Your Mortgage Can Make You a Millionaire

Many people would. The ‘American Dream’ is to own your home outright, with no mortgage. However, if the American Dream is such a successful model, how do we explain the fact that thousands of financially successful people, with more than enough money to pay off their house, refuse to do so?

The answer? Most of what we believe about mortgages and home equity, which we learned from our parents and grandparents, is wrong. They taught us to make a big down payment, get a fixed rate mortgage, and make extra principal payments in order to pay off your loan as early as possible. Mortgages, they said, are a necessary evil at best.

The problem with this rationale is it has become outdated. The rules of money have changed. Unlike our parents and grandparents, we will no longer have the same job for 30 years. In many cases people will switch careers five or six times. Also, unlike our grandparents, we can no longer depend on our company’s pension plan for a secure retirement. A recent Gallup survey showed that 75% of workers want to retire before the age of 60, yet only 25% think they will be able to!

Unlike our grandparents, we no longer live in the same home for 30 years. Statistics show that today, the average homeowner lives in their home for only seven years. And unlike our grandparents, we no longer keep the same mortgage for 30 years. According to Fannie Mae, (the Federal National Mortgage Association), the average American mortgage lasts 4.2 years.

Today, people are refinancing their homes every 4.2 years to improve their interest rate, restructure their debt, remodel their home, or to pull out money for investing, education or other expenses.

Wealthy Americans, those with the ability to pay off their mortgage but refuse to do so, understand how to make their money work for them.

The wealthy go against many of the beliefs of traditional thinking. They put very little money down, they keep their mortgage balance as high as possible, they choose cash flow mortgages, and most importantly they integrate their mortgage into their overall financial plan to continually increase their wealth. This is how the rich get richer!

The game board is the same, but while most Americans are playing checkers, the affluent are playing chess. The good news is the strategies used by the wealthy work for the rest of America as well. Any homeowner can implement the strategies of the wealthy to become a Millionaire.

Ric Edelman, one of the top financial planners in the country and a New York Times Best Selling author, summarizes in his book The Truth About Money. “Too often, people buy homes in a vacuum, without considering how that purchase is going to affect other aspects of their lives. This can be a big mistake, and therefore you must recognize that owning a home holds very important implications for the rest of your financial plan. Although a fine goal, owning a home is not the ultimate financial planning goal, and in fact how you handle issues of home ownership may well determine whether you achieve financial success.”

In order to discover how our parents and grandparents got the idea that a mortgage was a necessary evil at best, we must go back in time to the Great Depression. In the 1920’s a common clause in loan agreements gave banks the right to demand full repayment of the loan at any time.

When the stock market crashed on October 29, 1929 millions of investors lost huge sums of money, much of it due to stock margins. Back then, you could buy $10 worth of stock for $1. Since the value of stocks dropped so low, few investors wanted to sell, so they had to go to the bank and take out cash to cover their margin call.

It didn’t take long for banks to run out of cash and start calling loans due from good Americans who were faithfully making their mortgage payments every month. However, not many had the money to meet the banks demands and with no market to sell their homes, prices continued to drop, ultimately seeing the stock market fall more than 75%.

As a result, more than half the nation’s banks failed and millions of homeowners, unable to raise the cash they needed to pay off their loans, lost their homes. Out of this the American Mantra was born: Always own your home outright. Never carry a mortgage.

The reasoning behind America’s new mantra was quite simple: if the economy fell to pieces, at least you still had your home and the bank couldn’t take it away from you. Maybe you couldn’t put food on the table or pay your bills, but your home was secure.

But times have changed since the Great Depression. The FDIC was created to insure deposits. The Fed is quick to infuse money into the system if there was a run on the banks, as we saw in 1987 and Y2K. And laws have been enacted making it illegal for banks to call your loan due if you are making timely payments.

Still, it’s no wonder the fear of losing their home became instilled in the hearts and minds of the American people who grew to fear their mortgage and for nearly 75 years, because of this "old school" mind set of fear, most people have overlooked the opportunities their mortgage provides to build financial security.

