I find that just about every first time home buyer find the prospect of borrowing hundreds of thousands of dollars a bit nerve-racking. However, after owning a home, those looking to refinance their next home seem to take the idea of getting another mortgage in stride. However, what’s the difference between paying off your mortgage vs. Investing?
I’d say about half of my clients, after owning a few homes, don’t ever plan to ever have their home paid off but to those that do want to pay their home loan off and early, there are some pros and cons to consider.
Lazy Asset
Do you know that your home’s equity is a Lazy Asset? What I consider as a Lazy Asset is an asset that doesn’t in itself, offer any growth or return opportunity. If your home’s equity has grown, it’s either because you paid down your home loan, saw the value of your property grow, or a combination of the two. Equity is sitting in your home stagnate if left in the house.
Equity Is Not Easy To Tap Into
It’s ironic but very true the saying, “When you need the money the most, is when it’s the hardest to get.”
Moreover, this is true with home’s equity in many cases. If you accelerated the payoff of your mortgage and didn’t take care to build up your savings, you could have a problem one day if you ever were to get laid off or experience an emergency that requires a chunk of money. If you get hurt or sick and it costs you your ability to work for a few weeks and added medical bills, how would you manage that?
Paying Off Your Mortgage vs. Investing
Does, your employer, contribute a match to your 401K? If you already have some money saved for your emergency fund and want to put some money to work, perhaps first consider putting your money in your employer’s 401k to receive the full match. With your employer matching your investment, you are getting a guaranteed return on your investment.
Over the long haul, investing in something as simple as a low-cost mutual fund invested in the S&P 500 will return greater than 8% annually. This investment is compound growth too. If I had a choice of putting extra money towards my mortgage where Equity has 0% return on my capital or a Tax-Advantaged retirement plan with an employer match, no brainer, that’s what I’d pick.
Shave 6+ Years Off Your Mortgage The Easy Way
If you have good savings set up already, saving for retirement and want to still feel like your paying your loan off faster, consider paying an extra 10% of your mortgage payment as additional principal payment early in the mortgage life. Often my clients that are getting a mortgage with a payment of $1500 will find it very affordable to pay an extra $150 on top of their mortgage. Over the course of a year, that can add up to 1 additional payment that will shave over 6yrs of their loan in most cases. That can be a significant saving. There are Amortization Calculators that you can calculate a payment for your loan based on when you want to pay it off.
