Can you spot the difference? Let me give you a hint; it’s not the landscaping. It’s not the location. It’s not the gold plated fixtures in the master bathroom. In fact, it’s not anything you’d ever notice with the naked eye. The $596,000 differences are in how much the buyers unwittingly may pay for this home if they aren’t careful.
I recently met with a gentleman who was referred to me by his financial advisor to receive some consulting on how to best structure his mortgage in preparation for retirement. He wanted to retire in 13 years and he had refinanced his mortgage last year to a 15-year fixed rate loan, taking advantage of the low rates, and wants to own his home free and clear right about the time he retires.
Most home owners have the misconception that the wisest method to accelerate the pay-off of their home is to simply pay extra principal payments to their mortgage by utilizing a 15-year mortgage, bi-weekly payments or even by adding an extra $100 each monthly. In actuality, none of these methods usually proved to be the wisest method to accomplish a “free and clear” home.
You can accumulate sufficient cash in a conservative tax-deferred mortgage acceleration plan to pay off a home just as soon or sooner than utilizing the methods described above. In addition you can accomplish the goal of paying off your home just as soon (typically in less than half the time) plus you will have the following advantages: 1) Maintain flexibility, liquidity and safety of principal by allowing the equity to grow in a separate side fund where it is accessible in case of emergency, temporary disability, or unemployment. 2) Maximize the only real tax-deductible interest allowed by tax reform by keeping the loan balance as high as possible until you have the cash accumulated to pay off your home in a lump sum.
Let’s look at our example above…by strategically refinancing and taking advantage of the tax deductibility of mortgage interest we were able to accumulate enough money (at only 6% rate of return) to pay off the home in 8-1/2 years instead of 14 years. If he continued to invest his monthly saving he would have $596,000 more than the balance his mortgage at the time he was ready to retire. Don’t be fooled into giving up the liquidity, safety and potential rate of return on your money by giving it to your mortgage company. Get the facts and structure your mortgage to give you the greatest advantage from the start.