Good Reasons to Pay Off Your Mortgage
- Wednesday, March 20, 2013
I’ve heard of mortgage burning parties but would categorize them along with the Pony Express and covered wagons. Things from a bygone era.
There was a time when mortgage burning parties were common. It was like putting the cherry on top of the American Dream. And this burning thing was not figurative.
Once that last house payment was made, the mortgage company would send the paper document back to the borrower stamped, “Paid in Full.” This would be such a cause for celebration, the new homeowners would invite everyone over to watch them set it on fire, all the while cheering while it went up in smoke.
Things have changed, especially in recent years as mortgage rates have dropped so low. There are some financial advisors who actually advise their clients to not pay off their mortgages, and invest the money instead to build greater wealth. Of course, this action provides a healthy income for the advisor who collects commissions when a client takes that advice.
You may be tempted to follow that advice, refinancing and stringing out your mortgage for as long as possible—even well into your retirement years—while you try to eke out a higher return on your investments.
Before you decide to stick with minimum payments, consider the following benefits of having no mortgage payments by the time you reach retirement:
Risk-free, guaranteed, high-yield investment
Show me any investment advisor who can offer you an investment that is risk-free, guaranteed and returns a high yield. Well, I can.
First, let’s agree that there are only two ways to increase your net worth: Increase assets or decrease liabilities. If you have debt, your net worth will increase at the very same rate if you increase your assets or decrease your liabilities.
Let’s say you receive a $1,000 bonus with which you buy shares in a mutual fund. Your net worth increases by $1,000. If instead you repay $1,000 of debt, your net worth still increases by $1,000.
Using the example above, let’s say you bought ABC stock instead of paying off $1,000 of debt. Next month the stock drops by 50 percent. Now your stock is worth $500. But if you would have paid off debt with that $1,000 and ABC stock tanks, it does not affect your net worth at all. That $1,000 “investment” in your debt increased your net worth without any risk.
High-rate of return.
Investing in your debt pays you a guaranteed rate of interest equal to the amount of the interest you were paying on the debt. Really!
If your mortgage is subject to 5 percent interest, every dollar of principal you pay off means you won’t have to pay interest on it next month. You get to keep the 5 percent you would have paid. That’s your return on investment. Once you pay off your mortgage, the money you are not paying out in interest on it every month is the return you get for investing in your debt.
If you have an extra dollar, you can invest it in your debt. Not true of investing in the stock market. It’s not unusual for a mutual fund to require an initial purchase of $1,000 or more.
Every dollar you invest in your mortgage puts you that much closer to owning your home free and clear. Once paid, it’s yours no matter what happens to the economy or the stock market.
Peace of mind
Once you eliminate your mortgage, you are able to live “rent-free.” You have just eliminated your biggest monthly bill. You also don’t need to agonize about whether your investments are outperforming the interest you are paying. Owning your house free and clear reduces a huge amount of stress, which is why you want to make sure you do this before you retire—the season of your life when you need to experience true peace of mind!
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