Many people hate their mortgage because they know over the life of a 30 year loan, they will spend more in interest than the house cost in the first place. To save money it becomes very tempting to make a bigger down payment, or make extra principal payments.

Unfortunately, saving money is not making money! Or, put another way, paying off debt is not the same as accumulating assets. By tackling the mortgage pay-off first, and the savings goal second, many fail to consider the important role a mortgage plays in our savings effort. Every dollar we give the bank is a dollar we did not invest. While paying off the mortgage saves us interest, it denies us the opportunity to earn interest with that money.

Ric Edelman has educated his clients for years on the benefits of integrating their mortgage into their overall financial plan. In his book, The New Rules of Money, Ric tells the story of two brothers, each of whom buy's a $200,000 home. Each brother earns $70,000 a year and has $40,000 in savings.

The first brother, Brother A, believes in the "old school" way of paying off a mortgage, which is as soon as possible and secure's a fifteen year mortgage at 6.38% shelling out all $40,000 of his savings leaving him zero dollars to invest. This gives him a monthly payment of $1,383. His tax rate is 32%, so his average monthly net after tax cost is $1,227. And, in an effort to eliminate his mortgage sooner, Brother A sends an extra $100 to his lender every month.

Brother B, in contrast, subscribes to the "new school" strategy of mortgage planning, choosing instead to carry a bigger, long-term mortgage. He secures a 30-year interest only loan at 7.42%APR. He outlays only a 5% down payment of $10,000 and invests the rest of the $30,000 in a safe, money making side account. His monthly payment is $1,175, 100% of which is tax deductible over the first 15 years, and 64% over the life of the loan, leaving him a monthly net after tax cost of $799. Every month he adds $100 to his investments (the same $100 Brother A sent to his lender), plus the $428 he’s saved from his lower mortgage payment. His investment account earns an 8% rate of return.

Which brother made the right decision? The answer can be found by looking into the future. As illustrated below, after five years Brother A received $14,216 in tax savings, however zero dollars in savings and investments. Brother B, on the other hand, has received $22,557 in tax savings and his investment account has grown to $83,513.

Now, what if both brothers suddenly lose their jobs? The story turns bleak for Brother A. Without any money in savings, he has no way to get through the crisis. Even though he has $74,320 of equity in his home, he can’t get a loan because he doesn’t have a job. With no job and no savings, he can’t make his payments and has to sell to avoid foreclosure.

At this point it’s a fire sale so he must sell at a discount, and then pay real estate commissions. Brother B, while not happy at the prospects of searching for a new job, has choice and control because he has $83,513 in savings to tied him over. He doesn’t need a loan and can easily make his monthly payment, even if still unemployed for years. Cash is King!

Now let’s say neither brother lost his job. We’ll check in on them after fifteen years and evaluate their financing strategies. Brother A has now received $25,080 in tax savings, he has $30,421 in savings and investments (once his home paid off he started saving the equivalent of his mortgage payment each month), and owns his home out-right. Not too bad, right?

Now let’s check on Brother B. He's received $67,670 in tax savings and has $282,019 in savings and investments. If he chooses to, he can pay off the remaining balance of $190,000 and still have $92,019 left over in savings, free and clear.

Finally, let’s assume that rather than pay off his 15 yr. mortgage, Brother B rides out the thirty years of the loan’s life. While Brother A has still received only $25,080 in tax savings, his savings and investments have grown to $613,858 and he still owns his home outright.

Brother B, on the other hand, has received a whopping $107,826 in tax savings and has accumulated $1,115,425 in savings and investments, and also owns his home outright. He can start over fresh and enjoy the same benefits once again.

Unfortunately, the majority of Americans follow the same path as Brother A, as it’s the only path they know. Once the path of Brother B is revealed to them, a paradigm shifting epiphany occurs as they realize Brother B’s path enables homeowners to pay their homes off sooner (if they choose to), while significantly increasing their net worth and maintaining the added benefits of liquidity and safety the entire way.

