Mortgages dominate Utah’s debt, with an average of $61,120, making up 77.1% of overall debt. And it’s understandable, considering Utah’s rising house costs.
However, while debt often carries a negative connotation, the right mortgage strategy can be a powerful wealth-building tool. There’s a reason high-net-worth individuals (HNWIs) aren’t in a rush to pay off their mortgage, even if they can afford it easily.
Choosing the right plan lets you turn your mortgage into an asset that grows your financial portfolio over time. This article highlights mortgage strategies recommended by financial planners that can help you maximize returns and build wealth with confidence.
How High-Net-Worth Individuals Use Mortgages to Build Wealth
HNWIs don’t just see mortgages as a necessary debt—they see them as strategic tools to grow wealth. By making smart decisions with their mortgage plans, they leverage debt to their advantage. Here’s a breakdown of key strategies they use and how you can apply them to your finances.
1. Choose the right mortgage type from the start
As a way of building wealth, you must select the right type of mortgage for your financial goals. There are several options to consider, each with unique benefits depending on your situation.
Fixed vs. adjustable-rate mortgage (ARM)
A fixed-rate mortgage locks in a consistent interest rate for the entire term, offering stability and predictability. It’s ideal if you plan to stay in your home long-term. On the other hand, an ARM starts with a lower interest rate that adjusts after a certain period. This can be advantageous if you expect to sell or refinance before the rate changes, giving you initial savings.
Interest-only mortgage
As its name implies, an interest-only mortgage entails making payments toward the interest for a set period (typically 5–10 years) for lower monthly payments initially. However, your payments will increase once the interest-only period ends.
This loan type can free up cash for investments or other financial goals. It works best if you expect a significant income raise or plan to sell the property before the higher payments begin.
Balloon mortgage for investors
A balloon mortgage involves making smaller payments during the loan term with the “balloon” (a large lump sum) due at the end. This mortgage is often used by real estate investors who plan to sell or refinance before the lump sum is due, allowing them to make smaller payments upfront while maximizing their cash flow.
2. Make lump sum payments
Another wealth-building strategy is making lump sum payments on your mortgage when you can. By putting extra money—such as from a bonus, inheritance, or tax refund—toward the principal loan, you reduce the amount of interest you’ll pay over time.
Even a single large payment can knock years off your mortgage, freeing up funds for other investment assets or financial goals sooner than you anticipated.
3. Try recasting your mortgage
You can take your lump sum payments a step further if your lender allows for mortgage recasting. It allows you to pay a large amount toward your principal balance and have your lender recalculate your monthly payments based on the lower balance. This strategy keeps your loan term the same but lowers your costs.
It’s an excellent option for reducing monthly expenses without going through a full refinance, which can involve higher fees. For example, if you receive a windfall of cash, recasting could reduce your monthly mortgage payment while allowing you to stay on track with your financial plans.
4. Take advantage of tax benefits
One of the most significant advantages of mortgages is the ability to deduct mortgage interest on taxes of higher-income earners like yourself. If you itemize deductions, you can reduce your taxable income by the amount of interest paid on your mortgage.
For instance, if you pay $10,000 in mortgage interest yearly and fall into the 24% federal tax bracket, you could reduce your tax bill by $2,400. Over time, those added savings allow you to reinvest in other areas of your portfolio.
5. Understand the principal resident exclusion rule
If you sell your home and it’s your primary residence, the principal residence exclusion rule allows you to remove up to $250,000 in capital gains from the sale ($500,000 if married and filing jointly).
This rule allows you to buy, live in, and then sell properties to keep more of your profits, turning real estate into a key wealth-building tool. However, you must have lived in the property as your primary residence for at least two out of the five years before the sale.
Imagine buying a home, living in it for a few years, selling it for a significant profit, and keeping that profit tax-free. Over multiple properties, this can greatly boost your wealth.
However, keep in mind that the exclusion can only be used once every two years and that gains above the exclusion threshold will still be subject to capital gains tax.
6. Always keep your debt-to-income ratio in mind
Even if you’re using your mortgage as a strategic financial tool, it’s critical to keep an eye on your debt-to-income (DTI) ratio. This ratio compares your monthly payments to how much you earn and is a key factor in determining your ability to take on more debt.
HNWIs often aim to keep their DTI below 36%, meaning no more than 36% of your income should go toward debt payments. A lower DTI not only gives you more borrowing power but also increases your financial flexibility for other investments.
7. Consult with a financial advisor
Lastly, while these strategies can help you build wealth, it’s important to consult with a financial advisor before making any major decisions. Mortgage strategies aren’t one-size-fits-all, and an advisor can help customize a plan based on your financial goals, risk tolerance, and current market conditions.
They can also guide you on how to balance mortgage payments with other investment opportunities, ensuring that your entire portfolio collectively grows your wealth.
Transform Debt Into Opportunity
Mortgage strategies can turn a home loan into a powerful financial tool. However, real estate isn’t just an investment; it’s often your family’s home and source of security. That’s why it’s crucial not to take risky gambles.
Financial advisory services can minimize these risks while gaining substantial benefits, ensuring you make the best decisions for your future.
Tencap Wealth Coaching is a team of financial planners led by the firm’s founder, Greg Black who is a Certified Financial Planner® based in Utah that offers personalized financial guidance, helping you navigate complex mortgage decisions, optimize investments, and build long-term wealth. Contact us to learn more!
Nick Carrigan
Nick trains and develops families in creating, maintaining, and growing wealth. This includes educating clients on the science and academics of investing, comprehensive financial planning, and ongoing coaching to ensure discipline for a lifetime. Nick has seen this create incredible levels of freedom, fulfillment, and love for the families he works with.
