Mortgage planners are a sub-set of financial planners and one area of guidance they offer is “Equity Management". Equity in a property makes no interest. It may often be better utilized to re-strategize your overall financial portfolio and this article will discuss the various opportunities you may have.
For purposes of this article we shall assume you are a homeowner and we are discussing the equity in your primary residence, the home in which you live. Although these principles do apply equally well to investment property and even commercial real estate portfolios with the exception of the income tax deductibility of mortgage interest.
The Internal Revenue Service does permit you to deduct from your income the payment of all interest on any mortgage(s) against your primary residence as well as your second home. There are some limitations, consult your tax advisor.
Couple this interest deductibility with the fact that interest on a home loan is usually substantially less than interest on consumer debt such as credit cards, unsecured loans, auto and student loans, etc. , and there is an apparent opportunity to save a lot of money and maximize your mortgage interest tax deduction.
This area is known to mortgage and financial planners as debt consolidation or repositioning. Essentially, the unused equity in your home is drawn out in a loan and used to pay down/pay off the higher-interest (and non tax-deductible interest) consumer debts. Yes, you will then have an additional loan against your home. But the interest rate will be lower than what you were paying the credit cards companies. And now the interest you do pay can be deducted from your income taxes as mortgage interest. It is a simple prospect: you had, for example, $20,000 in credit card debt at 18%. Your minimum monthly payment on a 24-month revolving charge card would have been about $1,000 per month. You take out a 15 year second mortgage at 7% and now the monthly payment is $180. And you can now deduct the interest on that second mortgage off your taxes! Plus you just put over $800 per month back in your pocket, and that money can now be put to work in an asset accumulation vehicle such as stocks, bonds, collectibles, your retirement accounts, college tuition for your children, or used to more rapidly pay down your mortgages. True, your term for the credit card debt is now 15 years not 24. But you can choose to pay off the loan early with the savings.
Your tax advisor and financial planner can run the numbers for you and tell you if you would be better off to pay off this new mortgage quickly or use the money you freed up for other investments or retirement planning. Everyone's situation is unique.
Sometimes several birds can be altered with one stone:
Case study: I had a client who was a doctor and ran a great practice. Her accountant had done a good job of minimizing her taxes by minimizing the amount of income she “showed. " Too good, it turned out. She came to me to refinance her home and take some cash out to pay some debts. Unfortunately when I initially ran the numbers, her income she “showed" to the IRS was the same income tax returns I had to show lenders to prove her self-employed income and it was insufficient for the amount of debt she was carrying. her “debt-to-income ratio" or DTI was unacceptably high. It looked, on paper, like she was maxed out every month to pay her bills, when in reality she had plenty of money. But she did have some high-interest balances on her credit cards she should get paid off. And she wanted to start a retirement fund for herself and a college fund for her daughter.
I ended up having to work with her accountant to re-file her last year's tax return as an amended return to show more income. She had to pay some additional taxes, yes. But she got the loan she wanted, refinanced 3 interest rate points lower, saved about $700 a month in mortgage payments, pulled out enough cash to pay off those credit cards and saved another $800 a month in credit card interest, increased her mortgage interest tax deduction for next year, and got her retirement plan and college tuition plan for her daughter set up.
It took months and at the end of it she not only was a mortgage client for life, and refers me to everyone she knows, but has become a financial planning client for a good friend of mine, and I get referrals from him for sending her his way. Everybody won!
She is a great case study because she is a compound example of a few different reasons people want to use their equity-or should want to, anyhow: pay off higher-interest non-deductible consumer debt; fund college tuition; fund retirement account; and refinance for a lower interest rate and reduce payments; and then utilize at least some of the savings to accelerate mortgage payoff!
And the fact that I had to work closely with her CPA and also get her hooked up with a financial planner for future years is a classic example of how a Certified Mortgage Planner works as a member of a team with a client's other financial advisors to optimize the client's financial picture and move them towards financial goal achievement! Other team members I have obtained for a client, or worked with for a client, include insurance agents, attorneys and stock brokers/investment advisors and trust fund trustees.
Every time I do this the client becomes stronger and I become stronger by adding to my network of professionals I can call into play to help my clients.
I conduct an annual review of their equity position with each of my clients in addition to emailing them quarterly reports and interest rate alerts.
James Hussher is a Certified Mortgage Planner and licensed in all 50 states. Please visit James at http://ezmortgages123.com for all of your residential and commercial mortgage needs. Apply online, check current offered rates and loan programs and more! Many free articles and educational resources may be accessed at http://swifthussherrealestate.com which James also runs!