Jeff Trevarthen

(I just realized that my 10 part series had only 9 parts! Sorry for the delay in getting out Reason #10)

You may have heard this one before, but let's take a look at the tale of two brothers. Both brothers are exactly the same age at 25, both make the same amount of income at $75,000 per year, both have $40,000 in savings, and both want to buy a house for $200,000. Let's assume for the sake of an easy example that both have no other debts besides their mortgages.

• The first brother decides that he wants to put 20% down on a new $200,000 house. He takes a 30 year fixed mortgage at 5.5% for payments of $908. But he also decides that he can afford to put more money into the house each month, so he puts in an extra $100, bringing his total monthly contribution to his mortgage to $1008. He has a little room left for investments and decides to invest only $100 every month because he want to burn the rest of the money on junk.

• The second bother decides to use an FHA loan and put only 3% down on a $200,000 house. He gets a 30 year fixed FHA loan for 5.5% with payments of $1100 plus he has to pay $100 per month in mortgage insurance, bringing his total payment to $1200 per month. He can still afford an extra $100 per month to invest, plus his initial left over savings of $34,000.

Both brothers invest their money in identical investment vehicles which return them 6% on average. So where are they after 5 years?

• The first brother has paid down his balance to $140,686 which has given him around $60,000 in home equity. His investments total $7200 assuming he earned a 6% rate of return annually.
  
  
• The second brother has paid his principal down to $179,000 which gives him about $21,000 in home equity. His investments total $$52,600 assuming he also earned 6% annually.

After 5 years, the second brother is obviously in a better situation. If both brothers lost their job, the first brother would be able to live for a month or two, but then would be flat broke. The second brother would probably be able to live comfortably for at least a year on his $52,600 worth of investments.

Although the first brother has way more equity, he's also flat broke. We refer to this as being house rich and cash poor. He'd be forced to sell, or even worse foreclosed upon, and we all know what happens when you have to sell fast....

The second brother has less equity, but has plenty of money to survive for a while until he can get back on his feet. He could sell and has plenty of time to get a good deal and walk away with any equity if he wanted to.

So to summarize, by carrying a higher balance mortgage and investing your savings rather than putting money under the mattress (extra payments to the house), you create an environment where you have more liquidity and greater flexibility for any rainy day situation you come across.

I admit it...as a lender, I've had to change my game plan over the last couple of years. Much of my old business used to be refinance business. But then, the big crash hit and all of the sudden people couldn't refinance anymore. As of late, some of the refinances have started to come back, but I wanted to share a strategy with you that you may or may not be aware of. It's actually been around for a long time, but I picked up on it about two years ago.

The strategy that I'm referring to here is called, "The Seller Buy down". In a nutshell, instead of reducing the list price of a home, the seller should offer to buy down the interest rate on a perspective buyer. This does two things for the homeowner:

1) It allows the homeowner to get full value for the property keeping most of the equity that they may or may not still have.

2) It allows less income to qualify for perspective buyers. By "buying" down the interest rate, the buyer's monthly payments will be lower and thus there will be more people who can qualify to buy the home.

Let's take a look at the following example and see if you get an "Ahh ha" moment.

Traditional Financing
Purchase Price: $500,000
Down Payment: 20%
Loan Amount: $400,000
Program: 5/1 IO
Rate: 6.75%
Payment: $2900
Income to qualify: $109,000
Monthly Savings: --

Price Reduction
Purchase Price: $480,500
Down Payment: 20%
Loan Amount: $384,400
Program: 5/1 IO
Rate: 6.75%
Payment: $2812
Income to qualify: $105,500
Monthly Savings: $87.75

Interest Rate Buy down
Purchase Price: $500,000
Down Payment: 20%
Loan Amount: $400,000
Program: 5/1 IO
Rate: 4.875%
Payment: $2275
Income to qualify: $85,500
Monthly Savings: $625

Do you see what I've just done here? I've created a win-win situation for everyone. As a seller, you will get a lot more equity out of doing a buy down, rather than reducing your price. As a listing agent, you'll get more commission. And as a buyer, you've just gotten a gift in the amount of $625 savings per month. More people will be able to qualify at the lower income as well.

Here's the kicker...if you were to reduce your price to attract buyers at that income level (for this specific scenario), you would need to reduce it to $363,500. That's a $136,500 price reduction which would a seller would NEVER agree to.

I hope this gets you thinking...

