The common wisdom of debt elimination is that the key to wealth is getting out of a mortgage. During that process, you not only reduce the money that you owe but you also start building up equity. Instead of simply waiting for a mortgage to be gone before using that equity, though, you can accelerate your earnings through debt recycling.
What is Debt Recycling?
As one might expect from the term, this sort of wealth generation relies on re-using one’s debt. Instead of merely paying off what one owes, it is a process of turning one’s unusable (bad) debt to usable (good) debt. It is a circle of payment and borrowing that helps an individual to get rid of a mortgage while still focusing on wealth generation. All you need is a home loan and equity.
This tax effective wealth generation method is actually quite simple.
Most people think that a major focus of getting out of debt is paying down their mortgage. While doing so, most people build up a great deal of equity – an amount of money which can be borrowed against. In the case of debt recycling, one borrows an amount equal to the equity in the home, and then uses that money for investment purposes.
The individual will then take the money earned off of those investments, pay down the mortgage, and take out another loan equal to the amount of equity now in the home.
By going through this circular motion, the individual in question quickly pays off his or her mortgage and accumulates debt he or she can use on the market. Wealth generated this way is far more tax effective, and allows for movement out of debt more quickly. There are, however, pros and cons to the process which must be considered before entering into a debt recycling process.
The biggest advantage to this strategy is that it allows an individual to begin long-term investing processes before one’s home is paid off.
- This means that wealth generation increases early on, and that most investors can see greater growth before retirement.
- It is also important to note, though, that recycling is a tax effective strategy – while your mortgage is not deductible, the debt you accrue in this method may be deducted. This allows for more money flow back into paying off the mortgage, and thus more money to be used for future investment purposes.
- Finally, this recycling strategy does something important for homeowners – it liquidates their equity, putting into play money they actually have without requiring them to sell their homes.
It should go without saying that there’s no such thing as a perfect method of wealth generation, and debt recycling certainly has its disadvantages.
- First and foremost, it does require you to take on another loan on top of your mortgage – those without stable employment or who are going through major life changes may not be able to shoulder the burdens of paying both a mortgage payment and the interest payments on the recycling plan.
- There is also no guarantee that the money that you invest in the stock market will actually pay out – a bad investment could leave you holding the bag on two loans, with precious little to show for it.
- Recycling can be a risky proposition if you don’t have the right investments or if you suddenly find yourself without a reasonable cash flow.
Is Debt Recycling Worth The Risk?
For many, the answer is a resounding yes. It’s a tax effective wealth generator, and a good way to put the equity in your home to work. If you are willing to take a small gamble, you can pay off your mortgage far more quickly than you may have anticipated and start making money for the future.
If you’re looking for a way to make money today, the best thing that you can do is put the money you already have invested in your home to work for you.