Today’s lesson is all about pilots and home equity. The goal is to help teach you how to move away from broke mentalities and introduce you to ways that will help grow long-term wealth.


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We’ll talk about how the affluent pilot manages home equity and how they use it to safely and conservatively build long-term wealth. Too many people are following old strategies that just don’t apply today. Most of what we believe about mortgages and home equity is wrong and we’ll explain why.


Sky Snippets:

0:00 – Intro

0:23 – Don’t pay off your mortgage early

0:50 – Most of what we believed is wrong

3:00 – Why pilots shouldn’t hate their mortgage

8:06 – How large equity can be a disadvantage

9:45 – Personal furlough story

11:26 – Separating equity to increase safety of principle



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Episode Transcription:

(Note, this is an automated transcription. Please forgive any errors.)

Ryan Fleming  00:00

Today’s lesson is about PILOTs and home equity. I want to teach you to get away from broke mentalities and give you ways to grow long term wealth. So let’s talk today about how the fluid pilot manages home equity. And how easy is it to safely and conservatively build long term wealth? If you had enough money to pay off your mortgage right now, would you? Many people would, in fact, the American dream is to own your own home to own it outright with no mortgage. Pilots talk to me nonstop about paying off their house prior to retirement. And I normally cringe inside when I hear about this, or then make an extra payments. A 15 year mortgage almost makes me sick to my stomach. Why? I’m about to tell you why. If the American Dream is so wonderful, how can we explain the fact that 1000s of financially successful people who have more than enough money to pay off their mortgage refused to do so? The answer most of what we believe about mortgages and home equity, which we’ve learned from our parents and grandparents is wrong. That’s right, wrong. They taught us to make a big downpayment, get a fixed rate mortgage and make extra principal payments to kill that interest that you’re going to pay over the life of the loan. Mortgages, they said are a necessary evil at best. The problem with this rationale is it’s become an outdated, the rules of money have changed. Unlike our grandparents, we can no longer depend on our company’s pension plan for a secure retirement. We’re on our own to figure it out the generation before you lived with their home for 30 years and never left their hometown. Statistics today show that the average homeowner lives in their home for only seven years. According to the Federal National Mortgage Association or Fannie Mae. The average mortgage lasts only 4.2 years, people are refinancing their homes to improve interest rates, restructuring their debt, remodeling their homes, or just to pull money out for investing education, other expenses. building long term wealth requires a pilot to go against old traditional thinking. You should have as little money down anytime you buy something, even if it increases your mortgage payment. Because this is an integral part of your mortgage, to overfill your financial plan and continue to leverage your money to increase your wealth. This is how the rich get richer. It’s all about leverage using other people’s money to make you money. The gameboard is the same. But why most Americans are playing checkers Do you have fluent are playing chess. The good news is the strategies used by the wealthy worked for the rest of Americans as well. Hell, it even works for pilots, any homeowner can implement the strategies of the wealthy to increase their net worth. So next, we’re going to talk about why pilots hate their mortgage and why they shouldn’t. Pilots hate their mortgage because they know over a life of a 30 year loan, they will spend more on interest than the house probably cost them in the first place. To save money, it becomes very tempting to make a bigger downpayment or make extra principal payments to kill the principal and interest. This is the broke mindset that we were taught as kids. If we could pay cash for it, we would. Unfortunately every dollar we give the bank is $1. We did not invest and can’t use for long term growth for us. While paying off the mortgage saves us interest. It denies us the opportunity turn other interest on that money for the rest of our lives. To show you this, I’m going to tell you about a tale of two fighter pilots, Maverick and Iceman. They both secured a mortgage to buy a $200,000 home each earn $70,000 A year and had $40,000 in savings. Iceman believes in the old school way of paying off a mortgage, which is as soon as possible. He bites the bullet and secures a 15 year mortgage at 6.38 APR and shells out of $40,000 of his savings as a 20% downpayment, leaving him $0 To invest. This leaves him with a monthly payment of $1,383. Trying to eliminate his mortgage sooner. Iceman also sends the extra $100 to his lender every single month. Maverick being the risk taker, he subscribes to the new way of mortgage planning, choosing instead to carry a big long term mortgage. He secured a 30 year interest only loan at 7.42% APR. He outlays a small 5% Down payment of 10,000 and invest the remaining $30,000. His monthly payment is 11 175 bucks. Every month Maverick adds $100 to his investments, the same $100 that Iceman sends to his lender, plus the four to $28 He saved from his lower mortgage payment, his investment account earns an 8% rate of return. So here comes a question, which pilot made the right decision, we’re going to look at a couple of different years. If you look into the future, after just five years, Iceman has made $0 in savings and investments. Maverick savings and investment account has grown to $83,513. If both pilots were suddenly furloughed, Iceman would be screwed, he would lose everything. Without any money and savings, he has no way to get through the crisis. Even though he has $74,320 of equity in his home, he can’t get a loan because he doesn’t have a job anymore. With no job and no savings. He can’t make his monthly payments and has no choice but to sell his home to avoid foreclosure. The bank won’t even give him a HELOC. At this point, he will have to sell quickly and probably at a discount, he will also have to pay realtor commissions. Math on the other hand, we’re not particularly happy about losing his job, we’ll have at $3,513 in savings to help them survive, he can easily make his monthly payments for years if he must. He has liquidity with his investments, and he’s in control. If neither lost their job, after 15 years, Iceman will have paid off his house and starting to invest his money. He has $30,421 in investments and owns his home outright. Sounds pretty damn good, right? But let’s check on Maverick. Maverick has $282,019 in investments, he could press the button and pay off his mortgage of $190,000 at anytime he wants, he’d still have $92,019 leftover and investments free and clear. Still well ahead of Iceman. After 30 years, Iceman has continued to save his investments after paying down his mortgage, and those investments have grown to 613,858 bucks, Maverick has accumulated an incredible $1,115,425 in his investments. He owns his home outright as well. Most pilots follow the Iceman strategy and don’t understand how this equity could work for them somewhere else. You also give up liquidity and safety the entire way. So would you have a house totally paid off? worth a million dollars and be a total dead asset not earning you anything? Or could you have a million dollars working for you somewhere else earning eight to 10% per year at 10% spitting out $100,000 for doing nothing. Oh, and guess what? Then it compounds $1.1 million working for you the next year. Pretty wild right? The next part of our lesson, how large equity in your home can be a big disadvantage. By having liquid security for emergencies and investment opportunities, or having your home’s equity working for you. Most pilots are better off than having all their money tied up in a dead asset. With a paid off home or a paid down home. It isn’t really helping you at all. liquidity and flexibility are key. So why would you want to separate the equity from your home? Well, liquidity, safety and rate of return. Having home equity fails all three tests of a prudent investment. Let’s examine each of these core elements in more detail so you can better understand why home equity fails the test of a prudent investment. And more importantly, why homeowners benefit by separating their equity from their home separating equity to increase liquidity. What is the biggest secret real estate? Your mortgage is a loan against your income. It’s not a loan against the value of your house without an income in many cases you cannot get a loan. If you suddenly experience difficult financial times, would you rather have $25,000 of cash to help you make your mortgage payment or have a an additional $25,000 of equity trapped in your home can’t even access it. Almost every person who has ever lost their home to foreclosure would have been better off if they had the equity separated from their home liquid safe conservative and a fund that they could use for mortgage payments during their time of need. Unfortunately, life happens it’s not always hunky dory.


