A few months ago I wrote the article 'Equity Harvesting & Cash Value Life Insurance!' In the article we discussed some of the most frequently asked questions about Equity Harvesting. Questions like: "Does Equity Harvesting really work?" "Is Equity Harvesting Truly In Your Best Interest?" "Is Equity Harvesting Just a Scam to Sell Cash Value Life Insurance and Make Higher Commissions?" "What Happens When The Mortgage Interest Rates Rise?"  I also stated in the article that… "Equity Harvesting, when done properly, is truly an invaluable financial concept when it comes to accumulating wealth."

Obviously, I'm a great believer in Equity Harvesting... When it is done properly! I have been using and teaching the concept for 25 years. The problem is that most agents, advisors and planners are not being taught the right ways to use it! And, it's now coming back to haunt them! Insurance companies are starting to receive complaints from policy owners who have been using the concept for three or more years. Many of these insurance companies have been compelled to put serious restrictions on the use of equity harvesting to avoid future law suites! Midland National won't accept any business where 'Equity Harvesting' is involved. Aviva won't accept business that involves refinancing, unless the client meets certain financial strength. 

The Wrong Ways to Use Equity Harvesting
One of the biggest problems with  harvesting home equity appears to be the improper use of 'Option ARM' loans! In their effort to make as much money as they can from each client, many agents are focusing exclusively on using the minimum payment of the Option ARM. Their goal is to remove as much home equity as possible, to invest in cash value life insurance. And, they are neglecting to mention the future implications.

Many of the people, who have followed the advice of these agents, are now facing serious financial problems. Their minimum monthly mortgage payments, with the 'Option ARM' loans, have been increasing each year. Plus, in the past year, the values of homes have leveled off, and in some cases have declined. The 'deferred interest' they have been accumulating, with the 'Option ARM' loan, means they now owe more on the home than it is worth. These 'Option ARM' loans require that at the end of five years the borrower must either refinance their home, or start paying a 'normal' mortgage payment based on the higher loan balance they now have. In many cases these 'normal' mortgage payments will be more than double what they were paying.

Now these people have a serious problem. They owe more on the home than it's worth! They can't refinance their mortgage. And, because they were advised to remove as much home equity as possible, in many cases, they are already paying the maximum mortgage payment they can afford. So, if refinancing isn't possible, where do they come up with additional money they need for the 'normal' mortgage payment, on a higher loan balance? They are in real jeopardy of losing their home!

If they want to keep their home, they are being forced to dig deep into the cash values of their new life insurance policy. However, because their policy is new, there is very little cash in the early years that they can use, without completely destroying the policy.  They are now in a worse position then when they started!

The Right Ways to Use Equity Harvesting
In my 25 years of using the 'Equity Harvesting' concept I have never recommended, or used the 'Option ARM' loan with a client. My sons and I do use the 'Option ARM' loans for our personal situations. Using the 'Option ARM' does allow you to free up the most equity and the most monthly income, but it does involve some risks, as mentioned above.
We believe that the 'Option ARM' loan should only be used if each month you save the difference between the minimum mortgage payment and 'normal' mortgage payment.

Why aren't we using the 'Option Arm' loans with our clients?
The biggest reason we aren't using the 'Option ARM' loan with our clients, is we believe they are just too risky for most people in the Middle Income Market! There are many unexpected financial challenges we face in our lives; medical bills, a new roof, car accidents, floods, tornados, layoffs, and the list goes on and on.

Plus, the 'Option ARM' loans are complicated, and are uncomfortable for most people. And, they can be expensive. (Refinancing costs, closing costs, etc.)

Then there are the questions about the deductibility of mortgage interest when you refinance to put home equity into a life insurance policy.

In most cases you can accomplish many of the same financial goals, without using an 'Option ARM' loan. You can reduce and/or eliminate consumer debt, free up money for savings, establish and emergency fund, and increase life style income.

Consider, if you use a Home Equity Line Of Credit (HELOC) you can "Harvest Equity" to pay-off credit cards, car loans and other debts. You can normally do this without paying any refinancing costs. Now you have freed up the monthly payments they were making for those loans.

Example: Your clients are currently spending $800 per month for $30,000 of debt. If you use a HELOC to borrow $30,000, at 8% it will cost them $200 per month. You have just freed up $600 per month that your client can now put into savings. ($800-$200) If they can average 7.0% on that savings in 20 years they will have $306, 244; and in 30 years they will have $705,639.

The biggest advantages are your clients are not locked into an $800 per month payment, and they can legally write off the mortgage interest on their income taxes (Up to $100,000)

Plus, it is simple and it is easy for clients to understand.

Now couple that with our other 'Found Money Management™' concepts to free up more money and you've significantly helped these people, without causing them to take unnecessary risks. It's just smart money management.