I got this email the other day about the economy. It was forwarded to me by a friend (not my boss). Personally, I think it brings up some great points about the benefits of business ownership as well as the socialistic ideal of a few. The question that comes to mind mind after reading this, is what can be done? Perhaps you have the answer.

Here's the email (it's actually a letter to employee's):

To All My Valued Employees:

There have been some rumblings around the office about the future of this company, and more specifically, your job. As you know, the economy has changed for the worse and presents many challenges. However, the good news is this: The economy doesn't pose a threat to your job. What does threaten your job however, is the changing political landscape in this country.

However, let me tell you some little tidbits of fact which might help you decide what is in your best interests.

First, while it is easy to spew rhetoric that casts employers against employees, you have to understand that for every business owner there is a Back Story. This back story is often neglected and overshadowed by what you see and hear. Sure, you see me park my Mercedes outside. You've seen my home at last years Chris tmas party. I'm sure; all these flashy icons of luxury conjure up some idealized thoughts about my life.

However, what you don't see is the BACK STORY :

I started this company 28 years ago. At that time, I lived in a 300 square foot studio apartment for 3 years. My entire living apartment was converted into an office so I could put forth 100% effort into building a company, which by the way, would eventually employ you.

My diet consisted of Ramen Pride noodles because every dollar I spent went back into this company. I drove a rusty Toyota Corolla with a defective transmission. I didn't have time to date. Often times, I stayed home on weekends, while my friends went out drinking and partying. In fact, I was married to my business -- hard work, discipline, and sacrifice.

Meanwhile, my friends got jobs. They worked 40 hours a week and made a modest $50K a year and spent every dime they earned. They drove flashy cars and lived in expensive homes and wore fancy designer clothes. Instead of hitting the Nordstrom's for the latest hot fashion item, I was trolling through the discount store extracting any clothing item that didn't look like it was birthed in the 70's. My friends refinanced their mortgages and lived a life of luxury. I, however, did not. I put my time, my money, and my life into a business with a vision that eventually, some day, I too, will be able to afford these luxuries my friends supposedly had.

So, while you physically arrive at the office at 9am, mentally check in at about noon, and then leave at 5pm, I don't. There is no "off" button for me. When you leave the office, you are done and you have a weekend all to yourself. I unfortunately do not have the freedom. I eat, and breathe this company every minute of the day. There is no rest. There is no weekend. There is no happy hour. Every day this business is attached to my hip like a 1 year old special-needs child. You, of course, only see the fruits of that garden -- the nice house, the Mercedes, the vacations...you never realize the Back Story and the sacrifices I've made.

Now, the economy is falling apart and I, the guy that made all the right decisions and saved his money, have to bail-out all the people who didn't. The people that overspent their paychecks suddenly feel entitled to the same luxuries that I earned and sacrificed decades of my life for.

Yes, business ownership has is benefits but the price I've paid is steep and not without wounds.

Unfortunately, the cost of running this business, and employing you, is starting to eclipse the threshold of marginal benefit and let me tell you why:

I am being taxed to death and the government thinks I don't pay enough. I have state taxes. Federal taxes. Property taxes. Sales and use taxes. Payroll taxes. Workers compensation taxes. Unemployment taxes. Taxes on taxes. I have to hire a tax man to manage all these taxes and then guess what? I have to pay taxes for employing him.

Government mandates and regulations and all the accounting that goes with it, now occupy most of my time. On Oct 15th, I wrote a check to the US Treasury for $288,000 for quarterly taxes. You know what my "stimulus" check was? Zero. Nada. Zilch.

The question I have is this: Who is stimulating the economy? Me, the guy who has provided 23 people good paying jobs and serves over 2,200,000 people per year with a flourishing business? Or, the single mother sitting at home pregnant with her fourth child waiting for her next welfare check? Obviously, government feels the latter is the economic stimulus of this country.

The fact is, if I deducted (Read: Stole) 50% of your paycheck you'd quit and you wouldn't work here. I mean, why should you? That's nuts. Who wants to get rewarded only 50% of their hard work? Well, I agree which is why your job is in jeopardy.

Here is what many of you don't understand ... to stimulate the economy you need to stimulate what runs the economy. Had suddenly government mandated to me that I didn't need to pay taxes, guess what? Instead of depositing that $288,000 into the Washington black-hole, I would have spent it, hired more employees, and generated substantial economic growth. My employees would have enjoyed the wealth of that tax cut in the form of promotions and better salaries. But you can forget it now.