Managing Home Equity to Increase Liquidity, Safety, Rate of Return, and Tax Deductions

In 2003, Doug Andrew, a top financial planner from Utah, was the first to clearly articulate the strategy the wealthy have been using for decades in his book, Missed Fortune. The book is based on the concepts of successfully managing home equity to increase liquidity, safety, rate of return, and tax deductions. Doug educates readers to view their mortgage and home equity through a different lens, the same lens used by the affluent. He shows how a relatively minor change in home equity perception and positioning can produce monumental long term effects in financial security.

Many Americans believe the best way to pay off a home early is to pay extra principal on your mortgage. Similarly, many finance professors think a 15-year loan saves you money by reducing the interest you pay. However, Doug Andrew points out in his book, Missed Fortune, that this thinking is flawed. "If you do the math, you find if you set aside the monthly payment difference between a 15-year loan and a 30 year loan, as well as the tax savings into a safe, side investment account earning a conservative rate of return, you will have enough to pay your home off in 13-1/2 years or in 15 years with $25,000 to spare".

Gerson & Co., with Home Equity Management experts personally trained by Mr. Andrews, host educational web seminar’s over the internet, based largely on the Missed Fortune and Ric Edelman concepts. In the seminar, we break down the four key benefits of integrating your mortgage into your financial plan (increased liquidity, safety, rate of return, and tax deductions) in order to look at each one in more detail. Our goal is to help clients conserve their home equity, not consume it.

We are one of the few mortgage planning firms in the country that specialize in showing our clients how to strategically position a mortgage as an investment tool in their overall financial plan and this is usually accomplished without our clients spending a dime more than their current monthly payment.

The April 1998 issue of the Journal of Financial Planning (published by the Institute of Certified Financial Planners) contained the first academic study on the question of 15 year vs. 30 year mortgages. They concluded the 30 year loan is better. Based on the same logic, a cash flow loan would be even better than a standard amortizing loan. If mortgage money costs you 4-5%, the chances are pretty good that you can get 5% return on your money. Interest rates are relative.

In the 1970’s, money cost 17%, but bank CD’s were returning 21%. And due to the tax deductibility of mortgage interest and the law of compounding returns, you can actually borrow at a higher rate, invest at a lower rate and still make a significant profit.

By converting equity into liquid cash available for emergencies and investment opportunities, most homeowners are better off than if their equity is tied up in their residence. Large amounts of idle equity, also called “house rich, cash poor”, can be risky if the homeowner suddenly needs cash. While employed and in excellent health, borrowing on a home is easy, but most people find they unexpectedly need cash for emergencies, when they are sick, unemployed or have insufficient income. Obtaining a home loan under these circumstances can be either impossible or very expensive.

How do we feel when we go to the bank having to prove we don’t need the money before they will loan it to us? The bank wants to know we have the ability to repay a loan. Imagine the conversation! “I brought your application to the board explaining you’re going through some hard financial times, you’re unemployed, your credit has suffered... but maybe they could help you through these rough times with a loan… Their response… ‘Fat Chance!’

What many people don’t realize is that even if they consistently made double mortgage payments for five years, the bank still has no leniency. If suddenly they experience a financial setback, the bank will not care. Regardless of how much you’ve paid your mortgage down or how many extra payments you’ve made, next month’s payment is still due in its entirety.

In the book, Missed Fortune and the new Missed Fortune 101 published by Time Warner and on the Barnes & Noble financial best seller list, Doug Andrew suggests people strongly consider separating as much equity as possible from their house, and convert it to a cash position. Why would you want to have the equity separated from your home?

These three elements are commonly used as the test of any prudent investment. When evaluating a potential investment, experienced investors always ask the following questions:

Home equity fails all three tests of a prudent investment! Let’s examine each of these elements in more detail to understand why home equity fails the tests of a prudent investment, and, more importantly, why and how home owners can benefit by separating their equity.

What’s the biggest secret in real estate? Your mortgage is a loan against your income, not a loan against the value of your house!

Without an income, in most cases you cannot get a loan. If you suddenly experienced difficult financial times, would you rather have $25,000 of cash to help you make your mortgage payment, or have an additional $25,000 of equity trapped in your home? Almost every person who has gone through a difficult financial time or lost their home to foreclosure, would have been better off if they had their equity separated from their home in a safe, liquid side fund, that could be used to make mortgage payments in a time of need.

