A mortgage is a tool that can either help or hinder your financial growth. In fact, a poorly structured mortgage has the potential of creating devastating financial implications, while a properly structured home loan can help provide financial peace and stability. Based on our research, it is clear that by working with a professional mortgage planner instead of a typical loan originator, you are more likely to achieve better long-term financial results. A mortgage lender should provide advice beyond the home loan. I have found there to be four primary steps that should be addressed when creating a mortgage plan. Each step should be addressed in order, with a written plan of action. The four steps should serve as a guide to both allocating cash flow as it comes into the household, as well as deciding how existing net worth should be distributed:
Step 1 | Develop a Cash Reserve – To be used for unbudgeted emergencies. If consumed, this cash is to be replaced as quickly as possible. The purpose of this strategy is to train you to handle unexpected situations with cash verses falling into the habit of using credit cards.
Step 2 | Pay Off All Consumer Debt – The objective is to eliminate all non-tax deductable debt. The number one reason to eliminate these types of debts is to free up monthly cash flow to form and/or exercise the habit of saving money and earning interest instead of paying interest. The key to financial independence is to have control over your cash flow and make wise decisions with how it is allocated.
Step 3 | Create Significant Liquidity – For retirement, college savings and other investments. This is also a fund that can be used in the event of a major financial challenge or opportunity. The goal is to have this invested according to your long-term objectives, so that is it growing and compounding.
Step 4 | Pay Off Your Home – Have a plan to pay the home off at a set point in the future or ensure you have the ability to pay the home off by a predetermined point.
When a plan is created it is crucial to review the plan no less than once per year. We accomplish this through our Annual Mortgage Review system. By updating and adapting the plan annually, we can help ensure that the home loan is still in line with your ever-changing financial needs and circumstances. Furthermore, as home values and interest rates move higher or lower, it is imperative to make sure that the mortgage is still consistent with the goals and objectives it was originally set out to achieve.