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Hi rsprang,

Can you explain that a bit more? When I got my mortgage (10/00), my 15 year fixed rate was 6.125 %. As I recall, ARMs at the time were in the 7% range. Is there an advantage to ARMs I'm not understanding?


If you took a 15 year fixed, I would assume your intention is/was to eliminate your mortgage liability within 15 years, AND (always my assumption) that you would prefer your net worth to appreciate in the fastest, most effective way possible.

The 6 1/8% interest rate you got on the 15 year fixed certainly LOOKS good at face value... especially after discounting it for mortgage interest tax deduction treatment. HOWEVER, it came burdoned with a hidden cost.

That 15 year loan sucks a relatively huge amount of your liquid capital away from you each month in the form of principal payments. Every dollar you pay to your real estate principal is a dollar you've locked into an illiquid asset that appreciates slowly and is expensive to break free again (because of transaction costs.)

This same dollar, if placed in a relatively equally stable investment vehicle (especially if in a tax-advantaged type of vehicle) can earn a compounding interest for you significantly greater, sometimes multiples greater, than the real appreciation on your real estate.

The difference between what you COULD be making on your dollar in such an investment, and what you DO realize in final appreciation on the real estate principal is the amount OF YOUR HIDDEN COSTS of the 15 year fixed (or any other compared mortgage, for that matter.)

In essence, because of the unique mortgage interest tax deductions AND tax advantaged investment programs we have in the United States, Uncle Sam is subsidizing anyone who wants to become wealthy by borrowing extremely cheap real-estate backed funds and investing them in protected, faster growing, liquid investment vehicles.

To boil it all down to simplicity (as NON-intuitive as it appears at a glance);

The ideal is to "rent" the property that you "own" from your lender by paying as little or none of the principal as possible... and if forced to, refinance it out at strategic intervals when the rates and fees make sense. Because you "control" the ownership of the property, the appreciation accrues to your benefit (which you take out as quickly as is practicable.) You then use this subsidized capital (at extremely low interest rates) to invest in another vehicle that gets much better appreciation AND is again protected against tax-risk... thereby subsidized AGAIN in your favor.

By following this strategy diligently (at least as diligently as you would have paid your mortgage anyway,) you will accrue a parallel, tax-advantaged "Home Owner's Freedom" investment account that will equal the amount owed on your mortgage in approximately 15-25 years. In effect, this is the same as paying off your mortgage entirely.

The difference is that after you've balanced out the two accounts (your mortgage equals your Freedom Investment Account,) your investment account CONTINUES to build your wealth at the same tax-advantaged rate of return WHILE you simultaneously continue to accrue appreciation in your real estate. If you only pay off your mortgage, you LOSE all the advantage of the investment account and are left with ONLY real estate appreciation.

Bottom line, it's all about understanding how the rules of the game have been set up, and stacking the odds all in your favor.

Hope that helps a bit. This excites me for a bunch of powerful reasons... not the least of which is my intention to help a specific number of people reach a certain level of wealth!

All the best,
Dave Donhoff
Lic. Mortgage Broker
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