Do you currently have a mortgage? Given our economic uncertainty, do you ever wonder if you should be making an effort to pay off the mortgage? What are the pros and cons if you do start making those extra payments? What if you don’t? RB40 recently wrote about this very topic, but as I expected, his perspective was a little bias toward taking on debt. And guess what mine is? You’ve got it, NO DEBT! Let’s take a look at my perspective.
Save on Interest
What is the current interest rate on your mortgage? If you have a 30-year mortgage, you likely have an interest rate over 4%, which means that on a $250,000 loan, you’re paying $180,000 in interest over those 30 years! If you bought your house for $300,000, after the interest, you actually paid $480,000 for it. Good luck selling that for a profit!
Now, the advocate for holding onto your debts will say, “What about inflation? And, what if you invested your money instead of put it toward the mortgage. I could earn more than 4% a year!”
It’s true. On average, the United States experiences between 3% and 4% inflation, which means that our dollar today can only buy about $0.96 worth of stuff next year. If we pay off our house today, we’re paying off our house with a greater valued dollar than in the future, which means that we’re paying more for our house than we should, or so the argument goes. There’s just one problem with the assumptions in this argument…
This argument assumes that if inflation is on the rise, so are our wages. But, last I checked, there weren’t many people getting huge bonuses lately. In fact, you’re lucky if you haven’t experienced a reduction in pay. So what if, in the future, your wages are less and it costs more to buy milk and bread, would that make it easier to pay your house off? I don’t think so!
The other argument against paying off your house is taking the extra money and investing it instead. After all, any shmo can make a 4% return in the market right? I’m not so sure. Tell me this, if you invest your money in the stock market, is it guaranteed to yield a return? After seeing the Dow plummet from $14,000 to $6,500 in 2009, I hope your answer to that is “no”. Investing can be tricky and given the incompitency of our government these days, I’d say that the overall market could crumble at any moment.
Also, if someone decided to invest instead of put extra cash toward their mortgage, what are the odds that all of the money would actually go toward an investment (a real investment)? I’d say that 95% of the time, the money would find its way into a depreciating asset. Something like a better car, a boat, or maybe even a small cabin. Investing is not very exciting, so it often takes a backseat to the “big-boy” toys. It’s best just to put the money toward the mortgage. At least then you know you’re saving thousands of dollars in interest.
The Mortgage Tax Deduction
I have to say that I actually get upset with people when they mention the “mortgage tax deduction”. Somehow we have been so brainwashed to think that having a big debt is a good thing because we’re getting a reimbursement on the interest that we pay. Some people actually keep their mortgage just so they can keep getting this deduction. Do you know how ludicrous that is?! If I told you that for every $100 you gave me, I’d give you $20, would you keep giving me $100? Of course not! But this is the logic of many when it comes to the tax deduction. If you pay off your mortgage, you stop giving away your $100. It stays in your pocket. I’d much rather have that scenario.
I think one of the strongest arguments against agressively paying down your mortgage is regarding cash flow. If you put most of your resources toward your house mortgage, you won’t have much cash left for other investments, which means that you’re not diversifying. Sounds kind of bad doesn’t it? But what happens to those that are diversifying their investments? For those that invest in real estate and have mortgages on each of their investments, they may have a positive cashflow but their debt load could easily be a million bucks! If a couple investments don’t work out, they could be in big trouble! With greater debt comes greater risks.
But, what if you could pay off your house in a very short time frame (less than 5 years)? Then you’d have an entire mortgage payment at your disposal each month. You’d quickly be able to save up a sizeable chunk of change to invest, and then with an increased cash flow and no debt, you’d be able to save up an even greater amount, and so on and so forth. All with virtually no risk! This method might not make you a billionaire, but it could easily give you a retirement fund of $10 million, and I would hope that that would be enough for you! 😉
Peace of Mind, No Risk
I’m obviously risk averse, which means that I loathe debt. Hate it with a passion. Just the very idea that I could lose my job tomorrow and have the bank foreclose on my house makes me want to pay it off today (if possible). Given the current economy, my job could really be gone at any moment. You just never know! If my house were paid off, then at least I would know that it was 100% mine and I’d have a guaranteed place to lay my head at night. There are far too many people that have lost their homes for me to think that I can play the game of the 30 year mortgage. There are just way to many things that could happen in those 30 years.
For me, I have a plan to pay my house off in the next 2 years. After that, I’ll have plenty of cash flow to invest in a rental property. Once that’s paid off (in a little less than 2 years), I can do it again…and again…and again. And with each property, my cash flow will continually increase, until it just takes off exponentially. I’m ok with this plan. How about you?
Are you trying to put extra cash toward your mortgage? Why or why not?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.