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The 4 Stages Of Wealth Building As A Homeowner

One of the primary objectives of owning a home is to let the home appreciate over time and become a pillar of a family’s financial strength.

But before we can discuss “wealth”, we need to identify the stages to get there.

Stage 1

Having “Emergency Cash” is the first stage. It’s having $5-7,000 liquid for life’s inconveniences (the boiler breaking down, the car needing work, etc). When faced with the inevitable challenges that arise, many people are forced to run to their credit cards to make it through. They become stuck with high interest rate, non-tax deductible borrowing.

Stage 2

The second stage is the elimination of “Bad Debt”. We define “Bad Debt” as any debt whose interest is not tax deductible. Obviously, those high interest rate credit cards must be the first to go. But we also want to divest ourselves of the borrowing associated with car loans, boat loans, student loans, and personal loans because it typically can be done cheaper.

Stage 3

Shockingly, when you arrive at stage three, you will be considered in the Top 5% of Americans in terms of financial security. Stage three is accomplished when you have 3-6 months of your total expenses in reserves. The average homeowner (who is logically financially better off than the non-homeowner) has less than one month’s expenses in reserve! When life shows them more than a minor inconvenience (like a job loss, an illness/disability, or worse), most people are in a panic situation. With 3-6 month’s reserves, you will have time to weigh options and make better choices.

Stage 4

True financial security is attained when you become “Debt Free”. But not without debt. We consider our clients “Debt Free” when they have enough liquid assets to pay off whatever mortgage they have outstanding. Wealth building almost requires utilizing the tax benefits of having a mortgage in combination with strategies that utilize The 3 Miracles of Money…

The 3 Miracles of Money

  1. Compound Interest – The impact of money left to grow upon itself can be dramatic. If you had $1 on Monday and you could double it every day ($2 on Tuesday, $4 on Wednesday, etc.), by the end of 20 days, you would have $1,048,576.00!!! Now, you can’t double your cash every day, not even every year, but the concept holds true…..compounding interest is a good thing!
  2. Tax Free Growth – The ability to accumulate assets without giving Uncle Sam a third of it (in the form of Federal and State Income Taxes) is how the $1 became $1 million. If the growth was taxed at 33% ($1 on Monday gave you $1.67 on Tuesday – instead of $2- and so on), your $1 would only grow to $28,466.20 after 20 days!!! THAT IS NOT A TYPO! You would have “lost” over $1 million.
  3. Leverage and Arbitrage – If you can put up minimum cash and take title to a significant asset (like a down payment on a home….the smaller the down payment the better), you can leverage that cash investment to large returns. At the same time, if you can take the cash that you don’t bury in home equity and effectuate a spread between your “after tax cost of money” (mortgage payment) and your investment options (hopefully, in a tax free environment), you can gain the exponential growth that creates wealth.

Bottom Line

Please take the time to investigate all that is possible, by harnessing the POWER of a mortgage to help you move your family towards wealth. Work with a loan officer who can educate you on the power behind properly leveraged real estate via tax savings and reallocation of equity.

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6 replies
  1. Charles The Realtor
    Charles The Realtor says:

    The information we get every day can be confusing as well as intimidating to most of us! This article clarifies some key points in the building of family’s financial strength with home ownership. Dean a real pro close to the core of the information. Keep it up!

  2. Phil Osborne
    Phil Osborne says:

    Dean, good article, I am a big believer that homeowner’s should have reserves prior to attacking mortgage debt either through pre-payment or leverage. However the principle of arbitrage is not really a reality for the average american who cannot and should not expose their money to riskier investments. At an average tax rate of 25%, the net interest on a mortgage of 5% is 3.75% so in order for arbitrage to work effectively the homeowner would need to have a tax free or net a 4% ROI on an investment. And I would argue that someone who is trying to utilize arbitrage in order to expedite pre payment of mortgage should not expose their assets to high risk. I’m not saying that they should pre pay on their mortgage i’m simply pointing out that arbitrage might not be reachable for a lot of americans. Thanks.

  3. Dean Hartman
    Dean Hartman says:

    to Phil- arbitrage may be difficult to achieve today, but if you believe rates will return to historical norms in the future, that challenge should be overcome. Additionally, you might want to look at properly structure cash value life insurance vehicles as an option.


Trackbacks & Pingbacks

  1. […] Dean Hartman explains the 4 stages of wealth building as a homeowner.  I think Dave Ramsey would approve of the strategies Dean outlines for homeowners as he  explains ” harnessing the POWER of a mortgage  helps you move your family towards wealth.” […]

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