Ordinary People, Extraordinary Wealth
by Ric Edelman |
Secret #1They Carry a Mortgage on Their Homes Even Though They Can Afford to Pay it Off.
If you had enough money to pay off your mortgage right now, would you? Many people would. In fact, "The American Dream" is to own your home--and to own it outright, with no mortgage. Imagine owning your home without having to send a check to a mortgage company or bank every month! Being so fortunate must evoke such a sense of security, satisfaction, and well-being that you could only dream of it! Imagine the feeling you'll enjoy when, after 30 long years--360 monthly payments--you finally make your last payment, and the house is yours forever!
If The American Dream is so wonderful, how can you explain the fact that thousands of financially successful people--people who have more than enough money to pay off their mortgage right now refuse to do so?
Consider these facts derived from my survey research. Of the respondents:
- The average home value is $255,700; the average mortgage balance is $142,000. Even though 100% have the ability to own their home without a mortgage, 83% carry a mortgage anyway.
- 100% have the ability to send in extra money along with their monthly payments, to eliminate the mortgage ahead of schedule--but 90% choose not to. Instead, 85% of the respondents have a 30-year loan and no one in this group sends in extra principal payments or participates in bi-weekly mortgage plans.
Clearly, these successful Americans are not bothered by carrying a big, long mortgage. Compare yourself to them. If you have a mortgage and are struggling to pay it off, or if you're dreaming of the day when you make your final payment, you're trying to do something that financially successful people do not do.
What do they know that you don't?
It's vital that you understand what's happening here. And we begin with the fact that talking about mortgages is not a conversation about economics or finance.
It's about emotions.
You "love" the idea of owning your own home. You "hate" your mortgage. If you're like many, you may even "fear" it. All of these are emotional words; none of them are financial. Yet, a mortgage is a financial tool--not an emotional state of mind.
Why, then, do you feel the way you do about your mortgage?
Blame it on your parents.
Just about everything you've learned about money, you've learned from your parents. Even though Mom and Dad never said a word to you about money, they had lots to say about mortgages--especially when you announced you were planning to buy your first house. "Make a big down payment," they told you, "and keep the mortgage payment low." "Pay it off early, child. You don't want that mortgage hanging over your head."Indeed, your parents and grandparents made it very clear to you that mortgages are bad, something to minimize, or to avoid whenever possible. A necessary evil at best. But what they never told you was why they felt this way about mortgages. It's important you understand their perspective or you'll fail to understand why their advice is bad for you. So let's look at mortgages from your parents' and grandparents' point of view.
Why People Fear Mortgages--and Why You Shouldn'tOur story begins in the 1920s. Back then, houses typically cost $5,000. Sure doesn't sound like much, until you consider that the average annual income in the US. was $1,434 in 1925. Consequently, few people could afford to pay cash for their homes--just like today. So, people borrowed the money from banks--again, just like today. But the loans were structured differently back then. A common clause in the loan agreement gave banks the right to demand full repayment of the loan at any time; if you failed to repay your loan when asked, the bank had the right to take your house from you and sell it to recoup its money.
So although the terms called for you to send $24 to the bank every month to pay off that $4,500 balance over 30 years, you knew you suddenly might be required to repay the remaining balance in full at any time. You didn't worry about that clause, because you knew that having the bank ask you for $4,500 in cash, well, they might as well ask for the moon.
Then came October 29, 1929.
When the stock market crashed, millions of investors lost huge sums of money. Problem was, it wasn't their money they had lost. You see, most investors back then had bought stocks with borrowed money--money lent to them by their stockbrokers, called a "margin account." Under rules then in effect, you were allowed to buy $100 worth, of stock by giving your broker just ten bucks; your broker would loan you the other $90. So when the Crash hit, knocking 30% off the value of everyone's stock portfolios, a typical brokerage account that previously was worth $100 now contained stocks worth only $70. But the investor had borrowed $90 to buy them! This led to a "margin call," where the broker would tell the investor that because his account had exceeded the "margin limits, " he had to come up with more cash. If the investor failed to do so, the broker would begin to sell some of the investor's stocks, and the broker would continue selling until enough cash was raised to meet the margin call.
Selling off the portfolio was the last thing the investor wanted his broker to do. The stocks were already down 30%--this was the worst time to sell. So, to avoid the margin call, the investor went to his bank and withdrew enough cash to meet his broker's margin call. The investor had to act quickly, because under stock exchange rules, margin calls must be fulfilled within 24 hours. Therefore, in the days following the Crash of '29, a lot of investors went to their banks and made withdrawals.
It didn't take long for the banks to run out of cash.
When they did, word quickly spread. Bank depositors stampeded the banks, demanding their money. To get more, the banks started calling their loans due. They sent telegrams to their borrowers, demanding they pay off their loans immediately and in full. Because these homeowners didn't have the cash--you might as well ask for the moon--the banks foreclosed and put the houses up for sale in a desperate attempt to raise capital.
It didn't work.
With no one willing or able to buy the houses, banks found themselves owning virtually worthless real estate. Unable to satisfy depositors who were demanding their cash, the banks closed their doors, many of them never to reopen. With investors unable to get their cash from their banks, they were unable to meet their margin calls--so their brokers started selling out their holdings. But everyone was in this dilemma, so the brokers couldn't find buyers for the stocks. With no one willing to buy, the brokers had to continually drop the stocks' prices.
Ultimately, the Great Depression saw the stock market fall more than 75%, from its 1929 highs. More than half of the nations banks failed. Tens of millions of Americans lost their jobs as companies went bankrupt. And millions of homeowners, unable to raise the cash they needed to pay off their loans, lost their homes. The American Dream had become a national nightmare.
But not for those who owned their homes outright. These lucky few were immune to the banks' collapse, With no loans to repay, they got no telegram demanding full payment. As their neighbors went broke and lost their homes, with thousands committing suicide, those who owned their homes outright succeeded in keeping them. They might not have found work, or had much to eat, but they kept a roof over their children's heads.And thus was born America's mantra: Always own your home outright.
Never carry a mortgage.
