This Four-Step Mortgage Process was originally developed by my associate, Jim McQuaig, from Churchill Mortgage in Northern Virginia. The process is simple in concept: When you select a mortgage for your purchase, ensure that the mortgage product you select allows you to accumulate reserves.
1. Build a safety reserve
The first rule ensures you will have an emergency reserve for those times where you have an immediate need for cash to meet an unexpected expense. An example would be the need to replace four automobile tires that were destroyed in a road accident. This could cost as much as $1,000, and if you have no safety reserve, you must find other resources, and usually these are expensive (credit cards are one example). So an emergency reserve totaling three months of income avoids the need to use expensive resource alternatives.
2. Pay installment or revolving debt
The next step involves not having credit card debt because it is expensive and if your mortgage payment does not provide for some flexibility then you may be inclined to use credit cards to purchase assets that a more liberal mortgage payment may not require. Also, if there is credit card debt then a mortgage program should be selected that would generate cash flow that would allow the complete elimination of that debt.
3. Accumulate liquid assets
The general approach of the Four-Step Mortgage process ensures that you accumulate funds for emergencies or unexpected life events. We suggest that a year’s worth of earnings be saved. The purpose of this money is to have a cushion to shield against a larger negative event, such as losing a job. It can sometimes take a considerable amount of time to find a new job, so if you have these funds in reserve, you will be able to work your way through this stressful period in a comfortable manner. The mortgage product selected should help you build these reserves.
4. Own your home but with a mortgage
Lastly, you should own your home with a mortgage. This allows you to maximize the tax advantages associated with the mortgage interest deduction. We have discussed how this can be valuable in reducing your overall tax obligation. Each individual or family will have particular needs, but the Four-Step Mortgage Process incorporates and facilitates the central idea of building wealth through the use of a mortgage.