It is likely that during your lifetime you will allocate more dollars to the place you are going to sleep than anything else. As such, the potential to transfer your wealth away unknowingly and unnecessarily as a result of decisions made surrounding your mortgage is just as high. There is a great deal of misinformation and misconception concerning this topic, and often our decisions are made based on hearsay or commonly accepted perceptions, what others have done, or even media influence, not what is necessarily correct.
Choosing a Mortgage
There are so many options available; it can be daunting which option is best to say the least. It is no wonder that making the right choice can be very confusing, and it can be easy to doubt that you have made the right decision even after the choice has been made. Ask yourself this. If the mortgage lending institutions made the same amount on every mortgage option, how many options would there be? Obviously, there would only be one. Since there are so many, it can be helpful to have someone on your side that is more knowledgeable about the subject to steer you clear of the pitfalls.
People tend to maintain different staunchly held views about which mortgage is “best,” and as a result it can be difficult to have an open conversation about it. After all, nobody wants to hear that the decisions they have made might not have been the best ones. What’s more is that these decisions have not been made haphazardly, but with great care and effort. We make decisions based on the things we “know,” which we also think are true. But what if what you “know” turned out not to be true?
The Mortgage Quiz
Let’s run through the mental exercise of taking the following true/false quiz:
A large down payment will save you more money over time than a small down payment
A 15-year mortgage will save you more money over time than a 30-year mortgage
Making extra principal payments saves you money
The interest rate is the main factor in determining the cost of a mortgage
You are more secure having your house paid off than financed 100%
Chances are you answered most, if not all of these questions with a reasonable degree of certainty. However, if you have made mortgage decisions based on what you thought to be true, and it turns out that the answers are different than what you thought, you could be negatively impacting your wealth potential as a result.
Does the value of your house go up when you make extra principal payments?
Do your payments go down?
Can you easily get to the money in your house after you put it there?
These are just a few of the questions we will discuss together and help you determine which mortgage option is best for you. If what you thought to be true about mortgages turned out not to be true, when would you want to know?
“We focus on the lifetime capital potential tank because that’s where the greatest opportunity lies for you to improve the efficiency of your money, improve your cashflow, and ultimately increase the amount of wealth that you’re able to accumulate over your lifetime.”
Up until 1993, I was exactly like you. I was making great income, but I was living pay to pay. The reason I was living pay to pay is because I was doing everything by the textbook of conventional wisdom. I had a 15 year mortgage and was paying extra on the mortgage. I was maxing out my retirement account. I was paying cash for as many things as I possibly could, but embarrassingly, I had credit cards and I had to borrow money from my father in order to pay my mortgage. The reason my cashflow was being pinched was because of the things that I was taught to do by the so-called experts.
There are two factors that can really pinch your cashflow. The first is an unsteady income. This could be whether you are a business owner and have a cyclical business cycle, whether you’re a sales person and commission comes when commission comes or maybe you’re an employee and you were expecting a bonus that didn’t come through. These things can really tighten up your monthly cashflow and leave you feeling stuck.
The second factor we’re going to look at is when unexpected major expenses come up, whether it’s tuition for kids or an annual premium for insurance that you’re paying, or maybe you need new tires or car repair, or we all know how bad it is when your refrigerator breaks and you’re forced to go out and buy whatever’s available at the store. All these things could really leave a dent in your personal economic model and leave your cashflow feeling tight.
So let’s take a look at this model. This is what we refer to as a personal economic model. We all have one. This is how we show how money works in our lives. Let’s start with income, your income, all the income that you’ll ever earn in your life. We’ll go through this lifetime capital potential tank. It’s the largest tank, cause it has the most money flowing through it, but it doesn’t stay in there. It flows through this tube and hits your lifestyle regulator. Your lifestyle regulator is where you have choices. You can either spend all your money or you could force some up into your future lifestyle tanks, your investments, and your savings.
Conventional wisdom tells us that we should focus on getting a high rate of return on our investments. That’s what most financial advisors do. They focus solely on the yellow tank and showing you how to get a higher rate of return, probably taking on additional risk. But our focus is different. We focus on the lifetime capital potential tank because that’s where the greatest opportunity lies for you to improve the efficiency of your money, improve your cashflow, and ultimately increase the amount of wealth that you’re able to accumulate over your lifetime.
