Weve all been taught by our parents, grandparents, and conventional wisdom that we should pay off our home mortgages so we can own our home free and clear. So that the bank can never take our home from us. Im going to show why that thinking is outdated and present some new ideas on using mortgages as a tool to increase wealth.

Depression-Era Thinking

During the early part of the 20th century, loans and specifically home mortgages were written very differently from the way theyre written today. The main difference for our purposes concerns the banks ability to call, or request full payment on, a mortgage at any time. This became a huge problem during the Depression. Like many crises in history, the Depression started out small and snowballed into a full-blown financial crisis, the likes of which our country had never seen before and hopefully will never see again. But this isnt a history lesson, so let me share the pertinent facts.

First, as the economy slowed and unemployment increased, the feeling of unease spread and people started to doubt the wisdom of keeping their savings in the bank. As more and more people withdrew their money, the banks were soon out of reserves and were scrambling for ways to repay depositors funds. In desperation, they began to call in home mortgages, essentially telling homeowners they had 30 days to pay off their mortgage in full or the bank would foreclose on the home. Hundreds of thousands of people lost their homes and were financially ruined. These dark economic times led to a deep distrust of banks and mortgages, so much so that everyone agreed the best way to ensure your financial security was to pay off your mortgage and own your home free and clear, so the bank could never take your home away from you.

The good news is that this is no longer the case! There are a few reasons for this, three of which Im going to cover in this article.

To protect the consumer, a shift in the way mortgages are written took place. It is no longer legal for banks to write mortgages requiring a mortgage to be paid in full with no reason. The new protections go further still federal law requires a drawn-out foreclosure process that means not only does it take at least 3-4 months to foreclose on you if you just stop making your payments, but you have many opportunities along the way to redeem yourself by bringing the mortgage current and bring yourself out of foreclosure. It is now extremely difficult for a mortgage lender to take your home away from you if you really want to keep it.

Another reason why the reasoning behind paying off ones mortgage is less applicable now is that were a much more mobile society than we were in the early 20th century. Back then, most people would stay in the same town where they were born and a vast majority of people lived in the same house for their entire lives, and probably even gave the house to their kids when they passed on! Now, very rarely as adults do we end up living in the house we grew up in. Not only that, as technology increases and the Internet makes our world smaller, its less and less necessary to live in a specific area. We can move wherever we want to without giving up much, and many people are taking advantage of this new-found freedom. The average time someone holds a mortgage now is 3.3 years!

Finally, the government has provided us with some very strong incentives to have a mortgage, the main one being the mortgage interest deduction. Every person in the United States who owns a home and has a mortgage can take the mortgage interest they pay each year and deduct it from their taxable income. This results in tens of thousands of savings every single year for every person who owns a home! Once your home is paid off completely, you may still deduct the property taxes from your income but you no longer have a mortgage interest deduction. The government is essentially rewarding you for having a mortgage.

So, if the Depression-era wisdom of paying off ones mortgage and owning a home mortgage-free no longer applies, whats the alternative and what are the best ways to take advantage of this brave new world? In two words: cash flow.

The great majority of wealth in property is built not by paying down the principle on a loan, but through appreciation. If youve owned a home for at least five years, think back to when you bought your home. Is the majority of your equity due to paying down the principle on your loan, or due to appreciation in the property? Except in very rare cases in markets with little or no appreciation, growth in equity comes primarily through appreciation. This being the case, the way to build wealth is to control real estate that is appreciating, and the way to control property is by controlling the mortgage.

If youre still with me, lets take this concept a step further. If the way to control appreciating real estate is by controlling the mortgage, it really doesnt matter if were paying down the principle or not. In fact, it would be to our benefit to control the property with the lowest payment possible. This way, were maximizing our monthly cash flow. Cash flow becomes extremely important for one simple reason its what allows us to control our property. The bank isnt going to take our house away if we run out of equity, as long as we continue to make the payments. As long as our monthly cash flow is enough to cover the mortgage payments, we have nothing to worry about.

Two of the best ways to control real estate with the lowest monthly payments are through interest-only loans and PayOption ARM loans. An interest-only loan is one in which you are required to pay only the interest that accrues each month and you pay no principle. A PayOption ARM gives you three payment options each month a principle and interest payment, an interest-only payment, and a minimum payment that actually allows you to borrow against your equity and pay less than the interest that accrues each month. In essence, youre using a little bit of your equity each month to keep your mortgage payments as low as possible and maximize your cash flow.

I hope this article has given you a fresh point of view on mortgage financing and some ways to maximize your wealth by using mortgages as a tool. Consulting with a trusted mortgage planner, someone who knows your situation and is experienced with these kinds of mortgage products, is highly recommended and will ensure that youre on the right track.

In Part II of this article, I will discuss what you might do with the money that youre saving by not paying off the principle on your mortgage.