Mortgages are a fact of life for many.
But how many of you think of your mortgage as an asset—one that can help you build wealth? Probably not that many.
You can optimize your home mortgage to create a tremendous amount of money to your or your family’s net worth. What I’m about to tell you may sound a little risky at first. It’s definitely not something the mainstream financial experts would ever talk about.
But I’ve done it with my own mortgage and helped hundreds of my clients do it with theirs. These people have been able to not only save a lot of money but build a capital reserve account that can be used for whatever they chose to use it for.
As I said in the last blog, that mortgage deduction is one if not the most important deduction you have on your personal income taxes. Why not make it perpetual?
In order to keep your “acquisition indebtedness,” high, which will allow you to deduct as much mortgage interest as possible, you need to eliminate or reduce as much as possible any principal payments to the bank against a home mortgage.
That’s right. You DON’T want to pay on the principal, and you certainly don’t want to pay any extra. You want to eliminate building up equity all together in your home.
In other words, you never pay off your house. If you’re saying “what??!!?” to that, I understand. But bear with me while I explain the rest.
To keep your loan indefinitely, you need an interest only mortgage. This means you only pay interest on your loan, and you do this as long as you live in the house. If that’s a little too aggressive for you, the second most optimal mortgage to minimize the equity from being added to the house is the 30-year fixed.
Both of these mortgages have their advantages and disadvantages, but either one is better than a 15 year mortgage or paying cash for a house. If you own the home outright, you have lost the “acquisition indebtedness” and no more deduction.
The goal is to pay as little as possible on a monthly basis to live in the house and yet have control of the property.
Now this doesn’t mean that you have a free-for-all with the money you would be paying on the principal of the mortgage.
The second part of how this works is you take the amount you would have paid on the principal into a side fund. This fund needs to be an interest bearing account that is earning a competitive rate of return but is also protected from as much stock market risk as possible. This account needs to be accessible but safe from creditors if possible. And you want it potentially safe from future income tax as well.
Sound impossible? I only know one financial product that can accomplish this task exceptionally well; it is a properly structured Index Universal Life (IUL) insurance contract. If you want to know more about that, please visit www.MyFamilyFinancialMiracle.com and watch some videos I created that explain how the Index Universal Life product works.
This interest-bearing IUL policy allows you to do something very intriguing: continually refinance the home. You can do that because you’ll have the value of the home as well as the cash value of the insurance policy to borrow against if necessary.
I understand that for most people, taking out an interest only mortgage and putting the principal into life insurance is about as alien as if Martians really did land on earth. The worry of “how am I going to pay the dang thing off in twenty or thirty years” is just too daunting.
But the concept of separating real estate equity from the real estate itself is being done by more and more people—and some don’t even know it. I was talking to someone recently about this concept, and she told me that her home mortgage was recently modified into an interest only mortgage. Up to the point of talking to me, she wasn’t sure how she was going to handle the balloon payment at the end of the whole ordeal.
I took her step by step through the process of putting the equity (the principal amount she would have been paying on the loan) into an IUL product. She was amazed. In twenty years, she would have more in the IUL policy than the balance on the home mortgage, and the annual average interest earned in the policy would exceed the annual mortgage payment.
Even better, the funds in the IUL would be tax-advantaged, meaning it would be shielded from taxes while it grew. She got really interested, though, when I showed her how she could access the money income-tax free and still keep the principal growing.
How many people do you know that has paid off their home that are house rich but cash poor? There are millions of people that are in this situation. This is why Reverse Mortgages are so popular. People with their homes paid off are using the reverse mortgage to annuitize their home during their retirement years to capitalize on this asset. I could spend a lot of time telling you why the reverse mortgage is not the optimal way to capitalize on your home—so I’ll do that in a future blog.
The truth is paying interest only on a home mortgage and putting the equity away in a side fund like an IUL insurance product puts you in an entirely different league—one that is about wealth creating, not just making ends meet.
The list of advantages to managing your mortgage this way are long, but I will give you a few of the best ones:
- The ability to earn a higher rate of return on the saved dollars, than the cost of the mortgage.
- The dollars saved in the side fund are liquid, are accessible at all times, even if a job is lost.
- The separated equity is protected from creditors, or a law suit.
- Maintaining a mortgage maximizes your mortgage interest tax deduction.
- The equity is protected from market fluctuation if it isn’t inside the real estate.
- By having the equity in a side fund instead of the house makes it easier to sell the house.
- The death benefit of the side fund pays off the mortgage at premature death (yes, this “side fund” is life insurance, and it’s a lot more flexible and helpful that you were probably taught to believe)
Liquidity, Use, and Control are the key advantages to equity separation. They also give you more money—funds you can use to play, to keep for a rainy day, to plan long-term financial strategies for retirement. The list is endless.
Improve your financial house by improving the way you’re paying on the very structure that keeps you warm and safe.