In Missed Fortune, Doug Andrew tells a story of a young couple who learned what he calls “The $150,000 Lesson on Liquidity”.

In 1978 this couple built a beautiful home featured in Better Homes and Gardens. The couple’s home appreciated in value, and, by 1982, it was appraised for just under $300,000. Because of market conditions in those four years, they accumulated a significant amount of equity. This couple thought they had the world by the tail. They had a home valued at $300,000 and only owed $150,000. They "made” $150,000 in four short years. They had the misconception that the equity in their home had a rate of return when, in fact, it was just a number on a sheet of paper.

Then, a series of unexpected events reduced their income to almost nothing for nine months. Without income, they couldn’t borrow to keep their mortgage current and within six months had to sell 2 other properties to bring their mortgage out of delinquency. They soon realized in order to protect their $150,000 of equity they would have to sell their home. As Murphy’s law would have it, the previously strong real estate market turned soft. Although they reduced their asking price — from $295,000 to $195,000 – they could not find a buyer. Sadly, they gave up the home in foreclosure.

In a time of financial setback they lost their most valuable asset due to a lack of liquidity. If they had separated their $150,000 in home equity and repositioned it into a safe, liquid side account, they would have easily been able to make their mortgage payments and prevented this series of events.

At this point in the story, Doug admits the young couple was really he and his wife, Sharee. Despite objections form the editor of his new book, Missed Fortune 101, Doug insisted the story remain because he wanted his readers to know he understands first hand the importance of positioning assets in financial instruments that maintain liquidity in the event of an emergency. If Doug and Sharee had access to their home’s equity, they could have used it to weather their financial storm. Doug learned from his own experience the importance of maintaining flexibility in order to ride out market lows and take advantage of market highs. And, most importantly, he learned never to allow a significant amount of equity to accumulate in his property.

Home equity is not the same as cash in the bank; only cash in the bank is the same as cash in the bank. Being house rich and cash poor is a dangerous position to be in. It is better to have access to the equity or value of your home and not need it, than to need it and not be able to get at it. Keeping home equity safe is having choice and control, to act instead of react to market conditions. You need to ask yourself …

“If I lost my job or my business failed today would I rather have $50,000 of equity tied up in my house or $50,000 in the bank?”

The Seattle Times, in an article published in March 2004, reported, “Remember that housing prices can and do level off. They sometimes decline as witnessed in Southern California just a little more than a decade ago, when prices took a 20 percent to 30 percent corrective jolt downward.”

Real estate equity is no safer than any other investment whose value is determined by an external market over which we personally have no control. In fact, due to the hidden “risks of life,” real estate equity is not nearly as safe as many other conservative investments and assets.

Americans typically believe home equity is a very safe investment. According to a recent study, 67% of Americans have more of their net worth in home equity than in all other investments combined. If a financial planner looked at a client portfolio 67% weighted in a single investment, 99% would immediately recommend the client diversify to reduce their risk and increase safety of principal. Holding large amounts of home equity puts the homeowner at unnecessary risk. This risk could be greatly reduced by diversifying their home equity into other investments.

What do you think the rate of return on home equity in Las Vegas was for the last 3 years? What about Portland or Miami? Careful, this is a trick question. The truth is, it doesn’t matter where you live or how fast a home appreciates, the return on home equity is always the same, ZERO, ZILCH, NADA!

We have a misconception that because our home appreciates, or our mortgage balance is going down, that the equity has a rate of return. That’s not true. Home equity has NO rate of return. Home values fluctuate due to market conditions, not the mortgage balance. The equity in a home has no relation to the home’s value... it simply sits idle in the bricks and mortar... earning nothing!

Assume you have a home worth $100,000 which you own free and clear. If it appreciates 5%, you have an asset worth $105,000 in a year. Now, assume you had separated the $100,000 of equity and placed it in a safe, liquid side fund earning 8%. Your side account would be worth $108,000 in a year. You still own the home, which appreciated 5% and is worth $105,000 and by separating the equity you created a new asset which was also able to earn a rate of return.

