1. Copyright © 2005 Strategic Equity Group Using Your Mortgage to Create Wealth n If you had enough money to pay off your mortgage right now, would you? n Many people would. In fact, “The American Dream” is to own home – and to own it outright, with no mortgage. n If the American Dream is so wonderful, how can we explain the fact that thousands of financially successful people – people who have more than enough money to pay-off their mortgage now – refuse to do so?

2. Copyright © 2005 Strategic Equity Group Most Of What We Learned About Mortgages, We Learned From Our Parents & Grandparents n Make a big down payment n Get a fixed rate mortgage n Make extra principal payments n Pay-off your loan early n Mortgages are a necessary evil at best

3. Copyright © 2005 Strategic Equity Group The Rules of Money Have Changed n Unlike our grandparents, we will no longer have the same job for 30 years. Most people will have five or six careers. n Unlike our grandparents, we can no longer depend on our company’s pension plan for a secure retirement. A Gallup survey showed that 75% of workers want to retire before age 60, yet only 25% think they can. n Unlike our grandparents, we will no longer live in the same home for 30 years. Statistics show that the average Homeowner lives in their home 7 years. n Unlike our grandparents, we will no longer keep the same mortgage for 30 years. According to FNMA, the average American Mortgage lasts 4 years.

4. Copyright © 2005 Strategic Equity Group Why People Fear Mortgages – And Why You Shouldn’t n The biggest secret in real estate: Your mortgage is loan against your income; it is not a loan against the value of your house. Without an income, in many cases you cannot get a loan. n If you suddenly experienced difficult financial times, would your rather have $25,000 of cash to help you make your mortgage payment, or have an additional $25,000 of equity trapped in your home. n Almost every person who has ever lost their home to foreclosure would have been better off to have their equity separated from their home into a liquid, conservative side fund that could be used to make mortgage payments during their time of need.

5. Copyright © 2005 Strategic Equity Group Why People Hate Mortgages – And Why You Shouldn’t n Every dollar we give the bank is a dollar we did not invest. n While paying off the mortgage saves us interest, it denies us the opportunity to earn interest with that money. n With mortgage rates so low, it is relatively easy today to earn more from an investment than a loan is costing us.

6. “A Tale of Two Brothers” Adapted from the book, The New Rules of Money Our story follows two brothers, each earning $150,000 a year. They each have $100,000 in savings and both are buying $500,000 homes. Brother “A” Believes in “The Old Way” – paying off the mortgage as soon as possible Brother “B” Believes in “The New Way” – carrying a big, long mortgage Who made the right decision? n $100,000 big down payment (20%) n $0 left to invest n $3,348 monthly payment (57% is tax deductible first year/33% average) n $2,983 average monthly net after-tax cost 2 n Sends in $200 extra each month with mortgage payment in an effort to pay mortgage off sooner. n $25,000 small down payment (5%) n $75,000 remaining to invest n $2,523 monthly payment (100% is tax-deductible) n $1,690 monthly net after-tax cost 2 n Adds $200 monthly to investment account, plus $1,293 saved from lower mortgage payment, earning 6.0% 3 n 15-year mortgage at 5.875% APR n 30-year interest-only loan at 6.375% APR 1 The above hypothetical examples are for illustrative purposes only. Plans vary based on the needs and wants of the customer. 1 This example is based on a 30 Year Interest Only loan at 6.375% APR. 2 Assumes combined federal/state income tax rate of 33%. 3 Assumes 6.0% rate of return on investments. Rate of return may vary based on type of investment. Copyright © 2005 Strategic Equity Group

