Given the current market, your mortgage is probably going to be the cheapest money you will ever be able to obtain. So why not use that money to invest and work for you? Most people think about having a mortgage as a risk or expense and want to get rid of it as quickly as possible so they can achieve some unknown mountaintop that comes with being mortgage free. A 30 year mortgage is not your parents’ or your grandparents’ mortgage. The truth of the matter is that a 30 year fixed conventional mortgage cannot fluctuate or be called due by the bank as long as you make your monthly payments and follow the terms of the deed of trust. The bank cannot demand you pay more than your monthly payment, so why not build long-term wealth from the savings you would have put into paying down your mortgage quicker? Ric Edelman is a renowned financial planner who authored “11 Great Reasons to Carry a Big, Long Mortgage” advocating for obtaining the biggest mortgage for as long as possible. As he says, stay away from 15-year mortgages, don’t make any extra payments, and keep the mortgage for the full 30 years.
The money that you put into your mortgage builds equity in owning your home. That’s great, but paying that extra principal does not give you any financial gain. Instead of worrying about paying off your mortgage more quickly, invest that money instead. The great part about mortgage payments is that the interest you pay is tax deductible. In Ric Edelman’s example from his article, a mortgage interest rate of 5% really only costs you 3.35% if you are in the 33% tax bracket. Conversely, if your investment return is 5%, you have a net profit of 4% given capital gains tax of 20%. This means that even if your investment return is the same as your mortgage interest rate, you are still making a profit!
This approach to your mortgage also allows you to build wealth. Even if you could buy a house outright, you shouldn’t. Put down 20% to avoid paying for mortgage insurance and invest the rest. Ric Edelman makes this obvious by asking, “Would you rather invest $240,000 right now as a one-time only deposit or $1,146 a month, every month, for the next 30 years?” The lump sum deposit generates a far greater return than the weekly option.
Don’t stress about paying off your mortgage as quickly as you can. Instead of obtaining equity in your home through your mortgage, focus on using that money to work for you. Homes typically appreciate 3% annually so you are already gaining equity in your home simply by making your monthly payments. There is no need to rush to pay down your mortgage as soon as you can. A mortgage can be your friend, not your enemy. I want you to be in the home that you love without rushing to pay off your mortgage.