:23 Paying off debt prevents you from accumulating assets. 08:48 Liquidity, safety, and rate of return are three reasons for keeping a high mortgage loan balance. 11:35 Why your foreclosure risk is greater if you have a high equity position. 16:33 Natural disasters. 19:56 Getting sued, asset protection. 21:40 The ROI from home equity is always zero. 26:15 Cash-out refinances and 1031 Tax-Deferred Exchanges. 28:12 Be your own banker. Create arbitrage. 29:00 30-year vs. 15-year fixed rate amortizing vs. interest-only loans. 30:42 Another example of home equity providing zero ROI and being unsafe. 33:04 Enjoy collecting mortgages. Equity transfers. 34:37 Those with less financial education want to pay off their properties. 36:55 Outsource lower use tasks. 38:56 Control. 40:04 Mortgage payments vs. housing payments. 42:27 A house is not an asset. 43:58 Act at RidgeLendingGroup.com for loans, GREturnkey.com for properties. Resources Mentioned: GREturnkey.com RidgeLendingGroup.com CorporateDirect.com GetRichEducation.com Here. It. Is. Hey, Welcome to Episode 163 of Get Rich Education - the show that at this point has created more passive income and financial freedom for busy people like you than nearly any other show in the world. I'm Keith Weinhold. Your financial forecast is going to be looking sunnier than ever after today. I'll tell you why. But you know what, your open mind might very well find the content in today's show shocking. Some people have believed the same old antiquated thing for so long, that they figure that the notion that has been believed for so long MUST absolutely be true - merely because it's been believed for a long time. Yes, just because you've believed something for a long time, doesn't make it true. It's sort of like - I think Yoda even said it - "You must unlearn what you have learned". A lot of times you need to unlearn the old before you've made room for new ideas. Eliminating your debt can actually postpone your financial freedom. You need to form both the habits and the actions that produce income streams. Well, you can't very well do that if you put your money toward retiring debt. Focusing too much on becoming debt-free means that your money is being sent away to retire. That's why you can't retire. You can't retire - or be financially-free - because you've sent your money away to retire - rather than work for you. If you could invest in something that could never go up in value but could only go down in value, then how much of that invest would you want? Well, zero - right? We're intelligent people that invest for the production of income, not speculate on a hope for capital gains. The investment that can never go up in value but can only go down in value is home equity - or even your rental property's equity. In fact, I have the ability to pay off my home's mortgage but I refuse to do so. I embrace mortgages. I don't fear them. Many Americans believe these following statements to be true, but in reality they are myths and misconceptions: OK, here we go: Your home equity is a prudent investment. FALSE Extra principal payments on your mortgage saves you money. FALSE Mortgage interest should be eliminated as soon as possible. FALSE Substantial equity in your home enhances your net worth. FALSE Home Equity has a rate of return. FALSE THERE IS A REASON WHY SO MANY PEOPLE FEAR MORTGAGES, AND WHY YOU SHOULDN'T In order to discover how our great grandparents and our grandparents and even our parents and perhaps even you - got the idea that a mortgage is a bad thing and a necessary evil at best, we must go back in time to the Great Depression - and then we're going to bring it up to the Present Day here... In the 1920s a common clause in loan agreements gave banks the right to demand full repayment of your mortgage loan at any time. Since this was like asking for the moon and the stars, no one really worried about it. Then, when the stock market crashed on October 29, 1929 millions of investors lost huge sums of money, much of it on margin. Back then, you could buy $10 of stock for a $1. Since the value of the stocks dropped, few investors wanted to sell, so they had to go to the bank and take out cash to cover their margin call. It didn't take long for the banks to run out of cash - so they started calling loans due from good Americans who were faithfully making their mortgage payments every month. However, there wasn't any demand to buy these homes, so prices continued to drop. To cover the margin calls, brokers were forced to sell stocks and once again there wasn't a market for stocks so the prices kept dropping. Ultimately, the Great Depression saw the stock market fall more than 75% from its 1929 highs. More than half the nation's banks failed and millions of homeowners, unable to raise the cash they needed to payoff their loans, lost their homes. Out of this the American Mantra was born and it said this: "Always own your home outright. Never carry a mortgage." The reasoning behind America's new mantra was really quite simple: if the economy fell to pieces, at least you still had your home and the bank couldn't take it away from you. Maybe you couldn't put any food on the table or pay your bills, but at least your home was secure. Since the Great Depression laws have been introduced that make it illegal for banks to call your loan due. The bank can no longer call you up and say, "We're running a little short on cash and need you to pay off your mortgage loan in the next thirty days." That just can't happen. Additionally, the Fed is now quick to infuse money into the system if there is a run on the banks, as we saw in 1987 and we sort of saw with Quantitative Easing later. Also, the FDIC was created to insure banks. Still, you can see how the fear of losing their home became instilled in the hearts and minds of the American people, and they quickly grew to fear their mortgage. In the 1950's and 60's families would throw mortgage burning parties to celebrate paying off their home. And so, because of this fear of their mortgage, for about 90 years now most people have overlooked the opportunities their mortgage provides to build financial security. SO THERE'S A REASON WHY PEOPLE HATE THEIR MORTGAGE AND WHY YOU SHOULDN'T Many people hate their mortgage because they know over the life of a 30 year loan, they will spend more in interest than the house cost them in the first place. To save money it becomes very tempting to make a bigger down payment, or to make extra monthly principal payments. Unfortunately, saving money is not the same as making money. Or, put another way, paying off debt is not the same as accumulating assets. By tackling the mortgage pay-off first, and the investing goal second, many fail to consider the important role a mortgage plays in your effort toward financial freedom. Every dollar we give the bank is a dollar we then...did not invest. While paying off the mortgage saves us interest, it denies us the opportunity to earn greater interest with that money. Are you still doing something like this? "Hey Mr. Banker, here is an extra $100 principal payment. Don't pay me any interest on it. If I need it back, I'll pay you fees, borrow it back on your terms, and plus I'll try to prove to you that I qualify again." Some people - a lot of people - still do that! That is fear, scarcity, and a lack of education rather than knowledge, abundance, and mastery. Money you give the bank is money you'll never see again unless you refinance or sell that property - whether that property is your primary residence, or it's one of your income properties. Why separate the equity from your home? Why would you want to have the equity removed from your home? There are actually three primary reasons: 1. LIQUIDITY 2. SAFETY 3. RATE OF RETURN - there are many more reasons too. But, let's focus on those. HOW LIQUID IS IT? (Can I get my money back when I want it?) 2. HOW SAFE IS IT? (Is it guaranteed or insured?) 