American Dream 2007: Keep Those Real Estate Properties Financed!

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 a home - and to own it outright, with no mortgage. Imagine owning your home without having to send a cheque to the bank every month, the feeling one will enjoy when - after thirty long years - the moment finally comes to make one last payment so that the house is paid off, at last. Being so fortunate must evoke a sense of security, gratification and well-being that anyone only can dream of.

But if in fact the American Dream is so wonderful, how come thousand of financially successful people - folks who have more than enough money to pay off their mortgages right now - refuse to do so? Why is it that a small group of Americans and Canadians, who are invariably among the wealthiest five percent of the population, insist on carrying on a mortgage even if they can afford to wipe it out entirely today? Because they are aware of the biggest untold secret of homeownership: a mortgage is primarily a loan against the borrower's income, not primarily against the value of the house. It this was not the case, then naturally anyone with a $30,000 annual income would qualify to purchase a multi-million dollar mansion.

All of which, then, makes the whole difference in the world when it comes to a process known in Economics as the accumulation of wealth. Prosperity in any society and at any given time is the epitome of financial stability, reliability, and security. Specifically in Capitalism, additional capital value (commonly referred to as ‘surplus value') is what drives the accumulation of wealth. Although capital accumulation does not necessarily require production, ultimately the basis for it is value-adding production which makes net additions to the stock of wealth. Capital can accumulate by shifting the ownership of assets from one place to another, but ultimately the total stock of assets must increase. Other things being equal, if surplus value fails to grow sufficiently, the level of debt will increase, ultimately causing a breakdown of the wealth accumulation process.

This is exactly the reason why saving money has never made anyone rich. For some obscure logic people generally tend to equate the concept of saving money with that of making money, yet the two are not synonymous. As people want to save money in interest payments, they will go the extra length to pay off their mortgages. With that issue out of the way after a considerable number of years, they then start focusing on saving for retirement and do their best to save regularly. As a result, they fail to accumulate wealth and cannot figure out why.

The issue is relatively simple, though not necessarily transparent. By prioritizing mortgage repayments, they fail to consider the role that mortgages play in their wealth building process. The battle to reduce interest expenses is won, but the wealth accumulation war is lost. The reason is that every dollar they have returned to the bank is a dollar they have not invested.