Last week Doug and I presented a tele-seminar entitled "5 Steps to Financial Freedom." At the end of our presentation, we had a great question and answer session. Over the next several weeks, we would like to share some of the questions and answers with you.
QUESTION: So, if you have saved the equity you borrowed from your house in an "offset account" and then pay off your mortgage upon retirement, the benefit is the growth in your offset account which is what remains after your mortgage payoff? Is that correct?
ANSWER: This is a great question with multiple layers. The answer to the direct question is, "yes." If you borrow money from your mortgage and invest it in an offset account, one of the major benefits to you is that this offset account will grow faster than you would have been able to pay off your mortgage. If and when you decide to pay off your mortgage, you would have this remainder available to use to meet your needs.
Another benefit to this strategy is that it allows you to maximize and then maintain the mortgage interest deduction on your home loan. When you consider a loan of $300,000 at 6% generates an $18,000 write off, you can see how large a benefit this is. Assuming the taxpayer is in an effective 25% combined federal and state tax bracket, the savings would amount to $4,500 annually versus someone who aggressively paid off their mortgage and eliminated this write off.
Lastly, the question doesn’t account for the fact that we are often able to increase a homeowner’s cash flow by $500 to $2,000 per month by eliminating debts and selecting the ideal loan program to match the borrower’s needs. When this savings is conserved and not consumed, the monthly savings compounds quickly and steadily over time to create an even greater sum left over after paying off the mortgage.
I also would like you to consider one final thought. Most people plan on eliminating their mortgage before or upon retirement because they believe their taxable income will decrease to a point where there is little or no need for tax advantages. The reality is that most seniors continue to pay significant taxes in retirement and often find themselves in need of tax shelters. If you have been following a Freedom Plan and growing your offset account for 10 or 15 years, I would be willing to bet you will be comfortable continuing to let the account grow into retirement while you enjoy the ongoing growth of your nest egg.
If you missed the Making Money University Tele-seminar "5 Steps to Financial Freedom," I invite you to listen to the recording available at http://www.dougfabian.com/radio/5steps.jsp.
At the end of the recording, you will find out how you can receive several valuable tools absolutely free of charge. You also can contact me directly at email@example.com or by phone at 888-944-JOSH (5674), with any questions regarding your "Freedom Point" or anything else mortgage or real estate-related.