7. “A Tale of Two Brothers” Adapted from the book, The New Rules of Money The above hypothetical examples are for illustrative purposes only. 1 Assumes combined federal/state income tax rate of 33%. 2 Assumes 6.0% rate of return. Rate of return may vary based on type of investment. n Received $33,796 in tax savings 1 n Received $49,955 in tax savings 1 What if both brothers suddenly lose their jobs? n Has no savings to get through the crisis n Has $205,330 to tide him over Results After Just 5 Years n Has $0 in savings and investments n Has $205,330 in savings and investments 2 n Can’t get a loan–even though he has $185,562 in home equity – because he has no job n Must sell his home or face foreclosure because he can’t make payments n At this point he must sell quickly, possibly at a discount, then pay real estate commissions (6-7%) n Doesn’t need a loan n Can easily make his mortgage payment even if he’s unemployed for years n Has no reason to panic since he’s still in control — remember … Cash is King! Brother “A” Believes in “The Old Way” – paying off the mortgage as soon as possible Brother “B” Believes in “The New Way” – carrying a big, long mortgage Copyright © 2005 Strategic Equity Group

8. n Received $60,517 in tax savings 1 n Received $149,866 in tax savings 1 n Received $60,517 in tax savings 1 n Received $299,732 in tax savings 1 n Has $51,832 in savings and investments 2 n Owns home outright n Has $618,249 in savings and investments 2 n He has enough savings to pay off $475k mortgage and still have $143,249 left over! n Has $1,052,877 in savings and investments 2 n Owns home outright n Has $1,951,434 in savings and investments 2 n Never plans to pay his home off – he enjoys the liquidity, safety, tax savings, and investment returns too much! “A Tale of Two Brothers” Adapted from the book, The New Rules of Money The above hypothetical examples are for illustrative purposes only. Plans vary based on the needs and wants of the customer. 1 Assumes Brother B refinanced at year 15 into another 15 year interest only mortgage at 6.375%. 2 Assumes 6.0% rate of return. Rate of return may vary based on type of investment. Results After 15 Years Results After 30 Years Brother “A” Believes in “The Old Way” – paying off the mortgage as soon as possible Brother “B” Believes in “The New Way” – carrying a big, long mortgage Copyright © 2005 Strategic Equity Group

9. Incorporating Home Ownership into Your Financial Plan “Too often, people buy homes in a vacuum, without considering how that purchase is going to affect other aspects of their lives. This can be a big mistake, and therefore you must recognize that owning a home holds very important implications for the rest of your financial plan. Although a fine goal, owning a home is not the ultimate financial planning goal, and in fact how you handle issues of home ownership may well determine whether you achieve financial success.”

10. Copyright © 2005 Strategic Equity Group Ordinary People Extraordinary Wealth By Ric Edelman “Carrying a mortgage doesn't cause you to lose money at all, just the opposite is true. Carrying a mortgage is actually quite profitable. It's eliminating the mortgage that forces you to give up profitable opportunities.”

11. Copyright © 2005 Strategic Equity Group “Let me clarify why many Americans are remiss in arriving at the degree of financial independence they could otherwise obtain. While we do everything in our power to get tax deductions on our retirement contributions, we simultaneously eliminate one of the best deductions we have: our home mortgage interest.” Missed Fortune 101 By Douglas Andrew

12. Copyright © 2005 Strategic Equity Group Which Is More Prudent? $50,000 $500,000 All Your Eggs in One Basket with little liquidity $0 $300,000 $600,000 Cash/BondsHomeStocks $250,000 $100,000 Equity $400,000 Mortgage Diversified Asset Portfolio with Significant Liquidity $0 $300,000 $600,000 Cash/BondsHomeStocks

13. Copyright © 2005 Strategic Equity Group Many Americans Believe The Following To Be True: n Your home equity is a prudent investment. n Extra principal payments on your mortgage saves you money. n Mortgage interest should be eliminated as soon as possible. n Substantial equity in your home enhances your net worth. n Home Equity has a rate of return.

