Four Step Process to survive

Is it a good thing to have your home paid for? I know that paying off your home is a goal that is first and foremost in the minds of most individuals, however is having no mortgage on your home a good thing? Let us take a look.

Suppose your home is paid for and you lose your job or become disabled. Let's say your home has a value of $200,000 and so now you have "equity" in your home which amounts to $200,000! A good thing yes? Let us examine a few things:

Your home will still have to have homeowners insurance which could amount to $150.00 per month, plus your property taxes would have to be paid, which could be another $200.00. Utilities could be another $300.00, so is your home really paid for? Just those expenses amount to $650.00 monthly.

Now, let us look at how using your home to create "velocity of money" would work. Your home is worth $200,000 and 80% of that value is $160,000. If you were to refinance your home up to 80% LTV and put that $160,000 into an account, or investment, say tax free municipal bonds, or something similar, you may be able to earn 6% or 7% return on your money. Of course you would have had to be employed to refinance, however if you did you would now have $160,000 cash. Your monthly payment would be $959.28 at 6% interest, plus taxes and insurance, or in our example $1,309.28, of which the interest on the mortgage is deductible from your federal taxes, which could effectively lower your monthly payment by $248.00 per month if you're in the 31% tax bracket, so the "effective" payment would be close to $1,061.28. Remember you would have $160,000 still in the bank or in an investment earning you money. If you didn't have a job, you could go for 12 years just making your house payment!

Now if you were to invest that money at 6% rate of return in just 11 years that $160,000 would become $320,000! You would owe approximately $136,600 on your mortgage by then, so guess what? You could pay off your mortgage if you wanted and still have $183,390.94 in your account! This is a fact, not speculation.

So is Dave Ramsey right? I have questions about some things he says, and using your homes' equity to gain wealth is an excellent strategy in my very humble opinion!