Borrow Wisely, Build Wealth

By Don Stephenson 

Let’s explore the importance of managing debts and real estate equity by reviewing the advantages: liquidity, safety, return-on investment and tax benefits.

Investment advisers address these same criteria when they counsel clients on investment opportunities.

Real estate equity is usually not considered liquidity. Yet, liquidity is important to guard against financial setbacks, and stock markets and real estate markets can change overnight catching us off guard.

We need cash reserves that we can access to ride out short-term problems. And down markets bring buying opportunities—wealth building—to those with knowledge and liquidity.

Refinancing a property is always an option, and a cashout refinance can increase liquidity, provide investment possibilities and potentially increase cash flow.

A home fully mortgaged provides the greatest level of safety.

Our level of safety of principal decreases when we keep equity tied up in a property. In a soft real estate market, property values may drop, and this decrease in value comes off our equity, not off the mortgage balance.

Therefore it is often better to pull some equity out and invest in a liquid investment fund.

Then, if the real estate market values fall, we would control due to our pool of cash.


Equity grows as a function of real estate appreciation and mortgage reductions. With all our investments, we desire some reasonable rate of return. Equity in one’s property is often called dead equity because it does not produce a rate of return.

When we put extra cash into our properties such as paying down principal, we give up the opportunity to earn a rate of return on that money. This can dramatically affect our ability to build wealth.

Separating equity from our real estate and investing it in an asset-accumulation account increases the number of assets we own.


Mortgage interest is Uncle Sam’s way of partnering with us to accumulate wealth. Having mortgages on primary and second homes allows us to itemize and write off mortgage-interest expenses up to a $1 million loan amount.

Investment properties are governed by passive income rules, and investors may be able to use real estate losses to shelter other income. Mortgage interest and depreciation reduce net operating income thereby reducing taxes.

For example, a $10,000 primary property interest expense deduction on Schedule A of our 1040 tax returns can save us $3,400 in taxes assuming a 34 percent combined federal/state tax level. If we have no mort­gage or have a small mortgage balance, we will miss out on this annual tax benefit.

Another tax benefit occurs when the net cost of borrowing after taxes is less than the after-tax rate of return, called arbitrage. The difference is the profit you earn and keep by using borrowed funds.

— About the Author —

Don Stephenson is a mortgage loan consultant with American Home Mortgage and may be reached at 843-842-2531, ext. 107, and at or

Visit Mr. Stephenson's website at

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