More proof…that simple trumps complicated.

This is a strategy that will take up to three decades to fully unfold.

That’s o.k.

Regular readers of this column know that increased longevity is in the cards for most of us.

It starts with your first home purchase. Conventional wisdom calls for a thirty-year, fully-amortizing mortgage. Yes, the plain vanilla mortgage is very much back in style, after the disastrous results from negative amortization and other sucker bet loans.

But you want to stand out from the crowd when you submit your application, so ask for a fifteen year fully amortizing loan. This moves you to the head of the borrowing queue.

Right away, you have the lender’s attention. You can knock a full half percent off your loan by your willingness to halve your repayment period.

Let’s Do the Math

On a $250,000 house, plan on the full, traditional 20% down to avoid getting stuck with private or government mortgage insurance. Financing the $200,000 balance at 6.5% over 30 years requires a monthly payment of $1,264, for a total of $455,089 for the full 30 years.

Compare that with $1,688 as the monthly payment on $200,000, now at 6%, paid off in fifteen years.

Yes, you most pony up another $424 per month. But your total outlay for the shorter loan term is now $303,788. You have saved a cool $151,301, by the simple expedient of the forced savings aspect of the reduced loan term.

Here Comes The Twist

After your house is free and clear, do NOT trade in the equity for a larger house.

Instead, move out. Turn it into a rental home. Then buy your next home the same way you bought your first home.

Using yet another 15-year fully-amortizing loan.

Just like the shampoo instructions. Wash…Lather…Rinse…Repeat.

Now, at the end of the thirty years it would normally take to pay off one house, you have paid off two… and for the past fifteen years you’ve enjoyed a passive income from the rental of the first house…not to mention the other tax goodies that come with rental property.

Let’s assume the 2nd house was larger and more expensive, perhaps as your family increased and you continued to advance in your career.

A (Tax) Shelter Over your Head

Finally, after three decades of home ownership, you harvest the best tax shelter going: The ability for a couple to sell their principal residence, and exclude the first $500,000 in gain from all capital gains taxation.

Yes, all that Real Estate PAC loot was money well spent.

And when you decide to sell the 2nd house, give your tenant in the first house notice that you will not roll over the lease. Because you are moving back, downsizing, to the first, smaller home.

Be sure to stay two years in the smaller house, so that you can re-charge your tax exclusion.

Then you can sell the first house and yet again pocket up to a half million free from taxation.

That’s a round million now that has been realized tax free.

I don’t know that I would recommend going to the well and taking out yet another fifteen year loan on house #3.

More than likely, you would by now be deep into retirement.

At this point, I’m not sure I would recommend you buy any green bananas, either.

Posted: 08|14|08 at 6:57 am. Filed under: real estate, retirement, taxes.
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