“You don’t want to have so much money going toward your mortgage every month that you can’t enjoy life or take care of your other financial responsibilities.” —Dave Ramsey
Why would this CFP originate mortgages? So-called “financial planners” may be segmented by licenses and inclinations to promote stocks, insurance, annuities or realty—and this segregation betrays the long-term interests of clients who need integrated financial strategies.
My realty licensing barely respected stocks while CFP training failed to note CNBC reports that, in 2019, the median net worth of homeowners in the U.S. was $255,000, while renters’ net worth was $6,300. Homeowners had 40 times the wealth!
Renters pay a little less for rent than for mortgages, have greater flexibility of lifestyle, and avoid maintenance and property tax costs—but few are likely to invest differences in the market well enough to match house payments, which are virtually forced savings programs. Homeowners pay down mortgages over time and benefit from leveraged investments. Middle-income homeowners have seen their properties appreciate by 68% since 2012, according to the National Association of REALTORS®.
In San Jose, low-income earners with homes have accumulated nearly $630,000 over the last 10 years while middle-income earners gained $643,000. Santa Cruz had the second highest gains of wealth in CA, averaging $527,790 over 10 years. Many Californians retire mortgage free to pass on legacies of houses tax free with stepped-up basis.
Why? For homeowners or landlords alike, leveraged investment may grow with compound returns competing with the stock market, while interest costs decline with amortization. If the $800,000 house goes up 3%, that’s $24,000 gained on an investment of $160,000, which earned roughly 15%. If you had borrowed $600,000 at 4% to buy an $800,000 house, the appreciation is 8% of $800,000, which means the house doubled to roughly $1.6 million in nine years while paying fixed loan interest of about $300,000. So you turned $200,000 into $500,000 with returns over 15%.
Silicon Valley economic growth and needlessly stiff construction regulations keep housing prices rising. Few will play this game with higher 2023-24 interest rates and fewer qualify for loans even to try. So wait. The patient find that cleansing credit and saving for a down payment teach budgeting habits later sustained by steady mortgage payments, which defy destitution.
The life planner as Mortgage Loan Originator is doubly bound by law and ethics to serve as fiduciary who offers financial choices, then gets paid limited amounts based on the size of the loan rather than its interest rates. The fee-only fiduciary planner, preferably after giving a comprehensive financial life plan, will speak frankly about budgeting for mortgages and housing related to lifestyle.
While consumers and agents may want to rush, their decisions should relate to “the plan”: retirement savings so they don’t retire “house poor,” insurance to cover risks and assure mortgage payments, and analysis of the tax benefits of housing. As experts in the time value of money, planners may advise on mortgage interest and payment options as fiduciaries. Retirees’ mortgage payments may end, freeing cash, and owners have the choice of cashing in equity through reverse mortgages to make leveraged investments outside the house or enlarging legacies for loved ones and worthy charities.
Life Planners encourage homeownership not just for scrooges, but for those who fulfill dreams. Freed from landlord rules, homeowners live with pride of ownership as they create little utopias with tailored homes and manicured mountain gardens. Homeowners’ children complete high school and attend college more frequently. The Nebraska Economics and Business association reports a 1% increase in (lagged) homeownership leads to a 1.253% and 1.513% drop in the subsequent per capita property crime and a 1.043% and 1.123% drop in the subsequent per capita violent crime for the years 1991 and 1992.
The stability of housing probably enhances the feeling of community with people satisfied they established roots and enjoy long term friendships. Homeowners are more likely to lead wonderful, responsible lives active in social groups and churches. Or, writes singer and cancer survivor Chris Rea, “As soon as I paid the mortgage off…I started racing cars.”
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. This Mortgage Loan Originator (NMLS #2565162) serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
