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I promised a book review and here it is. I suggest you read it and give us your impressions. I think it makes a lot of good points.

Book review of *Missed Fortune* by Douglas Andrew:

This is a very extensive book on wealth accumulation at 500+ pages. It's not boring and I especially liked the early sections which talk about taking the equity out of your home.

I'm retired and have always thought that having a mortgage was a good thing. I've been a team leader for several Motley Fool retirement seminars and I always try to get that point across. In retirement, you have income in the form of a pension (perhaps), social security, and the rest comes from your nest egg. If you have a net worth of, say, $1 million and 30% of it is your paid off house, that's not doing you much good.

In this book, Mr. Andrew stresses (and I agree) that your assets should be:

1. liquid
2. safe
3. earning a reasonable rate of return
4. tax advantaged

Having $300,000 equity in a paid off house doesn't meet any of these. And, as the author points out, a house will appreciate at the same rate with no mortgage as with a large mortgage.

I quote the author: “Equity in your home does not enhance your net worth at all. Separated from your home, however, it has the ability to dramatically enhance your net worth over time.”

So he spends the first 200+ pages convincing the reader that having a large mortgage is a good thing if you can put the money to use in a tax free vehicle. Because the mortgage interest is tax deductible, an 8% (the numbers he uses which shows the book was written a couple of years ago) mortgage is really, after the tax break, a 5.28% loan if you're in the 34% tax bracket (combined state and federal).

If you can put the money to work in an 8% tax-free account, you're making money. Enough to pay the mortgage and have some left over. And of course, he has charts to show this year by year.

So what is this tax-free investment that makes 8%? Something called “Universal life insurance”. Apparently, you buy it with after-tax money, like the equity you've gotten out of your home via refinancing, the value accrues tax deferred, and you withdraw money by means of loans, which are tax free and don't need to be paid back. The amount of the loans simply reduces the death benefit of the policy which is not the primary reason we bought this policy anyway. And the cost of the loan interest, can be absorbed by the policy.

The author goes into quite a bit of detail to point out the tax implications of this approach and how certain federal guidelines must be met to qualify. This includes the way the life insurance is purchased which must be over a 5 year period, etc. But it sounds doable although fairly complicated. You have to know what you're doing.

And of course, one has to find the proper life insurance policy. One that will pay an interest rate which is better than your after-tax mortgage rate. A quick search on “Universal Life Insurance” got me to a State Farm site. They have a universal life policy that pays 5% presently with a guaranteed 4%. Not bad, considering my mortgage is 5.75% and the interest on it tax deductible.

So the main concern in all of this might be your cash flow. You're making money in one bucket but paying off a big mortgage out of another. Of the many, many examples he gives, several are say, a middle-aged couple paying into a 401K plan, with a house that's appreciated since they bought it, and perhaps a car loan they're paying off at 12%.

Typically, he can show a scenario where they re-mortgage the house to get out the increased equity, stop with the 401K plan, pay off the car loan, and put the money into the universal life policy.

Because of the higher mortgage, they get the same tax deductions as before, trading mortgage interest deductions for 401K contributions. The universal life policy is funded at perhaps $100,000, the amount their house has appreciated, the car loan is paid off, and the new, higher mortgage is being paid with money that would have gone into the 401K plus the money going into the car loan.

And the best part of all this is that in 20 or 30 years, the money can be accessed tax FREE whereas money out of the 401K will be taxed as normal income. If you're in the 30% bracket, you'll have 30% more cash to play with.

Everyone's situation is different but basically, if you can take equity out of your house at one interest rate and put the money into an investment at a higher rate (because of the tax break on the mortgage interest) and then at retirement access the money tax free rather than paying taxes on it as with a 401K, it's a good deal.

I'd recommend reading the book. And before jumping in, I'd make sure I knew all the answers about all of this.


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