So let’s take an example of exactly how making your money more efficient can improve your personal economic model. Let’s take a look at wealth and income potential. Let’s assume you’re age 42. Do you plan on retiring at 70? Your current income is $100,000 and you don’t expect any increase in your income and you don’t have anything saved to this point, but you could expect an investment return of 5% at your retirement age of 70. Your income potential would be $2.8 million. It’s a $100,000 of income times 28 years, gives us 2.8 million. Your wealth potential would be about 6.1 million. That comes from investing your full $100,000 of income over that 28 years.
Obviously it’s unrealistic to think that you can save 100% of your money because there are expenses that come along with our income. Whether we like it or not first and foremost are taxes, we’re going to put you in a 30% tax bracket. Now that’s federal state, local gas tax, real estate tax, and any other taxes that you would encounter on a day to day living. Our wealth potential now is reduced to $4.2 million. Additionally there’s debt. The average family pays 34 and a half cents of every dollar to service their debt. That’s student loans, car loans, vacation loans, you name it. Now our wealth potential is reduced to 2.1 million and then we have lifestyle, groceries, utilities, insurances, and hobbies. Now we’re down to $600,000. Again, conventional wisdom wants us to focus on getting a high rate of return. Well, let’s assume we can go from 5% to 8%.
They have to take some risks to do it, but now our wealth potential goes to a million dollars and to them, it can’t get any better than that. But again, the reason you can’t get ahead is because your cashflow is pinched. The reason your cashflow is pinched is because of taxes and debt. What if we can show you how to reduce your taxes from 30% to 25%, look at the effect that has on your wealth potential. Keep in mind, we’re going to reduce your investment return from 8% to 5%. So you don’t have to take any risk in order to do it. Our wealth potential grows from 600,000 to 900,000. It grows by 50% just by reducing our taxes by 5%, but we’re not finished.
We could also show you how to control your debt. If we can show you how to reduce your debt from 34.5 % percent down to 20%, look what happens to your wealth potential. Now you’re at $1.8 million just by reducing your taxes and controlling your debt. Now, all of a sudden you’ve tripled the amount of money you’re able to save. We’ve done all of this without having to reduce your lifestyle in order to do it. That’s the value of controlling your cashflow. This is how you can get ahead without having to earn or generate additional income.
Here’s the good news. If you’re ready to get rid of that stuck feeling, all you need to do is stop giving up control of your money. We always say, it’s not how much money you make, it’s how much money you keep that really matters. It’s not your income that’s holding you back, it’s not your rate of return that’s holding you back. It’s the inefficiencies in your cashflow that are stopping you from getting ahead.
Once you focus on what’s important, control of your cashflow, each and every decision becomes more and more clear and you’ll know exactly what to do. Our process focuses on identifying exactly where and how you’re giving up control, Whoever controls your cashflow controls your life.
“We’re going to show you why it’s not what you buy, but it’s how you pay for it and how using leverage can actually get you a higher rate of return on your money.”
Have you ever wondered how you can get the most out of your real estate investment? Today we will be using an example about how to leverage your money for real estate investing but know that this concept can be applied to any type of investment. So, keep that in mind as we go through todays example.
We’re going to show you how using the cash value in your life insurance can maximize the rate of return on your real estate investment. We have clients who invest in real estate who ask us, “ Why should we put money in a life insurance policy and earn a measly 4% when we can put money in a real estate deal and earn an infinite rate of return?”
We’re going to look at a real estate example, and we’re going to show you three different ways of acquiring the property; paying cash, financing with a traditional mortgage, and leveraging your life insurance cash value. We’re also going to show you how leveraging can actually get you the ultimate rate of return on your investment.
Here we have a $250,000 property and we are choosing to pay cash. After closing costs, we have $255,000 of our own money in the deal. We have no costs for financing and after taxes, insurance, and maintenance, we ended up with a gross rental income of $2,500 per month. We’re going to sell the property in 60 months and we’re going to assume that the value of the property appreciates at 2% per year over that ownership period. When we sell the property, five years later, the value of the property is $276,270. After we calculate everything that we received, we ended up with 13.08% as a rate of return on the real estate investment.
Now you may be wondering if the property is only appreciating at 2%, how did we get a 13.08% rate of return? Again, we have to evaluate the fact that we received $2,500 per month for 60 months. When you calculate that income versus the money we had in the deal, that’s how we can calculate a 13.08% rate of return. That’s a pretty good rate of return, but it can be so much better if we apply the laws of leverage to the purchase of the property.
