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Understand the Facts Before Paying Off Your Mortgage (Part 1)

August 24, 2018

Many homeowners consider paying off their mortgage a top priority. The general feeling is that by accelerating payments and paying off the mortgage early they improve their financial status by reducing their debt level. Generally speaking, however, this isn't the best option to pursue.

Let's examine why this is the case.

understand the facts before paying off your home mortgage

Every major monetary decision is comprised of two elements. The first element is the emotional response the decision invokes. The second element is the financial impact of the decision and how it will affect cash flow and net worth.

Look at the following comparison:

FINANCIAL SITUATION

A

B

Value of Home (asset)

$200,000

$200,000

Bank Account Balance (asset)

$0

$100,000

Mortgage Balance (liability)

$0

$100,000

NET WORTH (assets - liability)

$200,000

$200,000

Source: PartnersInWealth

Which is more appealing? Many would answer that financial situation A is the more desirable. Money-wise individuals, however, would select situation B. Changing status from scenario B to scenario A would be easy, requiring only a transfer of funds from one's bank to the mortgage company. However, the financially savvy recognize the flexibility offered by situation B. The interest generated by the available $100,000 can be either invested or used to supplement income. When most people think about paying off their mortgage they only consider their liabilities. They fail to take into account the earning potential of their assets. Money not spent to accelerate a mortgage repayment rate can be invested where its earning potential is greater.

This represents the first part of a two-part e-mail. In part two an analysis will be presented comparing the relative benefits of paying down a mortgage with placing the same sum in an investment account each month.

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Filed Under: Building Wealth

Written by PartnersInWealth

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