Paying Down Your Mortgage Ahead of Schedule Does Not Create Wealth!
Are you convinced that paying off your mortgage early is the most prudent and responsible financial decision you’re making? If so, first let us pay you a compliment. ONLY responsible, prudent, mature, and long-term thinking people do this. So, if you’re one of them, congratulations.
First, let’s look at situations where paying a home off early might be a good idea:
It might be a good idea to pay your mortgage down quicker if you spend your surplus cash on toys, vices, or other people mooching off of you. If you’re just blowing all your money rather than saving it, then paying your home off early vs. blowing your money might be a good idea.
If interest rates are so high that the cost of borrowing exceeds that cost of safe investing, it might make sense to pay down your debt as quickly as you can.
Chances are the two above two scenarios don’t apply to you. Interest rates are ridiculously low, so money is on sale. If you know how to make your money work efficiently for you, you can make your money grow drastically more than the interest you avoid paying by accelerating your mortgage payments or heaven forbid, paying your entire house off in cash.
We will help you understand why.
You have heard the term "Cash is King." When you overpay your mortgage, you're saving a negligible amount of interest 25 to 30 years from now, but in exchange, you make the bank the King. The bank will put that money to work for them. Why not do that yourself?
“The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of a doubt, what is laid before him.”
- Leo Tolstoy
You may strenuously disagree with the concept that paying a mortgage off ahead of schedule hinders rather than helps create wealth. In that case, ask yourself:
How does the equity in your house create wealth?
Does the equity in your house grow on its own?
In fact, while home equity does not grow on its own, it can do the opposite. Think about it. If the value of your home increases, this happens because the market goes up or because you add value, such as by remodeling. But it has nothing, absolutely zero, to do with how much you paid into your mortgage.
This is a difficult fact for many people to accept. However, if you ask yourself a few simple questions, you will realize the truth. When you purchased your last home, did you ask the seller how much the seller owed on the house? If the seller had paid his or her mortgage down, would that affect the value you put on the home? Of course not. Could the seller ask a higher price for the home simply due to the fact that the seller paid the house off ahead of schedule? Of course not. If you have ever sold a home, did the buyer ever ask you how much you owed on the house? If all of these details are irrelevant to the sale of a home, then you can see that the extra equity people put into their home does not create any extra value, except for the avoidance of paying interest. Let’s talk about that next, briefly.
Once again, without getting into a long economic discussion, responsible people overpay on their mortgages because they dislike debt. That is understandable. However, as stated above, the only economic value is the avoidance of interest payments.
Consider These Simple Points
If you took that extra money and put it in anything else that earned you a greater amount of money than the interest you are avoiding paying, even if the difference were one dollar, wouldn’t that be an economically better scenario?
If that extra money were liquid and accessible, would that be more beneficial than having the money locked up in an illiquid asset like a house? If you lost your job and wanted to take out a line of credit on your home, does that bank have to give you one? No. Who is in control here?
By not voluntarily overpaying your mortgage, might you still preserve a tax benefit by being able to deduct for mortgage interest (since the tax cut of 2016, this benefit has become irrelevant to many taxpayers, but it may once again be relevant after the tax cuts expire)?
If you were to choose an alternate scenario with your extra cash flow rather than overpaying your mortgage, you would likely not want to take any risk with that money. The last thing you would probably want is to put that extra $1000 into some speculative product like Bitcoin and then LOSE the money. And if you were only better off by one dollar, it wouldn’t be compelling enough for you to give up your current plan. You would need an alternative that does way better than making you a few bucks richer.
We can show you a strategy that gives you the same security and peace of mind as paying off your home early, and also creates substantially more wealth, without taking unnecessary risk. You could also retain control of and access to your money rather than imprisoning it inside a bank where they control your ability to access your money, as well as the terms. This is a key component to many of our Potential Financial Solutions. We can show you how to use the extra cash flow you put into your mortgage to increase your wealth, NOT the bank's.