Interest-only home loans pave path to riches

If you are adverse to new ways of thinking about yourmortgage and building wealth, don’t read “Untapped Riches” by Susanand Anthony Cutaia. This new book will challenge your thinking about mortgages.

Instead of making extra mortgage principal payments to ownyour home and investment properties free and clear as fast as possible, themortgage broker authors advise never paying off your mortgage and buildingwealth instead.

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This book is not for typical homeowners who think it’s smartto pay off their home loans as fast as possible. Instead, the husband and wifeco-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 Cutaiasare big advocates of using the leverage of borrowing and periodic refinancingto use tax-free cash to acquire more properties. They recommend interest-onlyadjustable-rate mortgages (ARMs) with maximum payment increase”caps,” and making 20 percent cash down payments to obtain 80 percentloan-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) payyourself first before you pay the bank.

The authors show how savvy wealth builders pay minimuminterest-only mortgage payments and then use the excess cash they would havepaid on a fully amortized 30-year mortgage to deposit into their savingsaccount earning at least 5 percent compound interest. They explain how the cashin a savings account earns money for the borrower instead of earning profitsfor the bank.

Susan and Anthony Cutaia emphasize putting money into otherrealty investments, rather than paying off a mortgage rapidly, will yield farmore profits. They see no future in pouring “dead money” into monthlymortgage payments higher than minimum interest-only payments.

A controversial part of the book extols the advantages ofthe negative-amortization mortgage. “Neg am” means the monthlypayment is less than the interest earned by the lender, and the unpaid interestis added to the mortgage principal instead. Most borrowers don’t feelcomfortable with this concept, however, especially if property values are notrapidly rising.

Even readers who don’t embrace the authors’ concept of”keep your money out of the bank’s hands, never pay off yourmortgage” can still accept the advice to “find a mortgage first, thenfind the property.” This simple, sensible suggestion means borrowersshould get pre-approved in writing first by a mortgage lender so they know howmuch they can then afford to pay for their home or investment property.

Just in case readers don’t agree with the authors that ARMsare good, not bad, one of the chapters is titled “The Single WorstMortgage in Creation: The Fixed-Rate Mortgage.” For borrowers who alreadyhave fixed-rate mortgages, the authors suggest never making extra mortgageprincipal payments and instead putting extra cash into a compound interestsavings account.

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

The second half of the book explains the tax advantages ofowning real estate investment properties. Most of these explanations areexcellent. However, the chapter about using a “cost segregationstudy” to accelerate depreciation deductions for short-life components ofan investment property is nice to know but a bit beyond the tax sophisticationof most investors and their tax advisers.

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

This is far from an average “how to get amortgage” book. It explains why the authors recommend interest-only ARMsrather than traditional fixed-rate mortgages, and why paying off mortgagesearly makes no sense. This thinking person’s book is sure to be challenged, butthe authors do an admirable job of explaining their viewpoints. On my scale ofone 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 orby special order at local bookstores, public libraries and

(For more information on Bob Bruss publications, visit his
Real Estate Center

Copyright 2007 Inman News

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