Now, most people think that because we’re saving so much of interest by not financing, by not using a traditional mortgage, that this rate of return is as good as it gets. We’re going to show you why it’s not what you buy, but it’s how you pay for it and how using leverage can actually get you a higher rate of return on your money.
Next, let’s look at the classic 80/20 finance. We’re going to finance 80% of the purchase price, put 20% down and pay closing costs out of pocket. It’s the same deal. It’s the same building, same purchase price, and the same closing costs. The only thing we’re changing is the fact that we’re using other people’s money.We’re going to borrow 80%, $200,000 at 5% for 20 years. That means we have a mortgage that we didn’t have by paying cash and the mortgage is $1,320 per month. So how are we going to pay for that mortgage? We’re going to pay for it from the rental income, the $2,500 per month.
We’re going to evaluate this over the same 60-month period. We’re going to sell the property again in five years at 2% annual appreciation. We only have $55,000 of our own money in the deal. We’re also going to get the tax deduction because a portion of the mortgage is interest. So now we have less monthly income, $1180 versus $2,500, but we also have less of our money in the deal. When we sell the property, the fact that we have a mortgage doesn’t change the selling price of the building, it’s still $276,270. The only thing that changes is, when we sell the building, we have to pay off the mortgage. Our net cash out is lower. It’s $109,380.
Now you may be thinking with a lower cash out and a lower monthly income, it’s really surprising that the rate of return is actually higher when you finance, right? But you need to consider that we only have $55,000 in this deal. Our real estate investing clients, they understand leverage, and they would never pay cash for a building. If they have $255,000, they can buy five buildings instead of one by not paying cash. They understand leverage and that is the beauty of using other people’s money. Would you rather earn 34.37% on one property or on five?
Let’s take a look at the final scenario where we finance 80%, but we borrow against our life insurance policy for that 20% down payment. The only expense we have out of pocket is the closing cost of $5,000. We have the same property, $250,000 with the same closing costs of $5,000. But this time we’re going to mortgage the $200,000, just like in the last example. We have a 5% loan for 20 years and we have the same mortgage payment. The difference is we’re going to take $50,000 against our life insurance policy. We’re also going to finance that at 5% for 20 years. Our total mortgage payment is actually going to be a little higher and our monthly cashflow is going to be a little lower.
When we sell the property for $276,270, after five years, our net cash out is $67,633 because we have to pay off the bank mortgage and the loan we took against our life insurance. But remember, we only had $5,000 of our own money in the deal. Looking at it, this is the ultimate leverage. When we calculate all the income that we received, plus the appreciation of the property, we end up with a rate of return of 245.87%. Now, you might be thinking that that’s a great rate of return and it surely is. But actually, this scenario is so much better because what we didn’t tell you is the fact that when we borrowed against our life insurance, our money was still continuing to earn uninterrupted compounding of interest at the rate of 4%. Additionally, we have a death benefit. So, we have so much more than we’re actually showing here, that we couldn’t and didn’t calculate into the rate of return.
This is why it’s not what you buy, but it’s how you pay for it that really matters. Leveraging can really increase your rate of return. We really illustrated that with these examples today, you know, conventional wisdom would have you believe that the less you pay the banks and finance companies and fees and interest charges, the greater rate of return you can earn. Today’s example really underscores the importance of having as little of your cash tied up in the deal as possible and how leveraging other people’s money can maximize the rate of return that you could earn on your money. Not to mention you still have control over all that money that isn’t tied up in the deal.
How often do we think about what will happen if we get sick, hurt, disabled, or lose our job?
These are just some of the factors that we need to consider when investing in real estate. Buying a house is an exciting but stressful time. With so many options out there, how do you know which one is right for you? In this week’s video, we dive in to explore the pros and cons of a 15-year mortgage vs. a 30-year mortgage. We also explain the difference between a bank’s equity and your own, and other factors to consider. Remember, if you need approval to access your equity, is it really yours?
“It’s important to choose the option that gives you the most liquidity, use, and control of your money.”
Which is better a 15- or 30-year mortgage? When shopping for a mortgage, it can be so confusing because there are so many options. Buying a home is one of the largest purchases you’re going to make, and many people get hung up on interest rates. Well, interest rates are important. It’s not the only factor you should consider when choosing the right mortgage for you.