Therefore, you earned $8,000 more than you would have if the money were left to sit idle in the home. You do have a mortgage payment, however since interest rates are relative, if we are assuming a rate of return of 8%, a strategic cash flow mortgage would be available at 5% or less. Also, since mortgage interest is 100% tax deductible, the net cost of the money is actually only 3.6%. This produces a 4.4% positive spread between the cost of the money and the earnings on that money.

The story gets much more compelling over time, although the mortgage debt remains constant, through compound interest, the side account continues to grow at a faster pace each year, The earnings on $100,000 in year 1 are $8,000, in year 2, $8,640 and in year 3, the earnings on $116,640 at 8% is $9,331.

The mortgage debt remains the same, but the spread between the cost of the mortgage money and the earnings on the separated equity continues to widen further in the homeowner’s favor every year. If we allow home equity to remain idle in the home, we give up the opportunity to put it to work and allow it to grow, compound and go through doubling cycles.

As Albert Einstein said, “The most powerful force in the universe is compound interest.” After all, homes were built to house families, not cash. Investments were made to house and accumulate cash.

Looked at from another perspective, suppose you were offered an investment that could never go up in value, but might go down. How much of it would you want? Hopefully none… yet, this is home equity. It has no rate of return, cannot go up in value, but could go down in value if a bubble or other market condition caused a decline or a homeowner experienced an uninsured loss, disability, or foreclosure.

To Reduce the Risk of Foreclosure During Unforeseen Set Backs, Keep Your Mortgage Balance as High as Possible

Is your home really safe? Unfortunately, many home buyers have the misconception that paying down their mortgage quickly is the best method of reducing the risk of foreclosure on their homes. However, in reality, the exact opposite is true.

As homeowners pay down their mortgage, they are unknowingly transferring the risk from the bank to themselves. When the mortgage balance is high, the bank carries the most risk. When the mortgage balance is low, the homeowner bears the risk. With a low mortgage balance the bank is in a great position, as they stand to make a nice profit if the homeowner defaults.

Assume you’re a mortgage banker looking at your portfolio of loans and you have 100 loans that are delinquent. All of the loans are for homes valued at $300,000. Some of the loan balances are $150,000 and some are $250,000. Suddenly, there is a bubble and/or glut in the market and the homes are now worth $200,000. Which homes do you as the banker foreclose on FIRST? The ones owing the least amount of money, of course. After all, as a banker you’d make money taking back those homes, however you’d lose money trying to sell a home for $200,000 that still owed $250,000 on it.

Banks have been known to actually call delinquent homeowners with high mortgage balances and offer assistance, “We understand you are going through some tough times, is there anything we can do to help you? We really want you to be able to keep your home.” The last thing they want to do is take back a home that they will lose money reselling.

Buying a home is a great investment. However, the wealthy buy the home with as little of their own money as possible, leaving the majority of their cash in other investments where it’s liquid, safe, and earning a rate of return. One of the biggest misconceptions homeowners have is that their home is the best investment they ever made. If you purchased a home in 1990 for $150,000 and sold it in 2003 for $350,000, that represents a gain of 133%. During the same period the Dow Jones grew from 2590 to 9188, a gain of 255%.

Not bad, however, the reality is that financing your home was the best investment decision that you ever made. If you purchased the $150,000 house in 1990 with $30,000 down, the $30,000 investment produced a profit of $200,000. That's a total return of 667%, far outpacing the 255% in the stock market!

When homeowners separate equity to reposition it in a liquid, safe, side account, a mortgage payment is created. The mortgage payment is considered the Employment Cost. What many people don’t understand is when we leave equity trapped in our home we still incur a cost, but that cost is called Lost Opportunity Cost! The money that’s parked in your home doing nothing could be put to work earning a potential $1,000,000 or more!

Everything you purchase is really 100% financed. In other words... you either pay interest to someone else (which is tax deductible) or give up investment interest you could have earned for yourself.

