Part one of this two-part message addressed the fact that paying off one's mortgage is often an emotional decision that does not always make financial sense. Many homeowners are driven by the allure of not having to make mortgage payments. The thought of not owing anyone money and not having to pay interest is appealing to most people. However, in order to make an intelligent decision it is necessary to evaluate the earning potential of the same amount of money if it were invested instead of used to accelerate a mortgage reduction.
For example, assume that a homeowner has a $100,000 mortgage at a 4% interest rate. Each year the privilege of having a mortgage cost the homeowner $4,000. If, however, the homeowner has $100,000 invested at 6%, they earn $6,000 per year. Each year the homeowner is ahead $2,000. The same concept can be applied to each incremental payment that is made toward the mortgage. Why pay extra money toward a low cost mortgage, when it could be placed in a higher earning investment?
Consider the following:
- At this time, mortgage interest rates are very low, typically in the 4.0 - 5.0 % range. This represents inexpensive money. It's reasonable to assume that investing the additional money that would be applied to the mortgage would enable the investor to come out ahead over an extended period of time.
- Possessing a mortgage free home provides no tangible benefit to a homeowner. The only way a homeowner can access (and enjoy) the equity (money) is by selling the home.
PartnersInWealth has developed a spreadsheet that compares accelerating the rate of a mortgage reduction with making regularly scheduled mortgage payments and investing the same amount of extra money that would have been applied to the mortgage. For a $100,000, 30-year mortgage at a 5% rate of interest, the homeowner has $15,000 more after 15 years and $24,000 more after 30 years by not accelerating the mortgage payoff.
Of course, this analysis represents a "generalized comparison" made using reasonable assumptions. PartnersInWealth would be happy to provide you with a customized comparison unique to your circumstances. Simply e-mail us and provide the following personal information:
- your current mortgage balance;
- interest rate;
- years remaining on mortgage;
- monthly payment (principal + interest);
- amount (considering) adding to each payment; and
- tax bracket.
If you would like a free consultation regarding our findings include a daytime telephone number. Otherwise, we'll simply e-mail you back the spreadsheet analysis for you to draw your own conclusions.