Zero Rate of Return

In Chapter 6 MF101 states that Equity in your home earns you a "ZERO rate of return." Sales people use this phrase commonly to motivate clients to move forward with Equity Harvesting instead to grow their wealth. This statement is patently FALSE and MISLEADING. It is also FALSE to say that an appreciating home does not have compound growth.

The other fact of the matter is that if you pay down the debt on a home, doing so does save you money (the interest expense) and does build your wealth. Paying down debt on a home might not work as well as Equity Harvesting, but it is absolutely false to say that paying down the debt on a home doesnít build wealth or creates a "ZERO rate of return."

If you pay down your home debt by $50,000 over a 10 year period, you will save the interest expense on every dollar of debt paid off over the first ten years and then on that $50,000 of debt every year after. If the interest rate on the loan is 7%, you will save $3,500 a year ever year thereafter.

While this is a simple rate of return (vs. compound); if you invested that saved money into a brokerage account or other wealth building tool, the returns would, in fact, compound. The $3,500 saved, if invested, could compound and every year thereafter you could invest $3,500 into this compounding fund. Therefore, not only does paying down debt on a home generate a rate of return and help a client build wealth, it can do so in a compounding manner.

This example does not take into account the tax savings for those who can tax deduct the mortgage interest on their personal taxes.

As for the comment that an appreciating home does not have compounded growth, that too is not an accurate statement. A house does appreciate whether it has debt on it or not. If a house appreciates on a national level on average a little over 5% a year; is that simple appreciation on a house value frozen when the client purchased the home? No, of course not, it's compound growth (5.33% on last year's home value not the initial home value).

This issue is not a big deal except that it sheds light on the sales process of advisors who use MF101 as a sales tool. Most take the words in the book as true which means they are not thinking critically about topics they bring to their clients, and due to that fact, such advisors can't possibly provide the best or even good advice to their clients (or advice that is given with full disclosure which canít be done if the advisor has no clue what is technically correct in such sales books).

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