Let’s say you had $100,000 of equity in your home to be separated. Current mortgage interest is say 6%, so the cost of that money would be $6,000 per year (100% tax deductible). Rather than hiding the $100,000 under the mattress, we are going to put it to work, or “employ” it.

If I'm an employer, why am I willing to hire employee's? The expectation is I can grow my business and earn a return greater than the cost of the employee. If we choose to leave the $100,000 of equity in our home, we incur a cost. The only difference is, instead of referring to that cost as employment cost, it is referred to as an opportunity cost. By leaving the equity in the home, we give up the “opportunity” to earn a return on the money.

By separating the equity we give it new life and give ourselves the opportunity to put it to work for us earning a rate of return. Assuming a 28 percent tax bracket, the net employment cost is not 6%, but 4.32% or $4,320 a year after taxes (mortgage interest is 100% tax deductible).

It’s common to find investments earning more than 4.32%. Using the tax benefits of a mortgage, you can create what the banks call “ARBITRAGE”. Borrowing at one rate and earning investment returns at a slightly higher rate. It’s what the banks and credit unions do all the time. They borrow our money at 2% then loan it back to us at 5%. And it's what makes millionaires, millionaires!

By using the principle of Arbitrage, you can become your own banker. Simply using the principles used by banks, credit unions and insurance companies, you can amass a fortune. A bank’s greatest assets are its liabilities. You can substantially enhance your net worth by optimizing the assets that you already have. By being your own banker… “Your Mortgage Can Make You a Millionaire”!

By repositioning $200,000 into a safe and liquid side fund, using equity management you can achieve a net gain of $1 million over thirty years. Assume you separate the $200,000 of home equity using a mortgage with a 5% interest rate. If the $200,000 grows at a conservative rate of 6.75% per year, it will be worth $1,419,275 in 30 years. After deducting the $216,000 in interest payments and the $200,000 mortgage, you still have $1,003,275 left in your account. A net gain of over one million dollars!

If you don’t have $200,000 in idle equity, or have debt that needs be be resolved, don’t worry, we have a more comprehensive way for you to take as little as $5,000 or $10,000 and turn it into a million dollars or more.

This example simply shows a one time repositioning of equity (usually accomplished without costing a dime more than current monthly payments). Imagine how the numbers grow for individuals that harvest and reposition their home equity every 3 to 5 years as their home continues to appreciate! This is how the wealthy manage their home equity to continually increase their net worth. Conversely, if the same $200,000 were left to sit idle in the home for 30 years it would not have earned a dime.

When taking the equity in our home into consideration, it is not something that can be risked in any manner, shape or form! It has to be safe from loss of principal. Most investors have their assets in their homes or the stock market. Neither of which provides the most crucial element of a prudent investment… Safety!

Whatever strategy an investor uses in the stock market, their principal is always at risk. This is the one major flaw of the market. You can make substantial gains year in and year out… but one bad stock, one bad year… can deplete our principal just as fast, and usually faster, than it took to achieve the gains!

This is because most of us take a direct participation approach! That is… we invest in a specific stock, index, or mutual fund… purchasing the individual equity on a direct basis. Direct participation provides us direct profit when it’s up but we suffer direct losses when it’s down. However, most investors don’t consider a mathematical anomaly. A 50% loss followed by a 50% gain results in a 25% NET loss! If your $100,000 principal receives a 50% gain… you have $150,000. If the $150,000 suffers a 50% loss… you now have $75,000! Not only did you lose the $50,000 profit… but have also suffered a $25,000 loss of principal.

The following graphic clearly illustrates how detrimental a direct participation strategy can be to your overall financial goals. Let's say you earn a solid 15% rate of return for the first three years of an investment. This however, is followed by a 15% loss in year four. Due to the loss, a gain of 56% in year five will now be required... just to make up for the loss in year four!

The only safe method of separating equity is to use a “linked index” approach. By utilizing a “linked” strategy, rather than “directly participating” in the market… our principal is contractually guaranteed from loss and the essential element of safety is achieved! Here’s the way a “linked index approach” works:

The separated equity is transferred “totally tax free” into a stratgic financial instrument. The instrument is contractually guaranteed by some of the largest financial institutions in the world. A liquid “side fund” is created, which provides for the funds to be “linked” and invested into an index. The index most widely used by investors is the single most solid fund of stocks available in the world… the S&P 500.

