THE MORTGAGE MYTH
If there ever was a topic more controversial than anything in the personal financial space, it
certainly is whether or not you should pay your mortgage off early. From CPA, Financial planners
or simply financial enthusiasts, everyone has an opinion on this topic and I believe I’ve heard
just about every position.
Let me be as direct and succinct as possible on the ques”on of should you pay your mortgage
off early.
The answer is emphatically yes!
What I have found is that the vast majority of the proponents that encourage you not to pay
down your mortgage are attempting to redirect you into sending those extra payments into
their coffers or some other financial vehicle they have a direct or indirect financial interest in.
The financial planner has a mutual fund that will earn you greater than your mortgage interest
rate and/or your insurance agent says insurance premiums would serve you be&er.
Let’s entertain a few of the dominant arguments for keeping a mortgage.
- The investment rate of return is greater than your mortgage interest rate
- The tax deduction
- You can’t access equity
- Not wanting to give up a low interest rate
THE INVESTMENT RATE, more commonly known as the APR or Annual Percentage Rate is the
most deceptive metrics for measuring the cost efficiency of a mortgage loan. The APR tells you
nothing about the total volume of interest being charged and therefore misrepresents the
calculation necessary to determine the benefits or disadvantages of said mortgage costs. The
infamous amortization schedule which was presented and made orthodox by the financial
industry for their benefit not the consumer, is designed to front load the interest
disproportionately in favor of the lender and NOT the borrower.
Each monthly mortgage payment is made up of what’s called principal and interest. If you took the “me to calculate the interest on a singular monthly payment you could determine a true interest cost, for example: a monthly payment of $1003.12, where $628.12 went to interest and $375.00 went to principal,
shows %63 of interest being applied to that payment by simply dividing the $628.12 interest
payment into the total monthly payment. You and I would be hard pressed to find an
investment with a %63 percent return on investment from a mutual fund but that is normally
the advice to deter you from paying down your loan.
Understanding that money saved is in fact money earned, when you reduce your mortgage payment, not only have you effectively earned that cost but the cost is guaranteed and irreversible unlike a mutual fund investment which is subject to both loss and gain and can potentially lose more than it gains at any given moment.
Not to say that investments don’t have their place but in the building phase of your financial
house, loss is not an op”on. It’s simply not the season to take risk but the season to strengthen
your position to strategically absorb loss on your own terms in the future. Lastly, a paid for
home, for the average person, represents financial stability on multiple levels, both
economically, mentally and spiritually. Such benefits include but are not limited to a renewed
outlook on how you see and approach the financial landscape, a heighten bond and/or
connection with your spouse and the strengthening of your personal financial infrastructure.
THE TAX DEDUCTION: has become a moot point in recent years with the standardized
deductions on your taxes. But even when taken into account, the cost saved is less than the cost
incurred. When calculated, the end result is you and I sending the mortgage company tens of
thousands in interest payments to save a few thousand on taxes. This is not a wealth building
strategy.
YOU CAN’T ACCESS EQUITY: although it is certainly true that the equity in your home is not
liquid, it escapes the average person that the equity in your home is not investment capital. It’s
serving a totally different purpose as mentioned above. The impasse on whether you should
invest or pay down your mortgage implies that you have to chose one or the other, instead of
viewing the decision as a placement of priority in the building of your financial house or
portfolio. The approach to paying off your home should be preceded by paying off all consumer
debts and the establishment of a fully funded emergency fund. That trajectory is the most
optimal path in securing a personal financial house that is healthy and self-servicing to you and
your family.
NOT WANTING TO GIVE UP A LOW INTEREST RATE: As frequent as this argument is espoused, it
is the most fragile argument of them all. Proponents of keeping a mortgage because of a low
APR not only miss the mark in using APR as a calculation of cost but it never seems to dawn on
them that zero is lower than their exiting interest rate. Please tell me, what interest rate is
lower than NO interest rate, assuming the argument is wanting to maintain a “cheap loan”.
I’d like to clarify that there is nothing wrong with an investment and nothing wrong with
utilizing insurance or taking a tax benefit. What we are arguing is the highest and best use of
your cash flow based on the order of financial operations. In mathematics we know that when
we work the problem outside of the order of operations, we fail to get the correct answer. Our
financial order of operations has a very similar premise, 1) become debt free, 2) establish a fully
funded emergency fund and 3) pay off your mortgage early (IN THAT ORDER).
