I’ve been there; I had no mortgage and it felt great! I reduced my monthly expenses by thousands of dollars, I owned my home and bid my bank loan a fond ‘fare-well’. Before I paid off my mortgage I felt trapped in my business by that monthly nut, but without the mortgage I felt so much less stress as a business owner. It was a guaranteed rate of return – what could be better than that?
There is no doubt that the satisfaction of having no debt is better than birthday cake with no calories! But be aware that there are things to consider about being mortgage debt free:
- Credit Card and Student Loan rates are high! Do you have higher interest rate debt that should be paid first? These days, credit card and even student loan debt may be a higher interest rate than your mortgage. Why pay off a 3.5% home loan when you owe 9.99% credit card and 6.5% student loans? Most people’s rates are even higher.
- Don’t get caught in an emergency! Would paying down your mortgage jeopardize your emergency funds? Do you already have 6 to 9 months of living expenses set aside for emergencies like a job loss? Don’t lose the opportunity to build your safety net by paying that money back early when in return, they might never give you another loan. Your saved dollars can pay for food, heat and regular mortgage payments for your family.
- I can do better than my bank. What is opportunity cost of paying down your mortgage? If you are a business owner, cash lets you invest in your business without having to ask the bank’s permission for a loan. You can buy that piece of equipment that will allow you to bring in more revenue or you could buy your competitor’s business cheap because you have cash when they want OUT! The myopic banker who only looks at your last 3 years of positive cash flows has no clue what it’s like to GROW a business. My banker asked for collateral for me to buy out a competitor! Sometimes they don’t understand our business.
- It’s just bad math. If my mortgage interest rate is 3.5% on $165,000, my payment is less than $1,000 a month, even if I won the lottery, a $200,000 account with a 6% yield (Yes, it does exist!) would pay my mortgage, possibly grow in value and be available to me if some other opportunity came along, like a business for sale cheap or investment real estate!
- I’m a ‘nervous nelly’. I want to know I can get at my money if I need it so I put all my money in a bank CD, yielding .05%. Yes, I know some people think I’m bad at math, but I want safety! Just pay your 4% loan while getting only .05% on your money; it makes you feel secure. Feeling safe is powerful stuff!
- Been there. Done that. I had a paid off mortgage and it was grand! Maybe I was stupid, but I’ve seen many of my clients with paid off mortgages too! Afterward when I wanted a swimming pool, a new car and a finished basement, I ADDED a new mortgage. I thought life would get better after 2006 (hey, Financial Advisers sell hope!); and it did get better; just not in the next 3 years. A paid off mortgage can be as bad as a paid off credit card. It’s tempting to finance new buying impulses. What could this little purchase of a $3,000 vacation hurt? Banks will give me money against my house for fun things, a pool, a new car, paying off my high interest credit cards. This is how we fondly remember 2006 and its easy credit! AH!
- Retirement. Yes, there will be a day when you want to retire or you can’t work. Maybe you’ll want to help take care of your grandchildren (how fun is that?!?) If you don’t have enough retirement money, you get to suffer the ignominy of asking the bank to give you a REVERSE MORTGAGE. You get to finance your home that you already own, start a new debt and ask your bank to “please” give me money each month to live. Did I mention the new closing costs?
- No NEW debt for you! I have clients who just retired. They’re happy. They have enough money to get through the next 25 years. (They had a great Financial Planner. Yes, yours truly. J). They want to buy an out-of-state retirement home, and can mostly afford it, if I kick their butts on keeping the lid on spending. But now that they don’t have W-2 incomes they don’t qualify for that retirement home! If they had not paid the off the first mortgage, they could pay have paid for that vacation home. Go figure!
- Be your own bank. Money in YOUR accounts does not need anyone’s approval to spend. You do not need to submit 2 years tax returns to yourself to see if you can buy that: rental, swimming pool, truck, house, business or equipment when you take the money out of your own account. Save for your own Opportunity Fund. If you had paid it on the mortgage, you’d have to apply for a Home Equity Line of Credit (HELOC) and ask the bank for approval.
- College Kids? I have two kids in private college. It’s just like paying employees who don’t do any work! But I can’t fire them just yet, because they’re my kids. I love them, but who really thought college should cost $56K a year?! If I had paid extra money on the mortgage who would pay for the fancy colleges?
- The banks don’t give it back! So if you pay off your mortgage, like the good American you are and then you just want a few thousand $ to put in those solar panels that will save you for the next 30 years. OOPS, you don’t qualify based on the new paperwork criteria. Paying ahead does not mean the bank will give it back to you later.
- It’s your soul. If having ‘no debt’ makes you soar to new heights, lowers your blood pressure, and gives you better sex; money calculations are NOT the issue! Go for it! But if you really want to excel in lifelong security, do the math and let me help.
Bottom line, think about your life plan and what else might happen before you pay ahead on your mortgage.
NEXT WEEK…. Smart ways to pay off your mortgage early while maintaining a smart life plan. There’s no single answer because everyone’s situation is different. That’s why YOU need a good financial planner to help carve your personal path into your future. Call me, Merra Lee Moffitt, Senior Partner, Wealth Strategist. Call, click, email, or telekinesis; I’ll help you.