One thing to consider that’s often overlooked is inflation. When you buy a house today, you get a mortgage, the dollars have more purchasing power today than the dollars that you’re going to use to repay the bank. So the longer you can take to pay back the bank, the less purchasing power the dollars are going to have at the time of repayment.
Let me give you an example. When I was younger, my parents would send me down to the bank to pay the mortgage. The mortgage was $52.80 and at the same time, they would send me over to the local hardware store to pay the utility bills. Our electric bill at the time was about $45 or $50 and I remember asking my parents, “how much was the electric bill was when we bought the house? ” And they said it was about $4 or $5 per month.
Think about what happened over 15 years. The electric bill increased by about five times, but the mortgage stayed the same. So my parents were negatively affected by inflation on the electric bill, but they were positively affected on the mortgage because the mortgage stayed the same and they were paying that mortgage back with dollars that had less and less value over time.
Conventional wisdom tells us debt is bad, so Americans want to get their house paid off as soon as possible. You think you’re making your position safer, but the fact of the matter is you’re actually making the bank’s position stronger. Let me give you an example. If you have a $250,000 house with a $200,000 mortgage balance, if the bank had to foreclose, it might be difficult for them to break even if they had to sell that house. But if you have a $250,000 house with a $125,000 mortgage balance, it’d be very easy for the bank to break even if they had to foreclose.
Don’t get us wrong, both you and the bank are building equity, but the nature of those equities are quite different. The bank has full liquidity use and control of their equity. Whereas you would need to qualify to access the equity in your real estate. The bank’s equity is cash and your equity is real estate equity, which requires bank approval in order for you to access your equity. So, basically if you need approval to access your equity, is it really yours? The next thing to consider when choosing a mortgage is control. Think about it. If your goal is to regain control of your money, then you should not be giving up your discretionary income to the bank. That’s money that you could be using for your lifestyle or savings.
You’re taking money that you have complete liquidity, use and control over and giving it to the bank and now they own and control that money. Which brings us to our third point. What happens if you become sick, hurt, disabled, or lose your job? You may have a lot of money in real estate equity, but now you have to apply to the bank in order to access that money and make no mistake. Banks are not loaning you money because you have equity in your real estate. They’re loaning you money on the premise that you’re going to be able to repay them. Anytime you want to tap into your real estate equity, you need to go to the bank, apply and prove that you could repay the bank.
It doesn’t matter if you had a great payment history on your previous mortgages. They don’t care if you actually paid extra on your previous mortgages. They have to consider whether or not you can pay back this new wealth. Let me give you an example. We have clients who had a $175,000 house with a $50,000 mortgage balance. The husband got sick and couldn’t work. They figured they could tap into their equity when they applied to do a refinance, even though the monthly payment was going to be lower, the bank declined them because they couldn’t prove that they could pay back the new loan.
So, all along the way, while this family was building their home equity, making their mortgage payments, they believed that they were making their financial position stronger and safer. But at the end of the day, it ended up hindering them. If you need to get approval from somebody else to get your money, is it really your money?
The fourth thing to consider when choosing a mortgage is what happens if the economic climate changes. For example, interest rates can go up or down. If interest rates go down and you’re locked in for 30 years, you could always refinance if it makes sense for you. But what happens if interest rates rise? Well, this happened actually in the early 1980s people who had money outside of real estate equity were able to take advantage of interest rates on CDs and money market accounts that were 15% or 16%. If you have money tied up in real estate equity and the CD rates go to 15% or 16% you can’t tap into your equity because the bank is going to charge you more than the 15% or 16% if you’re borrowing.
It’s really going to put you in a situation where you can’t take advantage of opportunities if those opportunities arise. This brings us to our fifth point when choosing a mortgage tax deduction. Not everyone will qualify for the mortgage interest deduction, but if you do, do you want all of it, none of it or some of it.
Most people want as much as they can get. With the 15-year mortgage, there’s less opportunity for tax deductions.
In conclusion, we’ve been trained to shop for mortgages using one criterion only, interest rates. While interest rates are an important factor, they’re not the only factor you should consider when choosing a mortgage. Let’s face it, if the banks made the same amount on all the mortgages, there would only be one option. It’s important to choose the option that gives you the most liquidity, use, and control of your money. Again, if the point is to regain control of your money, does it make sense to give that money to the bank and then still have to get approval to access your money?