If you’re not familiar with the S&P 500 index, it is the benchmark of the entire U.S. Stock Market performance. It represents over 70% of the entire domestic equity market value and its broad diversification counterbalances the extreme highs and lows of any one stock. Over the long term, the S&P has outperformed certificates of deposit, government and corporate bonds, and the rate of inflation.

The linked approach has a cap on the gains of 17%. In other words, in any given year, we do not participate in any gain the S&P returns that is over 17%. However, if the S&P has a down year, there is no loss of principal and a guaranteed minimum return of 1%. If the S&P suffers a 10% loss in any given year, the linked approach will still provide a minimum 1% return. Wouldn't you like to get a percentage of stock market gains if you're guaranteed none of the losses?

The goal is safety of principal. A 17% upside potential in exchange for a guarantee against loss of principal, and a minimum return... is a rather aggressive approach in an extremely conservative manner.

Even with a cap of 17% during the stronger years… by preserving principal combined with a guaranteed minimum 1% gain during the down years… YOUR MONEY WOULD HAVE GONE THROUGH THE EQUIVALENT OF 4 DOUBLING CYCLES DUE TO THE MAGIC POWER OF COMPOUNDING!

BUT THAT’S ONLY PART OF THE EQUATION… We have not taken into consideration the effect of taxes! The hidden benefit of a properly structured “linked index” approach is TAX-FREE ACCUMULATION!

If investing in a direct participation method, any gains would be subject to tax. Even if tax-deferred, it would still be taxed… however by utilizing the “Linked Index” method in a properly structured “side fund”, the IRS allows for your money to accumulate and be accessed... absolutely tax-free.

If you accumulate $1,000,000 and it’s taxed at 33% when you pull your money out, you’re left with only $660,000. Using the linked index strategy you would keep the full $1,000,000. That’s a $340,000 difference! The real rate of return after taxes are taken into consideration is now 12.78% (9.61 x 33% = 12.78%).

Conversely, in a taxable investment vehicle, you would have to earn a rate of return of almost 17% before taxes, to equal a 12.78% after tax yield. Using a “Linked Approach” enables investor’s to sleep well at night knowing they are earning an extremely good return, while their principal is contractually guaranteed from any loss!

Where to Safely Invest Home Equity with a Contractual Guarantee of Principal, Liquidity and a Tax-Free Rate of Return that has averaged 9.61%.

Home equity is serious money. We are separating it from the home to conserve it, not consume it. Therefore it should not be invested in any vehicle that does not provide a guarantee of the principal. Rather, home equity is best invested in safe, conservative accumulation vehicles. Tax-favored instruments are ideal. Many financial planners prefer the following tax favored products for investing home equity, however only one is truly tax free:

A recent Washington Post article surveyed 300 bankers from 12 large cities across the country to find out where they invest their personal funds. 9 out of 10 (89%) answered “Permanent Life Insurance”. Permanent life insurance (where cash accumulate's inside the contract) has long been the vehicle of choice for the wealthy, due to its tax-free (not tax-deferred, BUT TAX-FREE) status offered it by the IRS.

With the new breed of investment grade "Equity Indexed Universal Life" policies now on the market, savvy investors are finding safety and liquidity, with a guarantee of principal and potential returns as high as 17%, since the contract can be tied to an index such as the the S&P 500.

This is not your father' life insurance. If properly structured, investment grade insurance contracts can be designed for living (not death) benefits, filling your bucket with tax-free cash accumulation and access when needed the most… during retirement... with Uncle Sam picking up the tab along the way!

Gerson & Company is a National Mortgage lender specializing in helping clients manage their mortgage and home equity to build wealth. Michael Gerson, President and CEO, is a leading expert in equity management utilizing these strategies to help families use their mortgage to increase net worth. Mr. Gerson has handled tens of millions of dollars in financial transactions, has appeared on the Financial Television show, "Money Talks" and has had articles written about him in INC. Magazine, The Miami Herald, Ft. Lauderdale Sun Sentinel as well as numerous newspapers throughout the country.

