Liquidity – the use and control of your investment.

Liquidity Compare the liquidity of

typical investments:

Cash Same day access via check, debit card, mattress, etc.

Bonds / StocksSame day access, but with

possible market timing losses

House WealthHELOC – 30 to 60 days

Refinance – 30 to 90 days

Sell – 60 to 180+ days

Unlike most investments, you must make timely debt service payments to retain access to the wealth in your house.

If you can’t make these payments, you can potentially lose control of that wealth. #1 reason for Foreclosure – Disability…

Other factors ranked as most common reasons for loss of house in foreclosure: Loss of Job, Divorce and Death.

Safety - Foreclosure

Return – the rate of growth on your investment?

Return

The Return on wealth in a house is always 0%; wealth in the house can only increase two ways:

Principal Repayment (your wealth)

Property Appreciation (market wealth)

$400,000 purchase price$320,000 mortgage loan

$80,000 Invested

Interest Rate: 7% (30 year fixed)

Appreciation: 4% (annual) Day 1 5 Years 15 years 30 years

House Value $400,000 $486,661 $720,377 $1,297,359

Mortgage Balance $320,000 $301,590 $237,602 $0

Total Wealth $80,000 $185,071 $482,775 $1,297,359

It appears that $80,000 grew to $1,297,359 over 30 years…

Return – Typical Scenario

$400,000 purchase price$320,000 mortgage loan

$80,000 Invested

Interest Rate: 7% (30 year fixed)Appreciation: 0% (annual)

Day 1 5 Years 15 years 30 years

House Value $400,000 $400,000 $400,000 $400,000

Mortgage Balance $320,000 $301,590 $237,602 $0

Total Wealth $80,000 $98,410 $162,398 $400,000

Without appreciation, there is only principalrepayment.

Return - No Appreciation

$400,000 purchase price$320,000 mortgage loan

$80,000 Invested

Interest Rate: 7% (interest only)Appreciation: 0% (annual)

Day 1 5 Years 15 years 30 years

House Value $400,000 $400,000 $400,000 $400,000

Mortgage Balance $320,000 $320,000 $320,000 $320,000

Total Wealth $80,000 $80,000 $80,000 $80,000

Without principal repayment and appreciation, there is no growth.

Return – No Appreciation or Principal

$400,000 purchase price$400,000 mortgage loan

$0 Invested

Interest Rate: 7% (30 year fixed)Appreciation: 4% (annual)

Day 1 5 Years 15 years 30 years

House Value $400,000 $486,661 $720,377 $1,297,359

Mortgage Balance $400,000 $301,590 $237,602 $0

Total Wealth $0 $185,071 $482,775 $1,297,359

If you invested no wealth in the purchase of the house, their total wealth at the end of 30 years is the same.

Return on house isn’t Return on wealth in house…

Return – Nothing Invested

What did we leave out?

What Was Missing?

Loan Amount Payment Principal Interest

Tax Reduction Net Cost

$320,000 $2,129 $262 $1,867 *$700 $1,167

$400,000 $2,661 $328 $2,333 *$875 $1,458

difference ($292)

*based on a 37.5% marginal tax bracket

PaymentPayment Difference at 7%:

$80,000$80,000 Difference:

+$80,000

Investable Asset

Cash Flow Return(EPR™)

Net Cash Flow

$80,000 ($292) 4.375% $292

The real issue with Return is understanding your Effective % Rate ‘EPR™’.

Return – The Real Issue

Would increasing the Would increasing the potential Return on potential Return on wealth in the house wealth in the house increase your increase your confidence?confidence?

The Potential Impact of Liability Management

We’ll work together to determine which of these two approaches you believe to be most suitable for you.

Savings

Found

Savings Used For

30 Year Mortgage Payoff*

Savings Used For

30 Years of Investing **

$150 mo. 21.5 years $223,554

$250 mo. 18.5 years $372,590

$350 mo. 16 years $521,626

$450 mo. 14.5 years $670,662

$550 mo. 13 years $819,698

$750 mo. 11 years $1,117,770

$1,000 mo. 9 years $1,490,359

*Standard 30 year fixed at 7% / **Assumes an 8% After Tax Rate of Return

Why Focus on the Mortgage Liability First?

The mortgage is the lowest cost liability available to most people.

It is typically tax preferred to other liabilities because of interest rate deductibility*.

In managing liabilities, we look to utilize the mortgage first if borrowing is necessary.

The mortgage is the largest single liability expenses for most people.

*You must itemize to benefit from mortgage interest deductions.

Step 2 – PaymentConsider the different

ways to pay on your mortgage.

A smart payment approach can impact the Safety, Liquidity and Return of the investment in the house.

Step 3 - Availability

A simple rule of thumb, multiply current gross income by 4 for an availability estimate.

Consider what portion of the wealth might be available to you.

liquidity – liquidity – liquiditylocation – location – location

Consider your specific needs today and those in the future.

Step 5 - Management

All management of wealth in the house is afunction of Safety, Liquidity and Return (based on EPR™).

Step 6 - ProtectionConsider that wealth in the house, is

only safe if you have use and control.

lawsuitlawsuitdivorcedivorce

disabilitydisabilityjob lossjob loss

homehomeequityequity

lineline

foreclosureforeclosure

depreciationdepreciation

A smart protection strategy is to have a 100% HELOC that is updated when equity increases by 5%.