14. Copyright © 2005 Strategic Equity Group The April 1998 issue of the The Journal of Financial Planning, published by the Institute of Certified Financial Planners, contains the first academic study undertaken on the question of a 15-year vs. 30-year mortgages. Their conclusion? The 30-year loan is the best. Based on the same logic, wouldn’t an “interest only” loan be better than an “amortizing” loan? April 1998

15. Copyright © 2005 Strategic Equity Group “The popular press, following conventional wisdom, frequently advises eliminating mortgage debt is a desirable goal. We show this advice is often wrong because mortgage debt acts as an inflation hedge and a hedge against declines in local real estate values.” “We show under realistic circumstances, investors who mortgage their home can outperform investors without mortgage debt.” Mortgage Debt: The Good News September 2004

16. Copyright © 2005 Strategic Equity Group Interest Rates Are Relative n If mortgage money cost you 4-5%, the chances are pretty good that you can earn 5% on your money. n In the 1980s, money was costing 15%, but I could earn 15% on my money. n Later, I’ll actually show you how to borrow at a higher rate and invest it at a lower rate and still make a significant profit. n It’s what the banks and credit unions do all the time. n It’s what makes millionaires, millionaires!

17. Copyright © 2005 Strategic Equity Group LARGE EQUITY IN YOUR HOME CAN BE A BIG DISADVANTAGE “By having cash available for emergencies and investment opportunities, most homeowners are better off than if their equity is tied up in their residence.” “Large, idle equity, also called ‘having all your eggs in one basket,’ can be risky if the homeowner suddenly needs cash.” “While employed and in excellent health, borrowing on a home is easy…but most people, especially retirees, unexpectedly need cash when they are sick, unemployed or have insufficient income. Obtaining a home loan, under these circumstances, can be either impossible or very expensive.”

18. Copyright © 2005 Strategic Equity Group Equity $ 1. Liquidity 2. Safety 3. Return Equity Management Strategies

19. Copyright © 2005 Strategic Equity Group 3 Key Elements Of A Prudent Investment n If I was your financial advisor, and I had an investment for your consideration, there are usually three questions you are going to ask.  Can I get my money back when I want it back? (liquidity)  Is it safe, guaranteed or insured? (safety)  What rate of return am I going to get? (rate)

20. Copyright © 2005 Strategic Equity Group Home Equity is not the same as cash in the bank Only Cash in the bank is the same as cash in the bank

21. Copyright © 2005 Strategic Equity Group n “Here is an extra $100 principal payment Mr. Banker. Don’t pay me any interest on it. If I need it back, I’ll pay you fees, borrow it back on your terms, and prove to you that I qualify.” n Money that you give the bank is money that you’ll never see again unless you refinance or sell.

22. Copyright © 2005 Strategic Equity Group “Remember that housing prices can and do level off. They sometimes decline – witness Southern California just a little more than a decade ago, when prices took a 20 percent to 30 percent corrective jolt downward.” March 2004

23. Copyright © 2005 Strategic Equity Group Separating Home and Equity To Increase Safety n Real estate equity is no more safe than any other investment whose value is determined by an external market over which we personally have no control. n In fact, due to the hidden “risks of life,” real estate equity is not nearly as safe as many other conservative investments and assets.

24. Copyright © 2005 Strategic Equity Group Equity $ Opportunity CostEmployment Cost Mortgage

25. Copyright © 2005 Strategic Equity Group The Power of Leverage n Misconception – “My home is the best investment I ever made!” n If you purchased a home in 1990 for $250,000 and sold in June of 2003 for $600,000 that represents a gain of 140%. n During the same period, the Dow Jones grew from 2590 to 9188 – a gain of 255%. n Reality – FINANCING your home was the best investment decision that you ever made. n When you purchased the $250,000 house in 1990, you only put $50,000 down. The $50,000 cash investment produced a profit of $350,000. That is a total return of 600% - far outpacing the measly 255% earned by the stock market.

26. Copyright © 2005 Strategic Equity Group “Betting the Ranch”: Risking Home Equity To Buy Securities n Home Equity is “Serious Money.” n Liquidity and safety are the key when investing home equity. n You can make thousands of dollars by simply borrowing at 5% and investing at 5% in conservative investments other than securities. n Before taking out a mortgage or refinancing to invest in securities, ask yourself: How will I pay if my investment declines? n Do you have reserve funds or a secure salary to make mortgage payments if your investments lose value? n Do not invest equity for “current income” unless the investment is fixed and guaranteed. Especially if you are retired.