Ryan Fleming  09:45

And so with this, we could just talk about any getting furloughed story, but I have a personal one. I have a good friend. He had about $300,000 of equity in his home and he lost his job. He didn’t have a lot of liquid security and other investable all assets. So immediately, he was in a position where after only making a couple mortgage payments, he didn’t have any money. He tried desperately to get a home equity line of credit. But guess what, without a job, none of the banks would give him any money. He quickly got himself into a position where he had to sell his house, had no other options, had tons of equity in his home. But he failed to do the right thing and separate the equity from his home, still out on the street, can’t find a job, there was no choice but to sell the house at a discount, he was able to still get some money out of the house from the equity. But guess what this house is gone, the place where he wanted to keep his family keep his kids, they had to move on. And unfortunately, buy in a bad market. This really happened to a good friend of mine. Home Equity is not the same as cash in the bank. Only cash in the bank or cash in some other liquid investment is cash in the bank. Being house rich and cash poor is a very dangerous position to be in. Unfortunately, we have a lot of pilots that get themselves in this situation. No different than buying the captain house before its time. Keeping home equity Safe is a really matter of positioning yourself to act instead of react to different market conditions over which you really have no control. Now let’s talk about separating equity to increase safety of principal. Pilots typically believe home equity is a very safe investment. In fact, according to a recent study, 67% of Americans have more of their wealth tied up in home equity than any of their other investments combined. However, if you talk to 100 financial planners, and they looked at a client portfolio, where you had 67 to 70% of all your money in one single investment, I guarantee you 99 out of 100 of them would immediately recommend that you diversify your investments, reduce your risk and increase the safety of your principal. Why is that different for home equity. Holding large amounts of money of home equity puts the homeowner at unnecessary risk. This can be greatly reduced by diversifying your home equity into other investments. An example of necessity of keeping home equity safe separated from your property can be found in Houston, Texas, and multiple times over history. When oil prices fell to all time lows in the 1980s the city of Houston was hit hard 1000s of workers were laid off and ultimately forced to sell their homes. With everybody selling their homes in the market. Housing prices plummeted. There are far too many sellers and no buyers. Homeowners weren’t unable to sell their houses and then able to make mortgage payments. As a result, 16,000 homes were foreclosed. All these families. They weren’t bad people. But guess what, they weren’t able to make their mortgage payments. And just prior to a series of events there, they were all making extra principal payments. Unfortunately, because of life because of situations, they all lost their home, and they lost all the equity in their home. Equity these people have worked so hard for to build was completely lost. They learned the hard way that home equity is fragile, and certainly not as safe as they once thought. Could this happen today? Well, 2008 wasn’t too long ago, or another example Enron, Enron collapsed. 1000s of people lost their jobs. And once again in Houston. The same thing happened would have in Seattle, Boeing or Microsoft had major layoffs. Money could give you the bank that you’ll never see again, unless you refinance or sell. It’s trapped in your home equity. When people use depleted Mr. Banker, I’ve been making extra payments for years. I have all this equity in my home. I’m well ahead of schedule. What do you think the banker said? He didn’t care. You couldn’t get access to the money. Oh, and by the way, you probably didn’t have a job. So unfortunately, the banks not going to give you any money. And this is the hard hard lesson that many people have learned