Why I Won't Pay Down My Mortgage

Paying down your mortgage; for most, that's the goal. Pile every spare dollar onto it and get it gone as soon as possible. I have to say that in today's financial world, when mortgage rates are so low, I couldn't disagree more.

I don't consider my mortgage to be "debt". I actually see my mortgage as a valuable tool for helping me increase my wealth! Using the equity in my mortgage to add to my nest egg is part of my long-term strategy for getting ahead.

Okay, before I go on, I know that for many, this suggestion sounds reckless and foolish. People are so hyper-focused on paying down their mortgage, that to consider doing the opposite seems stupid to them. Hear me out.

Right now, the average mortgage can be had for around 3% interest, but the average investment makes upwards of 6% a year in interest. So, the math works without doing anything fancy, but let me go further than that.

Most people hesitate to get themselves further in debt, but remember, you’re not spending the money, you’re investing it, so if ever there was some catastrophic situation, you still have the money. It’s sitting there in your investment account, totally accessible to you at any time. It didn’t go anywhere.

Also, if you do focus on paying down your mortgage, what advantage is there  to having a mortgage-free house? You’re literally sitting on hundreds of thousands of dollars that aren’t benefitting you in any way. The only way to get the money out of that property is to sell it. And you have to live somewhere, so the only way to get a profit by selling it is to downsize. Also, as a house ages, you’ll have to put money into it in order to sell it, further reducing the profit from the sale.

The other reason people don’t consider this approach is because they don’t want to have a mortgage in their retirement years. Well, I don’t intend on retiring with a mortgage either. Investing the equity from now until then will increase my savings account balance to the point where I’ll be able to pay off my mortgage right before I retire. The main difference is, I’ll still have a huge balance left in my savings after paying it down, versus someone who paid off their mortgage and didn’t invest their equity.

Another concern may be that because you’re stretching the mortgage out longer, you’ll pay that much more in interest. It’s true, you will, but because the money was invested and making more than the loan was costing you, in the long run, you still come out ahead.

Borrowing your equity is a legitimate wealth building strategy, if it’s done right. Doing it right means doing the math and only borrowing to invest if it makes number-sense.

All right. Let's run the numbers:

Conditions for each scenario:

  • 30 year amortization on a $300,000 mortgage at 3% interest rate.
  • Start with $0 in your investment account and achieve 8% interest when investing.

Scenario 1:

Pay down the mortgage over the 30 years and after the mortgage is paid, take the mortgage payments each month and invest them for another 10 years.

Scenario 2:

Take the equity (approximately $32,000) out of the mortgage every 5 years, starting a new 30 year amortization at each renewal, pay the mortgage off at the 30-year mark (using money from the investment account), and then take the mortgage payments each month and invest them for another 10 years.

The Results:

Scenario 1:

  • After 30 years, you would still have $0 in your investment account.
  • You invest $1,260.70 monthly (the amount you were paying towards your mortgage) from that point on.
  • After 10 years (40 years total), you would have $224,000 in your investment account.

Scenario 2:

  • After 30 years, you would have about $642,525 in your investment account.
  • You would pay off the mortgage of $267,000 from that balance, leaving $375,525 in your investment account.
  • You add $1,260.70 monthly to your investment account from that point on.
  • After 10 years (40 years total), you would have about $1,054,000 in your investment account.

Remember, in each scenario, the amount coming out of your pocket each month was the same; $1,260.70, so the amount of extra interest you paid in scenario 2 is accounted for in that fact. The bottom line is still more advantageous if you borrow the equity in your mortgage and invest it.

Of course, the fundamentals are what make this work; i.e: the fact that the amount of interest you can reasonably expect to make on investments is about twice what you'll pay for a mortgage. When these stats change, so do the end results. But until then, I won't be paying off my mortgage!

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