I promised some more discussion about Douglas Andrew's Missed Fortune 101 — which is not really an investment book as much as it is a plug for lenders and insurance companies. In this post I'll talk about some of the points he brings up against paying down your mortgage faster.
The main idea of the book, in a nutshell, is to “manage your home's equity” by periodically pulling out more and more cash by taking out loans against the equity in your home, and investing the proceeds in life insurance vehicles in an arbitrage play. To this end, he sets the stage for this investment scheme by giving you reasons for not paying down your mortgage. These reasons are misleading and false.
On page 101, he claims that “[m]ortgage interest if your friend, not your foe.” Well, let's see why this is, shall we? If you accelerate mortgage payments by reducing the term, or making extra payments, etc., you risk all kinds of things, according to Mr. Andrew. I'll discuss each of the six bullet points he makes on page 130 in detail.
Losing control of your home equity
Well, you can't spend the equity any time you want, maybe, but you could tap into it if you needed to. You don't “lose control” of it just because it's untapped. Originating a “pre-emptive” HELOC doesn't seem to make much sense. You may stand more of a chance of losing control of it if you incur debts that you can't pay back or get into investments that are illiquid or lose money.
Increasing the after-tax cost of owning your home
Sure, you don't get to deduct as much mortgage interest. But you'll never recoup the interest in the form of tax savings — even though the tax deduction is 100% of the mortgage interest (in some cases), the tax savings is based on your marginal tax rate, which is always less than 100%. Even if you take into account the lost tax savings, since you're going to be paying the principal back anyway, pre-paying part of that principal is like getting a return on that payment (in the form of interest savings) at a rate that is a little less than your mortgage rate!
Increasing your risk of foreclosure and, therefore, the risk of losing your equity
I suppose if you get into trouble quickly then this might be a problem, since the mortgage prepayment is not available for other things, or if you tie such a high percentage of your free cash into prepaying your mortgage that you get stuck. But if you have the foresight to prepay your mortgage, you also probably have the foresight to see problems on the horizon, which makes this a non-issue. Prepaying your mortgage is almost always a smart move financially — just don't overdo it and paint yourself into a corner.
Dramatically reducing the return on your equity dollars
Mr. Andrew uses the term “equity dollars” a lot. Equity is a derived quantity. It is the difference between the fair market value of your home and the liens against the home. Both of these quantities can be determined by independent means. An appraiser can estimate the FMV of your home and give you a number. The lender knows down to the penny what you owe them. But what about equity? You need the other two numbers to figure it out. You can't call up either one of these people to ask them how much equity you have in your house.
“Equity dollars” are not real dollars that you can assign a return to — they're just not there. What the term “equity dollars” does do is draw your attention away from your mortgage debt. Now, I'll draw your attention back to it. By prepaying your mortgage, you will decrease the mortgage balance, and increase your equity (assuming that the FMV of your house doesn't change). And your equity will increase faster if you prepay, because you're saving yourself future interest payments.
“Equity dollars” are fictitious.
Decreasing your ability to sell your home quickly, at the best price, if needed
This is nonsense. The ability to sell your house depends on your asking price relative to comparable homes in the area, not how much you owe on it.
Unnecessarily extending the time required to become debt free, thereby increasing your costs
This also is nonsense. Making extra mortgage payments will always decrease the time to paying off that mortgage debt and will always reduce your overall debt.
There's so much junk in this book, I might need to post some more of it later. Stay tuned!
Well with this kind of review I'll be sure not to buy the book.
If interested, I have an article on my website that compares home equity loans & 2nd mortgages. A short but intesting read.
This is great information for a person who never wants to really make any money in this world.
Sure there is some risk invloved, but with risk comes reward.
You always have to think about the future, and paying down your home is a good way to do that. I know a lot of people who pay down their mortgage so that they can own their home, and give it to their heirs. They forget to take into consideration life in general and how that can affect the future.
Let's say for example that a person pays off their mortgage and when they retire they need care. Which is something that is not uncommon. The cost of that care could be significant, and would sometimes require them to sell their home. That gives them the equity to pay for the care and nothing for their heirs. Sometimes, that equity may not be enough to cover the costs of all things related.
Or, what happens if the person paying down their mortgage, or subsequently pays off their home gets injured or disabled and cannot return to work. They'll be fine, because they have all that equity right? Well not if they can't qualify for a loan because they do not have any income.
Sure their is insurance for all of these scenarios, and it is generally a good idea to purchase them. That extra cost will eat away at the money you use to pay down that mortgage, so you can be the big guy on the block talking about all of the equity you have at the neighborhood picnic.
That equity mind you, makes 0%. That's right, you make nothing on equity at all. So if you say "I got $450,000 worth of equity in my home, and it's paid off completely", what exactly are you bragging about?
Sure it's good to live a debt free life, yet having a mortgage on your credit report combined with a perfect payment history actually helps to increase your score. Plus over time, you eventually lose the tax deduction.
Now, let's say you take that mortgage and refinance it every 2 to 3 years, and used interest-only loans. Now don't be shocked at interest only, it's a good way to maximize a mortgage tax deduction, and have the lowest amount of outlay in your home. Every time you refinance your home, you take out some equity and invest it. Use the monthly savings in payment that you see fromt the interest only loan versus the standard fixed rates, and dollar cost average it into a safe and reliable investment. Now you have a portfolio that will grow and will be liquid to you under most circumstances (depending on the investment). Oh, and by the way, you have something to give to your heirs.
There is drawbacks to this approach too. You can choose the worng investment advisor or invetments in general. That is why it is always good to interview the people you decide to work with, they will be responsible for handling your money! Or, your home simply does not appreciate at all. Do the research on your area bfore you buy a home, and find where the historic gains in home values have been.