When you have a comatose man on the verge of death, you don't defibrillate and shock his thumb thinking that will bring him back to life, do you? Or, do you defibrillate his heart? Business is at the heart of America and always has been. To restart it, you must stimulate it, not kill it. Suddenly, the power brokers in Washington believe the poor of America are the essential drivers of the American economic engine. Nothing could be further from the truth and this is the type of change you can keep.

So where am I going with all this? It's quite simple.

If any new taxes are levied on me, or my company, my reaction will be swift and simple. I fire you. I fire your co-workers. You can then plead with the government to pay for your mortgage, your SUV, and your child's future. Frankly, it isn't my problem any more.

Then, I will close this company down, move to another country, and retire. You see, I'm done. I'm done with a country that penalizes the productive and gives to the unproductive. My motivation to work and to provide jobs will be destroyed, and with it, will be my citizenship.

So, if you lose your job, it won't be at the hands of the economy; it will be at the hands of a political hurricane that swept through this country, steamrolled the constitution, and will have changed its landscape forever. If that happens, you can find me sitting on a beach, retired, and with no employees to worry about...

Signed, THE BOSS

Jeff is a mortgage planner in San Jose, California. He is also the founder of Mortgage Wealth, a blog dedicated to helping individuals build real long term wealth through mortgage planning.

The idea for this plan has been at least a year in the making, and it's finally come to the point where I've heard enough. I want to lay out a step by step plan for any homeowner to follow, regardless of whether or not your are upside down on your mortgage, still have ridiculous equity, jobless, or even if you have no problems at all.

I can assure you that if you follow the sound advice in this blog post, you will be on the road to achieving the life of your dreams. There are so many different ideas of why people need more money, whether it be putting your kids through college, taking care of your parents, wanting to travel more, or even wanting to work less. Each of them has its own merit, and by no means does this make a difference or not, so try not to deviate from the plan.

Step 1-Analyze your personal situation--Ask yourself the all important question: "Do I want to simply become debt free or do I want to create wealth?" If the answer is the former rather than the latter, go ahead and stop reading. Keep doing what you are doing and keep getting the same results. In order for you to get to where you want to be, you'll need to break habits. These habits can inhibit you from getting to where you want to go. I like to call it, "The State of You" address because you're telling yourself where you are (you know, just like the State of the Union address or the State of the State Address where the president or governor talks about the condition of the matters of each respective unit).

A quick story. One day while I was walking around Barnes and Noble, I saw out of the corner of my eye, a book by Tony Robbins called, "Awaken the Giant Within". Honestly, I had heard a lot about him, especially in the real estate and mortgage industries, but I didn't have a care in the world about self help stuff. I've always believed that you are shaped and molded as you grow into the person you are today. More of a nurture rather than nature type thing. Self help, I though? Yea, right! But I went ahead and bought the book anyway and ended up reading it from cover to cover. I'll spare you all of the details, but the one main point that I have take from this book was that YOU have the power to change anything. It's a matter of mindset...PERIOD!

Here are some situations that you can apply to the current state of the US (bad economy and all) in order from most severe to least severe:

Jobless, homeless, just divorced
Jobless, homeowner, upside down equity
Jobless, homeowner, still have equity
Have a job, homeless, just divorced
Have a job, homeowner, upside down equity
Have a job, homeowner, still have equity

Which one are you? Chances are that if you're reading this, you are not jobless or homeless, but you might know someone who is. Use the rest of this guide to help them. If you're at the top of this list, there is still hope for you, but you'll need to dig even deeper. Let the human spirit endure. Thrive. Make the conscious decision to make a change right now. The difference is that you'll need to do more than the average individual who might not be as far in the hole as you are. The worst thing to do is panic, because when you panic, you won't make sound decisions. A friend of mine, went from being dead broke, no job, no home, and an unhappy family, to the head of a prominent real estate organization here in California. He did it because he finally realized that enough was enough. So, by analyzing your current situation you'll figure out where you need to go. There's this quote that I always remember, "you can't get where you're going without knowing where you have been." It applies here, doesn't it?

Step 2-Take Action-OK, so now you know where you are and you need to decide where you want to be. What is it that you envision for your life? Again, if your answer is to simply be debt free, you've read too far. If you want to be highly successful, rich, retired, doing what you want to do, now we're getting somewhere.

Since this action plan is for homeowners, the best advice that I can give for people who are not homeowners is to find a way to get one. You're long term wealth actually depends on it. Houses are dirt cheap right now, and by all means, buy if you can buy. If you try to chase the wave, I guarantee that you'll miss it.