27. Copyright © 2005 Strategic Equity Group Home Equity COLLEGE Fund n Thousands of homeowners are hurrying to pay down their mortgage so they can borrow the equity later to fund college expenses. n Why don’t they just invest their cash so it earns competitive returns and is available for use when they need it? n Case Study – My Client was making double mortgage payments and foregoing 401K contributions with a plan to get a new mortgage later to pay for college.

28. Copyright © 2005 Strategic Equity Group Tax Deductions To Offset 401K Withdrawals n Most successful retirees have the majority of their assets in their home equity and IRA/401Ks. n As they start withdrawing funds from their IRA/401Ks they are hit with a significant annual tax bill. n The kids have moved out. The mortgage is paid. Deductible contributions to 401Ks have stopped. n When they could use the mortgage interest deduction the most they don’t have it.

29. Copyright © 2005 Strategic Equity Group Making Uncle Sam Your Best Partner n Under tax law, you can deduct up to a $1.0 Million of mortgage interest subject to income restrictions. n Under tax law, you deduct an additional $100,000 from a home equity loan interest.

30. Copyright © 2005 Strategic Equity Group Secure A Large Mortgage When You Buy n Under tax law, mortgage interest is deductible only for acquisition debt plus $100,000. (Except for home improvements.) n If you sell your home for $400,000 and buy a new home for $400,000 with the cash from the sale, you will lose the tax break and liquidity. n But worse, if you later decide to take out a home equity loan, only the first $100,000 will be tax deductible. n Instead, secure a $360,000 mortgage (90%) when you buy the home and the entire amount is deductible.

31. Copyright © 2005 Strategic Equity Group Total Return of the S&P 500 Stock Index January 1, 1926 – June 30, 2003 Reflects capital growth with dividends reinvested. 1926June 2003 $100,000,000 $10,000,000 $1,000,000 $100,000 $10,000

32. Copyright © 2005 Strategic Equity Group

33. Learn To Be Your Own Banker n By using the principles banks and credit unions use, you can amass a fortune. n A bank’s greatest assets are its liabilities. n Substantially enhance your net worth by optimizing the assets that you already have. n By being your own banker, you can make an extra $1M for retirement.

34. Copyright © 2005 Strategic Equity Group $100,000 Net Annual Growth at 6% Yr.1$ 5,184 5$ 4,961 10$ 4,596 15$ 4,053 Total$ 70,541 $69,114 Difference $ 6,000 $ 8,029 $ 10,745 $ 14,379 $139,655 Net Annual Cost at 8%

35. Copyright © 2005 Strategic Equity Group n If these dollars were left in the property, they would have earned ZERO rate of return 1$ 4,650 $ 2,380 $ 7,000 5$ 23,100 $ 17,155 $ 40,255 10$ 46,200 $ 50,515 $ 96,715 15$ 69,300 $ 106,603 $ 175,903 20$ 92,400 $ 194,568 $ 286,968 Investing at 7% (Compounded Tax Free) Borrowing at 7% (Tax Deductible) Equity Repositioned $100,000 Net Cumulative Annual Cost at 7% Difference [ 3 – 1 ] Net Cumulative Growth at 7% Year 123

36. Copyright © 2005 Strategic Equity Group Strategic Equity Program n We’ve developed a Strategic Program to educate clients to use Equity Management concepts to significantly increase their net worth. n Our unique mortgage planning approach has helped clients find new ways to preserve capital and develop cash flows to achieve additional financial goals. n Our clients and Strategic Partners in many case can add $200K-$500k to their net wealth.

37. Copyright © 2005 Strategic Equity Group Thank You! Capital Funding Group 4709 Maple Avenue Bethesda, MD 20814 Tel: 240-223-4009 steve@stevecalem.com www.capitalfundingroup.com