Never Pay Off Your Mortgage and Build Wealth??

Interest-only home loans pave path to riches Jan 30, 2007, 4:00 am PST

If you are adverse to new ways of thinking about your mortgage and building wealth, don't read "Untapped Riches" by Susan and Anthony Cutaia. This new book will challenge your thinking about mortgages.

Instead of making extra mortgage principal payments to own your home and investment properties free and clear as fast as possible, the mortgage broker authors advise never paying off your mortgage and building wealth instead.

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This book is not for typical homeowners who think it's smart to pay off their home loans as fast as possible. Instead, the husband and wife co-authors explain why interest-only, so-called "option mortgages," and even negative-amortization mortgages cut monthly mortgage payments, enabling borrowers to acquire more properties.

Contrary to what most mortgage advisers suggest, the Cutaias are big advocates of using the leverage of borrowing and periodic refinancing to use tax-free cash to acquire more properties. They recommend interest-only adjustable-rate mortgages (ARMs) with maximum payment increase "caps," and making 20 percent cash down payments to obtain 80 percent loan-to-value mortgages.

The book's themes are (1) minimize your mortgage payments, (2) maximize the use of leverage and the use of compound interest, and (3) pay yourself first before you pay the bank.
The authors show how savvy wealth builders pay minimum interest-only mortgage payments and then use the excess cash they would have paid on a fully amortized 30-year mortgage to deposit into their savings account earning at least 5 percent compound interest. They explain how the cash in a savings account earns money for the borrower instead of earning profits for the bank.

Susan and Anthony Cutaia emphasize putting money into other realty investments, rather than paying off a mortgage rapidly, will yield far more profits. They see no future in pouring "dead money" into monthly mortgage payments higher than minimum interest-only payments.
A controversial part of the book extols the advantages of the negative-amortization mortgage. "Neg am" means the monthly payment is less than the interest earned by the lender, and the unpaid interest is added to the mortgage principal instead. Most borrowers don't feel comfortable with this concept, however, especially if property values are not rapidly rising.
Even readers who don't embrace the authors' concept of "keep your money out of the bank's hands, never pay off your mortgage" can still accept the advice to "find a mortgage first, then find the property." This simple, sensible suggestion means borrowers should get pre-approved in writing first by a mortgage lender so they know how much they can then afford to pay for their home or investment property.

Just in case readers don't agree with the authors that ARMs are good, not bad, one of the chapters is titled "The Single Worst Mortgage in Creation: The Fixed-Rate Mortgage." For borrowers who already have fixed-rate mortgages, the authors suggest never making extra mortgage principal payments and instead putting extra cash into a compound interest savings account.

The authors point to the 2005 hurricanes as an example of how little advantage there is in having a paid-off home. When homeowners build up too much equity in their homes, the authors suggest, the mortgage should be periodically refinanced and the tax-free cash taken out should be put into investment accounts, but not with the same lender.

The second half of the book explains the tax advantages of owning real estate investment properties. Most of these explanations are excellent. However, the chapter about using a "cost segregation study" to accelerate depreciation deductions for short-life components of an investment property is nice to know but a bit beyond the tax sophistication of most investors and their tax advisers.

Chapter topics include "Never Pay Off Your Mortgage"; "Don't be House Rich and Cash Poor"; "Create the Ideal Exit Strategy"; "What are New Smart Loans?" "Interest-Only Mortgages: the Increasingly Popular Way to Free Up Usable Cash"; "More on Neg Am Mortgages and Why They Are Gaining More Adherents"; "Gaining a Tax Advantage: Tenant in Common Real Estate Transactions"; "1031 Exchanges to Defer Paying Taxes"; and "Personal Strategies for Real Estate Transactions."

This is far from an average "how to get a mortgage" book. It explains why the authors recommend interest-only ARMs rather than traditional fixed-rate mortgages, and why paying off mortgages early makes no sense. This thinking person's book is sure to be challenged, but the authors do an admirable job of explaining their viewpoints. On my scale of one to 10, this controversial book rates a solid 10.

"Untapped Riches," by Susan and Anthony Cutaia (AMACOM Publishing, New York), 2007, $18.95, 179 pages; available in stock or by special order at local bookstores, public libraries and at the link below.