If you're jobless, you'll need to go and get a job or make one. Become an entrepreneur, but make sure that money is coming in some way, shape, or form. Getting a bank loan depends on it. I don't care how good the deal is, the bank will not lend you money if you don't have the ability to pay it back. The other way would be through private money, which can be done, but not without a very detailed plan.

If you're a homeowner with upside down equity, keep making the payments. Do whatever you can to save a little in the bank until you have twelve months worth of expenses. By doing so, you are hedging against a potential job loss. In which case, you can live off of your savings while you make every effort to find more work. I would never advise someone to stop making their payments, because you won't be able to borrow money for a long time. Borrowing money is actually the key to making real long term wealth, especially mortgage money. Since you've got nothing else to lose, go ahead and try and have your mortgage modified. Maybe you can get lower payments or maybe the bank will reduce the principal. Also try and get your property taxes reassessed. These are two ways to minimize your expenses.

If you're a homeowner that still has equity, REFINANCE right now. The interest rates for various mortgages are still really good and the prediction is that they will be good for another month or two. Take advantage of a lower payment so you can stock pile your savings account. Take money out if you can, and use that to fill your saving first, then invest the rest. Diversity is the key with investments and I'm not just talking about different types of stocks. I'm talking about stocks, bonds, real estate, gold, oil, and international securities. Each of them creates a hedge, so when one is not doing well, another is. This is the way to maintain a consistent rate of return year after year, without losing money. Don't believe me? Check out a graph of T-bills vs. gold. They're almost mirror images of each other.

Step 3-Stick with the plan-You should always move forward. For this last section, I've created a list for you to go about doing in order to create wealth. By analyzing your current situation and taking action, you'll soon find you're doing the right things to make real hard earned money in this world.

In order of importance (with 1 being the most important):

1. Earn money-You have to make money somehow, or the rest is not possible.

2. Pay off bad debt-(credit cards, car loans, auto loans, and personal loans). The faster you can pay these off, the better.

3. Get a long mortgage-30 yrs or even 40 yrs, which ever has the lowest payments (must be affordable though...and don't extend yourself too far). The slower you can pay these off the better. Extend your payments for as long as possible. Minimize your monthly payment as much as possible. This leaves more money to invest. For other reasons, see my "Top 10 Reasons to use your mortgage to create wealth" blog posts.

4. Build up 12 months worth of savings-Liquidity is key. If you have 12 months in your savings, you have an entire year to turn things around should something bad happen.

5. Invest-Find a financial planner and invest what ever you can after everything else is taken care of. Why? You can now grow your cash and this is what creates the real long term wealth. Again, the key is to diversify.

And that's it. It really is that simple. Hopefully, these three simple steps will help you go from where you are now to where you want to be in your life. As a side note, this isn't some get rich quick scheme. It takes time and effort to make it happen for most people. Sure some people inherit money or come into money one way or the other, but this should help them reach their goals faster. Be the change that you want to see in your life.

Jeff is the founder of Mortgage Wealth, a blog dedicated to helping homeowners build wealth through proper mortgage planning.

Ask yourself the following question: "Do I want to pay off debt or do I want to build wealth?"

I know, I know...there's A LOT of fluff out there in the world today about paying off your debt to become wealthy. We've covered several ideas in the "Top 10 reason's to use your mortgage to create wealth" series, but there are still two more. Some of the leading, self proclaimed, financial guru's will tell you that paying off all of your debt is the only way to be truly happy.

Understand one important point: Being debt free does not necessarily mean you are wealthy. There are a lot of debt-free people out there in the world who are dead broke. I even personally know a couple of them due to recent job loss.

So, in order to achieve financial freedom, being debt free isn't the best answer. If your real goal is to create wealth, you do that by adding as much money as you can to your savings (at least 12 months) and investments (highly diversified...not just stocks). In order to add as much money as you can to savings and investments, you need to pay as little as possible (meaning minimize your expenses).

That's why the longer term loans are better than shorter term loans (they cost less per month). That means a 30 year mortgage before a 15 year mortgage, and even a 40 year mortgage before a 30 year mortgage. In general, the longer the term, the lower the monthly payment. And the lower the monthly payment, the more money to invest.

Jeff is the founder of Mortgage Wealth, a real estate blog dedicated to helping homeowners create real long term wealth through proper mortgage planning.