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Financial Planning > Behavioral Finance

Fighting Max-Mortgage Madness

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“Max out your home equity line before your lender cuts off the limit…(and) stop making extra mortgage payments and take out a mortgage even if you don’t need one.”

Those suggestions come courtesy of the CMPS Institute, a 3-year old Ann Arbor, Mich., organization that certifies mortgage bankers and brokers. CMPS says such measures can help consumers protect themselves from today’s “perilous financial storm” on Wall Street.

I beg to differ. Given all of today’s mortgage-related woes, those ideas seem breathtakingly out-of-touch.

Granted, people do want or need mortgages and equity loans to ease financial burdens, no matter the economic conditions. And max-mortgages for the well-heeled do work.

But many consumers quake at the idea of taking such loans, for fear the debt load will crush them, especially if job or other income sources are iffy. Still others scoff at the idea of not paying off a mortgage early if possible, especially if near retirement.

What consumers need to know is that other financial tools are available to help build financial security.

Those “other tools” include fixed, indexed and variable annuities–many of which have multiple liquidity and guarantee options–and cash value life insurance. If these products are held in a portfolio alongside guaranteed banking products, Treasuries and other conservative investments, consumers could weather today’s financial storm in solid shape, and with room to spare for judicious risk-taking.

Unfortunately, the CMPS tips do not mention such products, nor do they mention matching options to needs and goals.

It therefore behooves insurance and financial professionals and providers to deliver that message. They should do this not just to promote their own products and services, but also to broaden consumer understanding of all available options and the need for sound financial planning.

This is a tall order. The word “financial crisis” is circulating as if it were common coin. So consumers are searching hard for safe financial havens. If they mostly or only hear calls to max out mortgages and equity loans, some may do just that.

CMPS does use some pretty strong wording, after all. If liquidity is needed, it warns, “the worst thing you can do in this environment is dump more of your cash into your home equity because you may not be about to get access to it if you run into financial difficulties, if the housing market continues to decline, or if the credit crunch gets worse.

“Although it sounds counter-intuitive, you should have as big a mortgage as possible–even if you don’t need it–and leave as much cash as possible in a safe, liquid place that is readily available to you. This empowers you to weather the storm and also have your funds available to take advantage of bargain opportunities that are becoming available because others have not followed this advice. In this environment, the one with the most cash wins.”

Now, the idea of freeing up cash to meet unforeseen needs or to take advantage of “bargain opportunities” is surely tantalizing. But the max-mortgage suggestion says nothing about the costs–or risks–of this particular brand of “freedom.”

Omitted are references to: the closing, insurance and other charges for setting up a new or second mortgage, the crimp on cash flow caused by out-sized mortgage payments, the continuing undertow on financial choice caused by keeping up a long-term mortgage, the stress on family life caused by that undertow, and the lack of security in knowing a home is paid for or soon will be (particularly if prepaying).

Besides, just how many people will actually take those freed-up funds to finance “bargain opportunities?” Probably very few. Maybe even fewer that the number of life insurance buyers who failed to invest after adopting the much-touted “buy term and invest the rest” strategy.

This is not the first time the insurance and financial sector has competed head on with max-mortgage promoters. In the go-go 1990s, mortgage-to-the-max was “in,” especially among entrepreneurial types who used the leverage to back their oh-so-hot deals, some of which later went kaput. In the early- to mid-2000s, it cycled around again, especially among “investor-homeowners” who leveraged home equity for funds to invest in properties destined for flipping or renting, only to lose out in the subprime meltdown.

To be sure, CMPS has some sound ideas, too–e.g., be sure investments are protected via the Securities Investor Protection Corp., and bank accounts via the Federal Deposit Insurance Corp.

But its max-mortgage idea should be deep-sixed. Insurance and financial advisors have more clear-eyed solutions. I say, let ‘em rip.


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