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Author: James Burns Article source: http://mortgagerefinance.blogharbor.com/. Used with author's permission.
How much interest are you earning on your home equity? If you answered nothing, zero, zilch, zip you are correct. What would you do if you could get triple compounding on your equity? Would you take action and build a fortune that would allow you to pay off the mortgage and create a retirement fund?
We use a strategy called Early Mortgage Pay Off System or EMPOS™. The strategy involves using common knowledge that is applied uncommonly. In other words, we have been told for years that a fixed mortgage is the way to the American Dream of having our homes paid off free and clear. But is that really a dream, when all along the way you struggle to make those large payments? What if you could reduce your monthly mortgage payments and increase your cash flow?
By using the right mortgage product you can keep your monthly payments low and redirect some of that cash back to yourself in an investment that gets triple compounding because it is tax deferred.
First, you examine to see if a Pick-a-payment Mortgage is applicable to your situation. This type of mortgage product allows you to choose between four options each month. The options are a 30-year payment, a 15-year payment, interest only or minimum monthly payment, which has a low start rate (currently 1.95% to 4.95% depending on the investor's, credit, income and other market factors). You can match your loan payments to your variable or seasonal income and begin using the saved income to create wealth.
This mortgage product uses a monthly Adjustable Rate concept to determine the actual rate of interest charged. The loan is linked to one of various indexes like the Cost of Funds Index (COFI), the Monthly Treasury Average (MTA), Certificate of Deposit Index (CODI), Cost of Savings Index (COSI) or the London Interbank Offered Rate (LIBOR). A loan consultant can determine the index and program that best fits your individual financial situation. Fixed percentage points (the "Margin") are added to the index and establishes your effective interest rate and monthly payment
Many of the super elite and very wealthy use this type of mortgage on their homes when they could afford to pay their mortgages off today. Why? Because they leverage their mortgage as a tool to create wealth. Even Alan Greenspan has an ARM mortgage on his home when he could afford to pay it off. History shows the ARM mortgage consistently outperforms a fixed rate.
What do I do with all my monthly savings you ask? We like to see it go into an environment where the money can earn triple compounding. Triple compounding is where you earn interest on your principal, interest on the interest and interest on the amount that would have gone to taxes. One of the best places to get tax deferral that creates a triple compound is with life insurance. In addition, there are equity indexed life insurance products that allow you to participate in the stock market while it is up and lock in the gains when the market falters. It is the best of both worlds because it earns at better than traditional fixed and is safer than a variable insurance product.
You may have sold yourself on life insurance being a useless product. Well, consider the following example of life insurance compared to a ROTH IRA.
The IRA offers no creditor protection if you get sued, the equity in your home is always on the table for a creditor to take. Additionally, your contributions to an IRA are limited, there is no death benefit if you prematurely pass away, and there is no disability aspect among other features.
After the Tax Reform Act of 1986, the Wall Street Journal had an article that said there were only five tax-advantaged investments left:
• Your personal mortgage
• Qualified retirement plans (i.e., EP, 401K, IRA, Pension, Profit Sharing, etc.)
• Tax Free Bonds
• Live Insurance
• Annuities.
The reason that life insurance was listed is because life insurance offers you the opportunity to have tax-deferred growth/compounding on your money as well as access on a tax advantaged basis.
What if we took the power of tax-deductible borrowing and invested the money tax-free? This is done by refinancing or using a Home Equity Line of Credit (HELOC). A client could take out money and fund the maximum in their equity-indexed universal life product to the extent they do not violate tax law and create a Modified Endowment Contract (MEC). Too, the client who is 59 ½ could place some proceeds into an single premium immediate annuity (SPIA) and fund the life insurance over the next couple of years directly. If the client were at least 55 years of age their situation could be appraised under the substantially equal payment exclusion to the 10% excise tax penalty on distributions prior to 59 ½ . There are other planning opportunities and the client would have the proceeds to invest, assuming their financials line up with the requirements of the lender.
Like any type of investing, there are pros and cons. The pro is that you can create significant wealth and is safer than playing the stock market. The con is that you would tap out equity from your home and by using one of many strategies; you might not pay your home off under the thirty years unless you choose to. However, you would likely build enough to pay off the mortgage in a lump sum if you cared to, or continue to use the mortgage interest deductions when you need them - as a retiree. Also, the amount of estate tax can be reduced since you only pay estate tax on what you own. There are numerous pros that outweigh the cons and you can find a savant on either side of the pro and con. Ultimately, a person must make up their own mind and begin to think outside of the box or join the masses that play it safe and will have to sweep floors in a retail store during their retirement years.
In closing, remember, equity can only be tapped two ways (1) selling the property or (2) an equity loan, but when you need it most the loan is not always that easy to get. If you want to create a significant amount of wealth and have a few years to still pay on your mortgage, you might want to examine to see if utilizing your equity to provide for your future is appropriate.
James Burns
Law Office of James Burns
18662 MacArthur Blvd, 2nd Floor
Irvine, CA. 92612
(949) 440-3243
© James Burns, Esq. James Burns is an attorney with two law degrees and helps individuals and small businesses with Life Planning Solutions, a trademark concept he created.
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