Have you ever found yourself wondering how banks make money? Do you want to learn how to regain control of your money? In this video we break down the process behind running a bank, and then we break down how you can keep your money flowing! While this process isn’t easy, we are here to guide you through the process. The four rules we have learned to live by are as following. 1. Always think long-term. 2. Don’t be afraid to capitalize. 3. Don’t steal the peas. 4. Don’t deal with bank if you don’t have to.
Make no mistake, although we park our money at banks, they don’t let it sit there.”
Are you thinking about implementing the infinite banking concept to regain control of your money? Well, it’s important to know how commercial banks operate and make money so you could duplicate their process using the infinite banking concept. The first thing banks need to do is, file for a charter. Once the charter is approved, then they have to capitalize the bank. But, understand banks don’t lend you their money. The next step is for them to go and solicit deposits. They usually charge higher interest rates than the neighboring banks in the community, but that’s only step one. Then, step two is to identify borrowers. You see, in order for a bank to make money, they need to have depositors and borrowers.
The third step is for the bank to solicit depositors and how do they do that? They generally do that by enticing you, by offering a higher interest rate on savings accounts and CDs to get you to deposit money with them. Most people are depositors and borrowers from the bank and understand banks can’t make money if they only have depositors and they can’t lend money if they only have borrowers, so they need both depositors and borrowers.
The bottom line is, banks make sure that money is always flowing. The same laws apply in nature. Water has to flow or else it stagnates, and you can’t drink it. Water has to flow through the body or else you die. Blood has to flow through the body, or you die. The same laws apply to money. It needs to continuously flow. Just think of all the ways that we make our money stagnate. We put money in retirement accounts, and we don’t touch it for 30 or 40 years. We pay off our house early and we have this huge amount of our wealth tied up in real estate that we really can’t access without getting permission.
Make no mistake, although we park our money at banks, they don’t let it sit there. They follow the same laws as nature, and they keep that money flowing. They keep that money flowing by using a basic business concept called, inventory turnover. Every business owner knows that, the faster they turn over their inventory, the more profits they make. It’s the same thing for a banking model. The only difference is their inventory is depositors’ money. So, let’s take a look at a real-life practical example of how banks make money. In 2016, Bank of America had $860 billion worth of deposits. Based upon that, they paid $1.9 billion to the depositors. Wow, that’s a lot of money to pay the depositor, but it’s nothing compared to what they earned in interest from borrowers. They earned $44.8 billion from things like mortgages, home equity, loans, fees, business and personal loans. That’s over $42 billion more than they paid out in interest to depositors. Bank of America had no skin in the game. They loaned borrowers, depositors’ money. The only risk they had was to pay the depositors $1.9 billion. By keeping money flowing, they were able to generate $44.8 billion in revenue.That’s why it’s important to keep money flowing, and that’s why it’s important to own the banking process.
Now that we know the benefits of owning the banking function in your life, let’s get started and look at the rules. My mentor Nelson Nash had four basic rules. Number one, think long-term. Number two, don’t be afraid to capitalize. Number three, don’t steal the piece. What did he mean by that? Basically, what he meant was if the insurance company is charging you interest, pay yourself more than that amount of interest. Your money is worth more than Bank of America’s or anybody else’s. The fourth rule was, don’t deal with banks if you don’t have to.
Now that we understand how banks operate and the basic rules for the infinite banking concept, let’s take a look at how we help our clients regain control of their money using the infinite banking concept. The first step is to identify where they’re actually giving up control of their money. We look at places like their mortgages, taxes, how they’re funding retirement plans, how they plan on funding college tuition for their children, and how they’re funding major capital purchases. Step two is really easy. They just agree to stop doing those things where they’re giving up control of their money so that they can go to step three. Which is to capitalize their policy, capitalize their bank. This leads them to step four, where they’re actually borrowing against their own cash value and paying interest back to an entity that they own and control so that they can control the process and make the profits.
Tier 1 was founded out of the frustration we all experience with trying to get ahead. Our founder spent nearly a decade in financial services doing things the conventional way. Paying down his debts and maxing out his 401K every year didn’t get him anywhere when he needed the funds to buy his first home.
Furious with the system, he began to find additional ways to secure his financial future. Since 1993, he’s used this method to help small business owners and families save for retirement while simultaneously having access to those assets to purchase a home, a car or send their kid to college.
