replace your mortgage

How to Increase Your Net Worth

 

Because our money never leaves the policy, our money continuously earns compound interest even while we’re using it. It’s as if our money’s in two places at once, because quite literally it is. We’ve cracked the code on creating wealth by making purchases.

 

Wouldn’t it be great if you could increase your net worth by making everyday purchases? Most people think there are only two ways to make a purchase. You could either pay cash or you could finance. But today we’re going to talk about a third option, an option that allows you to earn continuous compound interest on your money even after you make the purchase.

When it comes to making major capital purchases, the often most convenient way is to finance the purchase. Think about it – when you go to buy a car, how easy is it to show proof of income and them to give you a loan?

So when we borrow, we have no access to capital. We have to use somebody else’s capital, therefore pay them interest, and in the process, we’re not earning interest, but make no mistake we’re using the collateral of our future income to pay for the purchase. The bank is loaning us money because they know we have the ability to earn income.

Since we’re financing and we’re giving up that monthly cashflow, it hinders our ability to save for the future. And then the next time we need to go buy a car. We’re forced to finance again, because we didn’t have the ability we didn’t have the cash flow to build up a pool of cash to self-finance or pay cash for that car.

So you see how every financial splash we make creates a ripple effect down the road.

Every decision we make financially could either move us towards financial freedom or further away from financial freedom. Often times these debts snowball. So it’ll start with a car loan and then it’ll be paying for the wedding and tuition for our kids and appliances and furniture. These monthly payments slowly grow and grow and grow. Before you know it, we’re out of control of our cashflow.

Think about it from the perspective of a financial institution, what does the financial institution want? What does it need? It needs our money. And the best way to get that is to do it on a systematic basis – on a monthly basis. So the more of our monthly cashflow that the financial institution can control, the more that they can control us, but the more profits that they could make.

The goal of every debtor is to finally be able to go out and pay cash for that car. They’ll save month after month, year after year until they finally have enough money to go out and pay cash for that car. But what happens when they drain their tank down to zero is – they gave up all the potential to earn compound interest on that money.

You see the person who pays cash – does so, so they don’t pay interest. They think they’re getting ahead of the game, but really they’re always going back to zero. They save. They wipe it out. They save again. They still have payments – it’s to a savings account, but at the end of the day, they’re still not earning interest and they’re really not in control of their financial future.

You see, there are only two components when it comes to compound interest and that’s time and money. Every time we drain that tank, we’re losing all that time. And we all know time is an asset that we can never regain.

A lot of times we talk to folks who don’t finance and the reason they don’t finance is because, “I hate paying interest.” they’ll say. My response to them is, “Oh, so you like to lose interest?” And then I get a look like, what are you talking about? And then I explained to them how they’re losing interest by paying cash.

So if financing isn’t the answer and paying cash isn’t the answer – what is the solution to finally achieving financial freedom? And here’s the secret. It’s not what you buy – it’s how you pay for it, that really matters. So you may be wondering how we do this. The answer is we use specially designed whole life insurance policies. Mainly because they have some unique characteristics and that we’re able to collateralize loans against the cash value of the policy. What that means is we’re never taking money from the policy. We’re never draining that tank, but instead we’re placing a lien against that cash value so that we have access to make major capital purchases and basically self-finance.

Because our money never leaves the policy, our money continuously earns compound interest even while we’re using it. It’s as if our money’s in two places at once, because quite literally it is. We’ve cracked the code on creating wealth by making purchases.

There are two main differences between this type of financing and traditional financing. The first is that it’s an unstructured loan repayment schedule. Meaning that you get to determine when and how much you pay back towards this policy loan. And the second key difference is that every time you make a payment, your payment is literally increasing your net worth.

Make no mistake about it – whether you finance through conventional methods, through a bank or a finance company, or with using our process and borrowing against your cash value – every payment you make will increase somebody’s net worth. Using our process, you will increase your net worth.

So every time you make a payment, you increased your future ability to access that capital again. So that over time you’re less and less dependent on the banks and financial institutions – and ultimately can reach freedom this way.

Earlier we mentioned that it’s not, what you buy, it’s how you pay for it. We talked about financing, we talked about paying cash and then we talked about using our process. In this process, we focus on showing you how to regain control of your money. You see, when you focus on controlling your money, all of your decisions become very clear. It’s only when we take our eye off the ball and we focus on interest rates, or we focus on getting a high rate of return on our money that we really start to lose control of our financial future.

If you’re ready to finally regain control of your financial future, please check out our one hour web course. It’s on our website tier1capital.com. We go into great detail about how our process works and how it could work in your life.

Remember, it’s not how much money you make – it’s how much money you keep, that really matters!

Mortgages: Spoiled for Choice

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:

  1. A large down payment will save you more money over time than a small down payment
  2. A 15-year mortgage will save you more money over time than a 30-year mortgage
  3. Making extra principal payments saves you money
  4. The interest rate is the main factor in determining the cost of a mortgage
  5. 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?

How do I get the ultimate return on my investment?

 

“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.

 

Which is better- A 15yr or 30yr mortgage?

 

 

 

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?