UNLOCKING HOME EQUITY
How it works: “We analyze the equity in a client’s home,” says Lois Basil of Basil Financial Group. “If it is less than 50% leveraged, we recommend thinking of ways to unlock that real estate equity. This approach is markedly different than what is in the financial press, where the advice often is to prioritize paying off your mortgage. “While not having a mortgage may make sense for some people, we have found that always having a mortgage is a sound and tax efficient strategy,” Basil says.
“Our goal when working with clients is to minimize their tax liability. People often misunderstand that much of their income in retirement is taxed at ordinary income rates. We want to work to make sure our clients are taking advantage of every available deduction to reduce their taxable income.”
For example, Basil Financial Group will even recommend 30-year mortgages for 80-year-old clients. “Their retirement income is still being taxed at ordinary income rates, and we want them to keep more of their money,” Basil says.
Upside: The strategy reduces taxable income. For most clients, their home is their largest asset. “Having your house illiquid does not pay for health care, does not fund education and doesn’t buy groceries,” Basil says. What’s more, mortgage interest rates are declining after a postelection spike.
Risks: There might not be enough income to pay the mortgage. It’s also possible the value of the real estate will go down, property taxes will rise and unexpectedly large home-improvement repairs will be needed. “The biggest problem we have with this strategy is overcoming clients’ objections based on the psychological freedom they have that comes from not having a mortgage,” Basil says. “Sometimes, emotions can’t trump a sound financial rationale.”