At first thought, it would seem to make sense – why not have your house free and clear and have no house payments in retirement? If you ask three CPAs and financial planners, you will probably hear three different suggestions. It is important to think about your plan as early in your life as possible. To help you make that decision when you are working with your financial professionals, here are a few items for discussion.

First, if you can go ahead and pay off your mortgage, think about where those funds are located now and what they are earning. Then you need to look at what the interest rate is on the mortgage and consider the deductibility of that interest. If your funds are earning 6%, and the interest rate on the mortgage is 5% and is deductible, it would likely be best to just leave things as they are. However, likely, you are also paying taxes on the 6% return. This is where you need to sit down and analyze the numbers with your financial professionals.

If you have a free and clear home in retirement, the value will likely continue to appreciate over time, based on history. However, all the equity you have in the home is providing zero return. It is just sitting there! This is very confusing because most people believe that the rising price of homes is giving you a return on your equity. Now you shouldn’t secure a loan on all your equity and invest in the latest stock tip, but you can invest that equity in relatively safe places. 

One possibility to check into

If you borrow against your home, the interest is usually deductible. Plus, it is simple interest with the loan declining each month. If it is deductible, the effective interest rate is less than the face rate. When equity is pulled out and that cash is invested, you invest in something that earns compound interest, the opposite of simple interest. To maximize your return on your equity, you want to invest in something that earns compound interest, inside of a tax-favored environment. Then the growth potential is incredible! Combine all those factors and you have activated equity at an increased growth velocity.

So how do you combine all factors to optimize your return on equity?

The answer is what my financial planner has coined OUR Plan. The “OUR” stands for Optimized Universal Life Insurance Supplemental Retirement Plan. This amounts to investing within a life insurance policy! Your age and insurability will affect whether or not this will work for you.

Advantages of “OUR Plan”

*This plan involves the purchase of a life insurance policy so you will get a life insurance protection death benefit.  

*Your financial planner invests the cash value of your policy where your investment grows tax-free within the life insurance policy.

*You can withdraw without tax burden up to the original dollar investment OR Withdraw tax-free with a policy loan!

You may want to pose the question about this idea to your financial professionals and see if it is right for you.

 Another option to consider in retirement is a reverse mortgage instead of a “forward” mortgage

Reverse mortgages got a bit of a bad rap in the past. They are no longer the loan of “last resort” but now a financial tool to be considered.

A reverse mortgage can be secured by your present home, but it can even be used for the purchase of a different home. A reverse mortgage might help you stay in your home longer or you could sell your larger home and downsize, using a reverse mortgage to buy your next home.

Other benefits of a reverse mortgage include:

• Loan proceeds are not considered income and are not taxable. It may make the difference as to whether or not a retiree can stay in their home by enabling the retiree to get a monthly income rather than make payments. 

• The payments made to the retiree are not taxable.

• If there is an existing loan, it can be paid off from the initial proceeds of the reverse mortgage.

• The formula for the reverse mortgage prevents the mortgage from exceeding the value of the home. When the retiree dies, the estate inherits the home and any equity after the reverse mortgage is paid off.

• There are no restrictions on what the proceeds of the reverse mortgage can be used for.

• A reverse mortgage is a non-recourse loan. 

 Your financial professionals can help you decide if you want your mortgage loan paid off at retirement or if any of these other ideas work for you.

By Duane Duggan. Duane graduated with a business degree and a major in real estate from the University of Colorado in 1978. He has been a Realtor^® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by  RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail Duane at duaneduggan@boulderco.com, call 303.441.5611 or visit BoulderPropertyNetwork.com.