Most people who buy homes get mortgages where they pay principal, interest, taxes, and insurance. They are taught that they must pay down the debt and have their equity--their investment--in the house.
Now, let's think about this for a moment. On a 30 yr mortgage with a fixed interest rate, most of your payment will go towards paying the interest with very little towards the principal. You don't start making a major dent on the principal until year 20 or so.
Second, by having the money in the home, is it working for you and making you more money? The answer is no! What happens if you need some of that equity for an emergency? You have to either get an equity line of credit, get another mortgage, or refinance to get cash. That money, your money, that you're borrowing, you will have to pay interest on it. You're already paying interest on your mortgage but now you're going to pay payment to borrow your money?
Does that sound right?
NO!
What's the solution you ask?
Here it is: You get an interest only loan and never pay it off--never pay off the principal.
You get the money out of the house. By not paying the principal, you use that principal payment--money you would have paid in a regular 30 yr mortgage--and invest it in a mutual fund that's earning you 8-10%. Your money then is working for you making you money.
Your money now becomes more liquid--you can access it easier and you don't have to pay interest on it when you want to use it, unlike a HELOC or a second mortgage. In essence, you're using the bank's money to create wealth for yourself.
You're probably wondering, how do I build equity? Do you know that the mortgage has very little bearing on whether or not your home will appreciate? Your home will appreciate regardless whether you pay down the debt or not. The thing to remember is that you'll use your mortgage to build wealth. However, the key aspect to creating wealth is to invest regularly and consistently.
