A mortgage is a powerful tool that can work to help you achieve your goals. Used correctly, it can be a financial ally that will help you build wealth. The scenario below illustrates the powerful effect that proper mortgage planning can have on your personal wealth accumulation.

Plan A: Mr. John Doe is working hard to save, however a significant amount of money is used to pay the mortgage and credit cards. Anything left over is put toward mortgage principal to reduce the length of the mortgage. We will assume the mortgage is paid within 30 years.

Plan B: Mr. Doe uses their mortgage to retire consumer obligations and increase investments. In conjunction with professional financial advice, he uses $25,000 of equity to increase investment accounts. In subsequent years the client invests a small lump sum of equity every five years while continuing to invest a small monthly amount. The client is able to leverage the equity in the home, while still being able to payoff the mortgage in 30 years.

If Mr. Doe continues with Plan A, his current mode of operation, he will have a house that is paid off and they will have $961,869.97 for retirement. While this seems like a large sum, it is probably not nearly enough to allow this person to have a comfortable retirement over a 20-30 period considering what inflation can do to the purchasing power over that time. With a 7% return on investment in retirement, $961,869 will provide a monthly income of $5,610.91. Considering the fact that this is 30 years in the future, this would be the equivalent of $2,151.12 in today's dollars assuming a 3.2% rate of inflation.

If this individual implements proper home equity management strategies to get the dead equity in their home working for him, he can create a completely different financial picture. In fact, by investing a lump sum of $25,000 every five years through the age of 60 and by investing the $42,194.81 in payment savings over the first five years of the new mortgage and by increasing the average monthly investment from $250 to $500, he will have $3,168,583.75 by the age of 65. Using the same 7% return on investment in retirement, his monthly income will now be $18,483.41 without ever having to access the principal portion of his investments. In this scenario, the mortgage will not be paid off, but he will have a great income that will easily handle a mortgage payment which will provide him with a tax deduction as a side benefit. Certainly he would have the ability to pay the mortgage off if he wanted to but then he would have money that could be creating more wealth tied up in an asset that is not liquid.

Finally, if Mr. Doe takes advantage of leverage by investing in real estate, he may very likely get a much better return on investment than 10%. Assuming that he gets just 2.5% better on his return annually for his new investments, he would have $5,020,528.38 at the age of 65. This means that his retirement income based on a 7% return on investment in retirement would be $29,286.42. Again, with this much wealth, Mr. Doe could certainly choose to pay his house off or he could continue to grow his wealth to be able to help out his children, contribute to charities, and so on.

You don't have to be relegated to a low income in retirement if you own a home and have equity. As in the example above, if you invest wisely and have a decent time period (10 or more years) until you retire, it is possible to create substantial wealth.