Previous generations of well-meaning parents and grandparents drilled into our heads that it’s better to pay with cash and, by all means, attack that mortgage balance with ferocity until you are equity rich and balance poor. Unfortunately, we live in a different economic reality these days, one where Jason Hartman’s idea of periodically refinancing your loan to keep your mortgage principal balance high makes sense for yet another reason.
The recent wildfire in Arizona brought this issue to the forefront. With dozens of structures already devastated and others threatened, the basic problem becomes apparent when people sit down to talk to their insurance company and find out they are underinsured. This especially applies to those who either paid cash for their home or who nearly have it paid off and are no longer required by the lender to carry an adequate policy on it.
If history is any indication, expect that many home owners with low loan balances have reduced their house insurance to save on expenses. Good thinking – expect when the unthinkable happens. Chances are many of these underinsured folks are going to spend weeks or even months hashing it out with insurers about what exactly was covered. There will be no such agony for Hartman style investors carrying a high loan balance. Lenders require that the insurance is enough to cover any losses and discussions with the insurance agent are normally fairly cut and dried. Report the damage. Cash a check.
Avoiding the disaster after the disaster is yet another reason a high mortgage balance makes good financial sense. While Jason Hartman’s method is primarily intended for income property investors, it applies equally to any home owner. Equity sitting in your house is one of the worst places to keep cash. Did you know that inflation is constantly devaluing your equity? The government claims an inflation figure that usually hovers in the three to four percent range – we figure it’s closer to ten percent. That means each year your money sits in the form of equity in your home it is losing value at a rate of about ten percent. Put in the stock market? Same result. Bank CD’s, bonds, savings, or t-bills don’t help either.
Real estate is where inflation is mitigated.
The point is that a high cash balance in your house or investment property is a poor use of your resources and doesn’t do a thing to help you get ahead. Learn exactly how you CAN achieve financial independence through a steady application of Hartman’s principles at the Meet the Masters of Income Property Investing educational event this fall. Get the details here.
The Solomon Success Team
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