I do disagree with some of the things mentioned in the book, and just like owning a home, it doesn't work out for everybody. The overall concept is genious though. Maximize your money, and let it work for you.
You'll never get rich by owning your things, you'll get rich by leveraging them.
Sometimes I wonder why we have made things so complicated to ourselves? Still being incharge of situations.
Fan of Don Lapre
larisa@larisajoyreilly.com
Being a mortgage broker I have never met a wealthy person who has not been prepared to take a risk. Property if you have enough of them can fund a retirement and compared to pensions i know which one id rather have.
Time Warner Business books has spent huge amount of money on this book. I would think they would verify a few things if their money and reputation is on the line. It is interesting to read the opinion of some two bit yahoo who can't afford to buy the book apparently since he had to read it at BN and who, based on his lame rebuttals to some of the concepts in the book, clearly misses the concepts the author has practiced and successfully implemented for years making TREMENDOUS contributions to the lives of those who actually have implemented the ideas already. Some people would not recognize a novel concept if it crawled up their undercarriage..
Those of you who prefer co continue "mooing", don't bother buying the book. If you want to nut up and at least make up your own mind, spend a couple bucks to see what is in it.. and don't be a moocher, buy the darn book you cheapskates!
I’m 33 years old and am about to purchase my 4th piece of property. Since my wife and I purchased our first home back in 2001, we have used the principles designed in this book, although I never read it until Aug 2009. I would say that we have benefited more than others around us of who did not use these types of principles, especially considering what has just occurred in the housing market. Douglas is dead on with his principles and this reviewer is an idiot to think other wise. One quick explanation is this. Given the current market conditions if one had a 200k loan on a house that they bought in 2004, and then once the house appreciated in 2007 to est 280k, and pulled out their equity in 2007, and now with current housing market, where his house is now worth say 180k, was he better off to have that cash taken out in 2007 or have left it in?
its a rhetorical question.
Unfortunately in the book, they don’t give the example of the best EIUL policy to obtain. I gave the author a call to discuss the best posibility. I am curious if all of this could work in order to decrease taxes. I actually don’t even own a place. I think it is important to be open to ideas, but to also scrutinize them also. Because of high property taxes where I am(northeast), I find it is much cheaper renting than owning a place. But to use the EUILs like a roth ira may be useful. Speaking of which in the book, they tried to make an example of how using the life insurance is better than a roth ira, but it really didn’t make sense. I did call the author who admitted it can’t beat a roth ira. It is similar in that tax is paid on the initial contribution but nothing else.
I think part of the challenge in finding the right advice can be finding the best advisor!!! If you don’t get on with the expert who is advising you, and they do not understand your needs, it just won’t work. That’s why that I feel that it is such a problem with buyers using banks or price comparison sites looking for financial advice. One on one in my view should be the best method.
I’m with an planning advisory organization that started using the MF101 concepts back in 2005 and 2006. So here we are in 2010.
Almost 5-years removed from ‘mbhunter’ August 2005 rants. How are our clients doing? Guess what? Pre-2007 clients had their equity out before the housing bubble burst. As for the max-funded IUL performance? Annual statements are annualizing at around 5.5%. Soooo…I guess Doug and his posse were spot-on.
As for the post-2007 clients over 55?
Max-funded IULs replaced funding Mutual Fund IRAs. RothIRAs replaced non-matched 401(k)s. Especially this year if it made sense in light of the IRS 2011 and 2012 breaks.
Fact is Doug Andrew’s strategies have worked as planned for the BabyBoomer crowd. This inspite of horrific sell-offs in housing and stocks.
It would be interesting for ‘mbhunter’ to jump back in and either apologize or start another rant how Doug’s writings really didn’t work…despite what our clients’ annual statements show…and how their retirement plans are perking along. In real life.
The strategies worked.
PS: Here’s another insurance platform that can start rants…Fixed Indexed Annuities. Love hearing money managers and stock brokers rip ’em. Facts are these platforms outperformed the stock markets in the last decade…even though they were really designed to simply beat bank CDs and inflation. Again facts. Real life annual statements show these platforms were an excellent complement to a well balanced portfolio of mutual funds (American Funds, etc). FIAs helped dampen volatility in very chaotic times.
The advice is applicable for those people as in the examples in the book. If you don’t have qualified pension or never owned anything, back-off!
This clown really doesn’t know what he’s talking about. He also has missed the whole point. Doug is giving the reader options on how to let their money work FOR them by investing it in a SAFE, LIQUID Side Fund that EARNS A RATE OF RETURN. That is, your money is compounding – not earning simple interest – or paying simple interest like you do with a mortgage.
What this guy forgot to mention is that Doug provides the reader a way to accumulate enough money to pay off a 30 year mortgage in 13.5 years and if the person continues to pay themselves through year 15 they will have additional money that they would never have had otherwise.
Doug is providing an alternative to paying off the mortgage or keeping the cash and showing the reader how they can do it. If a person wanted to pay off their home in 13.5 years using this method, they would save thousands of more dollars then they would using the banks method of Bi-Monthly Mortgage Payments. They would also protect themselves from a job loss or loss of income from a disability or other unforeseen event.
However, if you don’t have the ability to save, then this is probably not for you, unless you are willing to allow automated withdrawals in your account to “force” you to save.
I cannot believe this dude is NOT getting it…. I don’t have enought time or text space to rebut…so here is a short perspective: If Bank of America, Chase, Wells Fargo, Federal Reserve Bank, Walmart, and a huge laundry list of other entities use this very method to safeguard their most valued cash positions…what makes you think it’s NOT appropriate for individuals dude?