3. WHAT RATE OF RETURN CAN I EXPECT? Home equity fails all three tests of a prudent investment. Let's examine each of these core elements in more detail to better understand why home equity fails the tests of a prudent investment, and, more importantly, why home-owners benefit by separating the equity from their home. So why SEPARATE EQUITY TO INCREASE LIQUIDITY? Well, what is one of the biggest secrets in real estate? It's that your mortgage is really a loan against your income, moreso than a loan against the value of your house. Without an income, in many cases you just can't get a loan. If you suddenly experienced difficult financial times, would your rather have $50,000 of liquid cash to help you make your mortgage payment, or have an additional $50,000 of equity already trapped in your home? Almost every person who has ever lost their home to foreclosure would have been better off if they had their equity separated from their home in a liquid, safe, conservative side fund that could be used to make mortgage payments during their time of need. The importance of liquidity became all too clear when the stock market crashed in October of 1987, or March of 2000, or September of 2008. If someone had advised you to first sell your stocks and convert to cash, they would have been a hero. Or, if you had enough liquidity you could have weathered the storm. Those with other liquid assets were able to remain invested. They were rewarded as the market rebounded and recovered fully - sometimes pretty quickly. However, those without liquidity were forced to sell while the market was down, causing them to accept significant losses. "It's better to have access to the equity or value of your home and not need it, than to need it and not be able to get at it." Of course, I don't advocate for people to have much exposure to stocks because that isn't where the wealth is created. If you want to build wealth, keep your equity out of stocks, and maintain small equity positions in many income-producing properties. TO REDUCE THE RISK OF FORECLOSURE DURING UNFORESEEN SETBACKS, KEEP YOUR MORTGAGE BALANCE AS HIGH AS POSSIBLE Is your home really safe? Unfortunately, many home buyers have the misconception that paying down their mortgage quickly is the best method of reducing the risk of foreclosure on their homes. However, in reality, the exact opposite is true. As homeowners pay down their mortgage, they are unknowingly transferring the risk from the bank to themselves. When the mortgage balance is high, the bank carries the most risk. When the mortgage balance is low, the homeowner bears the risk. With a low mortgage balance the bank is in a great position, as they stand to make a nice profit if you defaults. In addition to assuming unnecessary risk, many people who scrape up every bit of extra money they can to apply against principal often find themselves with no liquidity. When tough times come, they find themselves scrambling to make their mortgage payments. Alright, just imagine this scenario. Assume you're a mortgage banker - you're sitting in your plush leather chair in your corner office - and you're looking at your loan portfolio as this mortgage banker that you are, and you have 100 loans that are delinquent. All of the loans are for homes valued at $600,000. OK, so you've got all hundred of these $600,000 homes - and your borrower payments have become delinquent on every one. Some of the loan balances are $300,000 and some are $500,000. Suddenly, there is a glut in the market and the homes are now worth $400,000. Which homes do you as the banker foreclose on FIRST? The ones owing the least amount of money, of course. After all, as a banker you'd make money taking back those homes, however you'd lose money trying to sell a home for $400,000 when you still would have been owed $500,000 on it if you just keep that in your portfolio. Banks have been known to call delinquent homeowners with high mortgage balances and offer assistance to those people - they're not going to try to foreclose on them. In that case, as a mortgage banker in your plush leather chair, you're going to get on the phone with your homeowner / borrower and you're going to say, "We understand you are going through some tough times, is there anything we can do to help you? We really want you to be able to keep your home." The last thing they want to do is take back a home that they will lose money reselling. Because that homeowner smartly kept their mortgage balance high. So you as an owner of your own home or owner of income property want to keep your mortgage balance high and your equity position low. If you fall ill or become incapacitated in a car accident and you're not able to work, you want to be sure that your family is protected. Well, while you're in a hospital bed - or worse - or you're gone - the bank is going to foreclose on those homes that have a low mortgage loan balance first. Those with a high mortgage loan balance will get the workouts. More equity is more risk. So that's why I wanted to put you in the position of YOU as the mortgage banker in your leather easy-chair. Don't vilify the banks with being ruthless with foreclosing on those with high equity positions - because if you were given two equally difficult tasks, which would you do first? If you had two wheelbarrows sitting in front of you, you had to push each one up a hill, and one wheelbarrow was empty and the other one had 100 pounds of concrete in it that you had to grunt and struggle to push up the hill - yet both tasks paid you the same, then which wheelbarrow are you going to push up the hill first? It's the light, empty one. You know, it's interesting to note too, during the Great Depression, the Hilton chain of hotels was deeply affected by the stock market crash and Hilton couldn't make their loan payments. You know what saved them from finan…
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