The following article is a summary of content from the book, “Realtor for Life,” written by Duane Duggan.
The question many people ask is, “Should I pay off my mortgage or borrow against the house and invest the cash?”
My parents grew up in the generation when it was important to get the mortgage paid off, and when they did, they celebrated by holding a mortgage burning party. When I was in college, I learned about the deductibility of mortgage interest, keeping the mortgage balance high, and investing the cash from mortgage proceeds. Now, with the mortgage issues of the 2000s, many people are of the frame of mind to get their mortgages
Two techniques homeowners can use to build equity in their homes are known as Mortgage Acceleration and Mortgage Offset accounts.
Mortgage Acceleration is the process of getting a mortgage on a home paid off earlier than a 30-year amortization schedule would provide. If extra payments are made, the principal goes down faster. But what if tough times come around and you want money back? You can’t call up the lender and say, “I’ve been paying extra principal, can I have some of it back?” That is an argument for investing what could have been made in extra principal payments into something that would be accessible if cash needs arise.
A Mortgage Offset Account is the process of taking what would have been extra principal payments and placing them in an account to save and have a return, then taking the cash accumulated and using it to pay down the mortgage when desired. In the meantime, cash is still there if an emergency need arises.
Home Equity Management has a different twist than the techniques described above. These techniques are applied when your goal is simply to pay your house off. Regardless of your point of view, it is important to learn about equity management in your home. In many cases, homeowners will pull cash equity out of their home to spend on consumer items, vacations, etc. True equity management involves pulling equity out of your home via refinancing, and investing it in the proper investment vehicles. After all, equity has no rate of return unless you activate it! This is very confusing because most people believe that the rising prices of houses is giving you a return on your equity. Invest in “what grows” not in “what shows.” For example, you could borrow against your equity and buy more real estate. Get that real estate investment instead of that flashy sports car. However, if owning more real estate isn’t in your plan, here is another idea.
Equity in real estate grows as a result of the loan being paid down and values increasing. But remember, equity itself does not have a rate of return. Combine the proper investments with mortgage acceleration techniques and the deductibility of mortgage interest, and you have a powerful wealth-building tool.
Maximizing equity management
Interest on a home, that is usually deductible, is simple interest with the loan declining each month. If it is deductible, the effective interest rate is less than the face rate. When equity is pulled out and that cash is invested, it is invested in something that earns compound interest, the opposite of simple interest. To maximize your equity management plan, you want to invest in something that earns compound interest, inside of a tax favored environment. Then the potential for growth is incredible. Combine all of those factors and what you have is activated equity!
So how do you combine all factors in one equity management plan? The answer is what my financial planner has coined OUR Plan. The “OUR” stands for Optimized Universal Life Insurance Supplemental Retirement Plan. This amounts to investing within a life insurance policy.
Advantages of “OUR Plan”:
– You get life insurance protection death benefit.
– Your investment grows tax free within the life insurance policy.
– You can withdraw without tax burden up to the original dollar investment OR withdraw tax free with a policy loan.
The bottom line is that you will build a nice nest egg using this technique. You can contact your financial planner to see if this is a program that works for you.
By Duane Duggan, RE/MAX of Boulder. Duane Duggan has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail Duane at [email protected], call 303.441.5611 or visit BoulderPropertyNetwork.com.