We’re very close to jumping into the math but we do need to cover a little bit more so you understand the mortgage issue. It is a complex issue but ironically the math is simple…and we’re almost there.
The dilemma any homeowner has when choosing a mortgage product is that no matter what type of mortgage the owner selects, major wealth transfers will occur. The solution to reducing these transfers is understanding the opportunities that lie inside the mortgage itself.
What do we mean by “transfer”? Well, if you get a mortgage, you’ll pay interest to the lender (a transfer of your money), and if you pay cash not only will you lose the money that you paid for the house, but also the ability to earn more money from that money (lost opportunity cost).
People like Ramsey say, “Wait a minute! I’ve got the house.
I didn’t ‘lose the money’ and my money does earn
because the value increases.”
Not quite. The value of your home has nothing to do with the mortgage or lack thereof. Your home appreciates or depreciates either way. And, as a matter of mathematical fact, you do lose money because equity has NO rate of return – I’ll prove that later.
So you either pay interest or you lose interest; however, you must answer these two questions (and this is what all of our math will be based around):
- Which of these two situations will cause the least amount of wealth transfer for you personally?
- Which mortgage option makes the most money for the bank?
These two questions are by far the MOST important issue and we’re confident your Realtor, mortgage lender, CPA, financial planner, and certainly Dave Ramsey did not deal with this properly. We will!
Now that we’ve set the foundation let’s get moving. We’re going to address each one of the True / False statements on the quiz in the previous post.
We call it Financial Caffeine because once you understand the truth, it’ll keep you up at night.
Kelly O’Connor – email@example.com