In today's episode, I'm going to jump into the general personal finance arena. Let's talk about mortgages. Specifically, to pay them off early or not. I’ve shared some thoughts on this subject before on my website but with mortgage rates near all-time lows, I figured it was time to revisit.
The topic of whether or not to pay off a mortgage early is a question that often comes up in client conversations. Heck, it even comes up when I'm out for a beer with friends. Well, at least back when we were able to do that sort of thing! My initial response is usually this, odds are the numbers are going to show that it makes sense to maintain a mortgage. Paying off a mortgage is often a personal decision but if you’re looking for ways to grow your money instead of paying off your house early we should talk!
You will want to hear this episode if you are interested in...
- Reasons you should not pay off your home early [1:16]
- Paying off a house doesn’t mean housing expenses go away [2:10]
- Why you should pay off your mortgage early [3:27]
- This week’s FLASHBACK [5:19]
Better things to do with your money than pay off the mortgage
Cash is king and every extra payment you make towards your mortgage turns your liquid cash into illiquid equity in your home. You go from infinite options to limited ones if you need access to cash. In my opinion, paying off your mortgage is a bad investment. Most mortgages are around 3% right now, putting the extra money toward your house means you are admitting you cannot get a long-term investment return of at least 3% elsewhere. Even with the .com bubble and the great recession the S&P has averaged over 6% annually over the last 20 years.
An investment you may not be able to borrow against in a time of need
Home equity can’t even be accessed if you lose your job. Lenders want you to have an income to give you a home equity loan. Homes typically increase in value. If you put $10,000 down on a $200,000 house, and 10 years later, it is worth $300,000 your down payment is now increased 10 times. If you made an extra $40,000 in payments, that's only a 2x return on your investment. Additionally, if we have another 2008 where housing prices crash or you have to walk away for some reason, you're only out that $10,000 down payment, but if you made those extra $40,000 in payments, you may be out of those too.
This week’s FLASHBACK: Snow Days or the lack thereof
My last snow day was my freshman year of high school. I live now and grew up in Akron, Ohio. We have plenty of snow every year but we didn’t get to miss school often because of it. I had one snow day in all of high school, undergrad, and grad school! Times have changed a bit, my kids have actually had a few heat days. Their high school doesn't have air conditioning and some of their windows don't even open. A few years ago there were a few days with a real feel above a hundred. The school tried to have classes and kids were passing out from the heat. That’s one they have over me because I for sure never had a heat day!
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I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.