It’s not necessary to have a large chunk of equity in your home to benefit from using your mortgage to create wealth. Many homeowners without a large equity balance have benefited by simply moving to a more strategic mortgage which allows them to pay less to their mortgage company, thereby enabling them to invest more each month. For example, a couple used traditional thinking when they bought their $250,000 home. They put 20% down and obtained a $200,000 30-year fixed rate mortgage at 6% with a payment of $1,199 per month. This is how the vast majority of Americans would purchase this home.

However, once this couple understood the benefits of integrating their mortgage into their financial plan, they decided to make a change. They moved to a more strategic interest only mortgage. They kept the same loan balance, but were able to reduce their monthly payments to $709, a savings of $490 per month from their previous mortgage. The couple invests the $490 savings each month, and assuming a 6% rate of return, they will have enough money in their investment account to pay off their mortgage in 18.58 years, almost 11.5 years earlier than they would have with their traditional 30 year fixed rate mortgage. Therefore, by simply redirectinga portion of their monthly mortgage payment, they were able to shave all those years off their mortgage. In addition, they also received the benefits of having their cash liquid, safe and earning a rate of return in the process.

A recent case study of a couple living in a $350,000 home. They owed $160,000 on a 30-year fixed rate mortgage with a monthly payment of $947. They had $190,000 built up in home equity. A very common “Brother A”- type traditional scenario. After understanding the liquidity, safety, rate of return and tax benefits of properly managing their home equity, this couple decided to separate $155,800 of their equity to invest. By using an interest only ARM they were able to increase their mortgage balance to separate this chunk of equity, pay off $50,000 in higher interest rate consumer debt that they were paying over $1,300 a month on so they were paying a total of $2,247 a month and their new mortgage payment turned out to be $1,195 less than what they were paying on everything we paid off. The couple invested the remaining $100,800 in a lump sum and the $1,195 monthly savings in an investment grade contract. If we assume a conservative 6% rate of return, their investment will be worth $379,231.01 in 10 years and $594,900.99 in 15 years. That means that in less than 10 years they will have enough money to pay off their home, if they want to, where it would have taken them 30 years in their traditional loan. However, armed with their knowledge of equity management they plan to keep the mortgage well into retirement so they can keep the tax deduction benefits and continue to house their money in the contract where it’s liquid, safe and continues to grow and compound and can be accessed tax free during retirement, while providing a death benefit (paid for by Uncle Sam) to their heirs.

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DISCLAIMER - The material presented throughout this web site is for informational purposes only and covers a wide variety of information on various property and financing topics. Although some of the information might involve tax, legal, accounting or similar issues, Gerson & Company, Inc. and Michael Gerson absolutely does not intend this report or web site to be an advisory service. Our opinion on any financial matters may not fit your own particular circumstances. Rates and return calculations are our best estimate, but are only estimates and may vary in specific situations. Gerson & Company, Inc. and Michael Gerson is not an investment advisor and any copy on this page or any other page on our website is purely informational and is not to be considered investment advice. Gerson & Company, Inc. and Michael Gerson is not, and does not claim to be, professional investment counselors or financial planners. We never give legal, accounting or tax related advice. We strongly encourage you to consult with your own professional advisors (attorney, accountant, appraiser, Realtor etc.) concerning any transaction involving financing and investments. The opinions and information contained on this page are based on our experience and will apply to many situations. However, any statements or information contained on this page is strictly the opinion of Gerson & Company, Inc. and there may be exceptions, which makes the information inapplicable to your own particular situation. Gerson & Company, Inc. and Michael Gerson will not be held responsible in any way, and will be held harmless from, any decisions made by the reader based on information in this report, which might result in a financial or other type of loss. “Standard & Poor’s”, “S&P”, “S&P500”, “Standard & Poor’s 500” and “500” are trademarks of the McGraw-Hill Companies, Inc. All other copyrights and trademarks are owned by their respective owners.

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