Now that we better understand the advantages of equity extraction and investment, the next step is to explore specific methods of putting your cash to work for you. Again, these options are not for everyone, and they may not even be available to homeowners who have poor credit ratings or excessive outstanding debt. In fact, many mortgage experts recommend against withdrawing equity unless you have first assembled a management team to oversee its investment – and until you have fully committed yourself to exercise the financial discipline necessary to reap the long-term rewards.

If you have done these two things, and you qualify, then here’s how to put equity management to work for you:

1. Generally, the greater your income and assets – and the higher your credit rating – the more mortgage options there are available to you. The best of these options for investment purposes are known as “interest-only” (or “principal-optional”) mortgages that require little or no money down. In other words, not only will you preserve equity at closing, but you will also vastly reduce your monthly payment on such a loan for the simple fact that you will no longer be making amortized principal payments.

2. This creates immediate liquidity for investment and preserves the greatest possible income tax deductions on mortgage interest because you will not be reducing the principal amount of the loan. Put differently, instead of investing your cash in idle principal payments, you can be investing it in tax-free or tax-deferred interest-bearing funds whose rate of return may outpace the interest rate paid on your mortgage, enabling you to effectively out earn your debt.

If you already have substantial equity in your home, it can be accessed through a variety of means – most commonly through a home improvement loan or simple “cash-out refinance”mortgage. Again, the object is to extract cash for investment purposes while boosting the outstanding principal to create enhanced tax deductions. The difference between the nominal mortgage interest rate (plus any refinancing charges), and the superior rate of return on prudent investment funds, combined with your annual tax refund on interest deductions will be your new annual yield. When managed wisely in tax-deferred or tax-exempt investment funds, overall rates of return in the range of 8-10% are not uncommon – which is generally much higher than the interest rate on your mortgage. Better yet, your equity is now safe, growing and liquid in the event of an emergency. The critical component to realizing these gains, however, is to establish a systematic approach to capturing and automatically investing these savings (including your annual income tax rebate) in secure instruments. Responsible mortgage counselors warn that even the most disciplined consumer can be overwhelmed by sudden access to so much cash, or tempted to gamble on volatile financial vehicles like stocks in an attempt to “get rich quick” by “betting the farm.” This is why it is so vitally important to have a trusted financial adviser and an accountant to manage your investment program.

Generally, experts recommend that liquid equity be disbursed in the following order of priority: pay off any “regressive” high-interest debt like credit cards, car payments, or student loans that eat away at disposable household income; fully fund any “tax-protected” accounts you may own, such as 401(k)s, IRAs, Keogh accounts, or state-run tuition investment mutual funds up to the maximum allowed; “store” any balance in a conservative, interest-bearing instrument like a universal whole life insurance policy that is liquid in the event of emergencies.

Again, creating the right investment plan has to be a tailored exercise – a trusted financial adviser and your accountant should discuss your willingness to bear risk, your age, income level, and any other investments you may currently own. There is no one-size-fits-all approach to equity extraction and management. But if done wisely, a world of long-term financial gains can be realize.

My team creates customized financial strategies to help you achieve your long term goals. Give me a call today at 302-703-0727 to discuss your financial needs.

If you would like to apply for a Delaware Home Loan, you can APPLY ONLINE HERE, you can call John R. Thomas at 302-703-0727.

John R. Thomas – NMLS 38783

Certified Mortgage Planner – Primary Residential Mortgage, Inc.

302-703-0727 DE Office / 610-906-3109 PA Office / 410-412-3319 MD Office

248 E Chestnut Hill Rd, Newark, DE 19713