The beliefs in which you base the structuring of your Home Financing have very important implications on your long and short term Financial Goals.

The way you finance your Home can affect all aspects of your life and the lives of your family.

Conventional Wisdom and Traditional Thinking

The old traditional concepts were, put as much CASH down (or just Pay CASH), get a 30 year FIXED Loan (better yet, get a 15 year Fixed), and pay as much extra each month to pay off the Home Loan as soon as possible because if you fall on bad times, (and we all do) you are protected from the BANK Repossessing your Home.  This is Great Depression Thinking. The Rules Have Changed!

Since 1930’s this rationale is outdated. NOW a days the BANK can only demand “THIS Month’s” payment.  Also, Capital Gains Laws have changed since the Tax Reform Act of 1997. This is huge. As a result of the Tax Reform Act of 1997, ever Two Years an Individual has a $250,000 Capital Gains exemption (and if marred $500,000).

The Rules of Life Have Changed

People no longer keep a Home for 20, 30 40 years. In fact, most people move every Seven years and for First-time Homebuyers it’s about Four years. Now a days, people only keep the original Home Loan for 4.2 years.

A common misconception American Homeowners have about Home Equity is that, Home Equity is like having an Asset that belongs to them. Some even assume that it will be accessible when they need it. They believe in the event of an unexpected hardship it can be used as if it were CASH, or for Retirement Income.

Nothing could be further from the truth. If you are unable to prove your Creditworthiness and ability to repay, you can not even access Home Equity. Therefore I ask, is it really yours or just “Make Believe Idle Dollars”?

If you have to prove you have Income and your creditworthiness to access CASH, is it really CASH. Unless you can separate Equity from the walls of your Home, you will be Equity Rich and CASH Poor.

Home Equity is not the same as CASH in the Bank. Only CASH in the Bank is the same as CASH in the Bank.  If you have CASH in the Bank you have access to it regardless of your situation.

Liquidity is the critical. Transferring those “Make Believe Idle Dollars” into Asset Accumulation Accounts you create Liquidity in case of need, Safety in case of hard times, and a Rate of Return, regardless of the appreciation or depreciation of the value of your Real Estate. If you are unable to access Equity is it an Asset?

Acquisition Debt vs. Equity Reposition

Buying a Home, Real Estate, can be the greatest investment and the greatest Asset in your life. By having the LARGESET Acquisition Debt regardless of your CASH position you can save thousands of dollars a year.

Leveraging Your Property

In order to understand why you’d want to borrow as much as possible for your Home purchase, you must first grasp the concept that Equity has a Zero Rate of Return. Here’s an example:

If Consumer “A” buys a Home for $300,000, and puts 20 percent down, then they have $60,000 in equity. Over the next five years, the property appreciates $100,000 in value. Consumer “A” now has $160,000 in equity.

Consumer “B” buys a Home for $300,000, and puts no money down. At the end of five years, that same Home is now worth $400,000. Consumer “B” has $100,000 in equity, which is the same appreciation as Consumer “A”, a net $100,000.

As you can see, your down payment has nothing to do with your Rate of Return. What becomes important is how you choose to manage the $60,000 you didn’t use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest rate.

However, if you were to invest the $60,000 in Asset Accumulation Accounts that can out-earn the cost of that debt, then this could be a formula for success. This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest.

Worst case scenario, let’s say you buy the Home for CASH. You would have zero Acquisition Debt. By purchasing a Home with $300,000 CASH you will lose the benefit of using Others Peoples Money (OPM) and Acquisition Debt. In addition, you will forfeiting the future Asset Accumulation Accounts earnings and more importantly, you lose Liquidity.

Then later, more than 90 days, you Refinance the property to take $300,000 CASH-out at 6.5 percent because of good times (a business opportunity or maybe purchase additional Real Estate) or because of hard times (Loss of Income or Sickness).

But it doesn’t stop there. Should you later need Liquidity and decide to Refinance and take out CASH, only the first $100,000 Home Equity Loan will be Tax Deductible. Only 100,000 can be deducted as Home Equity Debt. Any future Home Equity Line Of Credit (HELOC) will not be deductible because the maximum 100,000.

If you were in the 35 percent Tax Bracket- this Financial Strategy will cost you about $7,000 a year, after year after year. Because of the loss of Acquisition Tax-Deductibility of Home Loan interest.

The I.R.S. uses the “Alternative Minimum Tax” (AMT) as a filter to ensure that a higher percentage of Taxes are paid by higher income individuals. AMT virtually eliminates deductions for individuals who are in this category. However, Home Loan Debt is one Deduction that is allowed by the I.R.S. When it comes to Taxes, there are two important types of Mortgage Debt.

1. Acquisition Debt

2. Home Equity Debt

Should you be subject to Alternative Minimum Tax, no Tax benefit applies because the Home Equity Debt portion is disqualified as a deduction. Today, 50 percent of Homeowners are subject to AMT.

Fortunately, Home Interest deductibility on Acquisition Debt which can even be in the form of a HELOC or Purchase Money Second Trust Deed which is used in the purchase of the Home is usually protected from AMT.

Here is the important point: Today’s Asset Optimization and Equity Management concepts combined with Fundamental Financial Planning Principles create greater safety and greater Wealth. A simple Loan Choice can make a HUGH Difference in Opportunity Cost and the Outcome of achieving your Lon and Short Term Financial Goals. I am not going to tell you when Homebuyers leverage the purchase of a Home or when Homeowners separate Equity from the walls of their Home there is not a cost. There is an Employment Cost to put those “Make Believe Idle Dollars” to work. Which is, I might add, can be Tax Deductible. What I am going to say is if wallpaper the walls of your Home with Equity (i.e. CASH Purchase or LARGE Down Payments) you incur a greater lost, Opportunity Cost.

Just the very name differences, Employment vs. Lost Opportunity cost give me a reaction. Which do you believe is a greater cost?

Let’s take another look this $400,000 Real Estate purchase. What we have is a $400,000 Real Estate Asset. We also have $400,000 in CASH. When we combine two $400,000 Assets, you would think, Four plus Four would equal $800,000 Asset. Not using a CASH Financial Strategy.

As an alternative, take that same $400,000 and only put down 10% ($40,000) the Real Estate will still appreciate at 4% per year (16,000) you would receive a 40% return on that $40,000 investment. Therefore, the more you put down the LESS your return on your investment. Oh, by the way you still have $360,000 to put in safe Asset Accumulation Accounts that are Liquid, Safe and do have a Rate of Return, unlike Equity which is Not Liquid, Not Safe and does Not have a Rate of Return. ZERO!