Thanks for joining me for Financial Fitness Friday – my weekly blog where I share a few words of financial wisdom to help put YOU back in the driver’s seat of YOUR financial future.
Today’s blog is about peeling back the curtain about your home mortgage, and it’s going to go against typical financial advice, but hear me out.
Interest rates are coming down again. My opinion: one of the WORST things you can do in the current environment is getting a 15-year loan or pay extra on your mortgage. (Or both)
I will go through many of the amazing benefits of bucking the trend, as well as why it actually serves the banks instead of you to pay off your mortgage early.
Look, I deeply detest the Federal Reserve and all they’re doing, but the best way to get ahead is to turn the tables back on them.
Now think about it, if inflation is running rampant, why wouldn’t you accept & lock in a 2.5% interest rate for 30 years??!!??
- That’s lower than the current rate of inflation, so it’s as if you’re borrowing for FREE. At 4% inflation vs. 2.5% cost of borrowing, it is actually as if they are paying you to borrow! It’s insane.
- We live in an inflationary environment where they print like crazy and devalue the currency. Doesn’t it make sense to pay that money back slowly, so you pay them back with the dollars that THEY purposely devalued?
Doesn’t the US Government purposely go deeply into debt, and plan to pay it back later? Why? Because while the debt “number” is the same, they inflate the money supply, so they are paying back the same “number” with dollars that have much less “value”.
So, could not you do the same thing with a 30-year fixed mortgage? 10 years from now, your payment will still be the same, but the value that you are parting ways with will be less.
20 years from now, your payment will still be the same, but the value that you are paying back will be a lot less.
IMAGINE
Now imagine 30 years from now… how much those dollars will be worth… much less than today. The number you are paying back on a monthly basis is the same, but the value you are departing with will be much less.
- The mortgage interest you pay is tax-deductible (under current tax law, this isn’t as valuable, as most people aren’t itemizing due to the large standard deduction. However, if tax laws are changed, this feature may once again come into play and be very beneficial)
- By having a smaller payment, you increase your cash flow, which lowers your risk.
- You can grow and maintain higher liquidity reserves for more security
So many people get into trouble financially because of a lack of liquidity. They tie up their money in a 401k. They tie up their money in 529 plans. And they compound the problem by tying up even more of their money in the walls of their house.
What’s the rate of return on equity? Zero. It doesn’t matter if you’ 80% Loan To Value, or 20% Loan to Value – the property will appreciate at the same rate, regardless of what the equity position is.
Most people don’t have enough liquid savings. Most are not able to save or invest properly. By lowering your payment, you’ll have the opportunity to do this.
I understand that the other side of this coin is that undisciplined people will blow the monthly savings of a 30-year mortgage (vs a 15-year mortgage) on consuming / material items. That’s obviously not what I’m talking about here.
I’m not advocating to free up cash flow for consumeristic spending. I’m talking about freeing up cash flow for additional financial security, and so you can save & invest more – not spend more.
- Your investments, over time, should do MUCH better than the paltry interest % you pay
- Finally, you can even grow “safe money” at a rate higher than your mortgage interest
For example, why would I prepay a 2.5% mortgage if I can instead put that money into a whole life policy paying 4% – 4.5%, TAX-FREE, where I have complete control, liquidity, and access to my money?
Having access to safe liquid capital is key here, because if a crash comes, not only will you not be hurt by it, you’ll actually be in a position to take advantage of it!
While this isn’t an exhaustive list, these are many reasons why you may want to buck the trend of “conventional wisdom.” Look, my goal is not to insult anyone if they have a 15-year mortgage – especially if they are able to handle that higher payment and save & invest regularly.
But for people who are struggling with their cash flow position, because they have been inundated with that thought process that they MUST accelerate their mortgage payoff, now you know that the math doesn’t necessarily make sense, and now you know that there are other ways to go about it.
Thanks for taking the time to read today’s blog, I hope you found it informative and valuable.
Disclaimer: this is education & my opinion and is not personalized “financial advice.” I understand that there may be certain situations where paying off a mortgage early makes financial sense.
If you don’t have an adviser to help you out with these important decisions, I’d love to be that person for you. Just send me a message on social or email me at Ronald.sneller@snellerfinancial.com
Enjoy your weekend!
Sincerely,
Ron
Disclaimer: While I am a personal Financial Consultant and Investment Adviser, what I discuss on these blogs isn’t to be taken as or construed as personal financial advice, or investment advice.
Rather, it’s about providing you with information & resources to empower you, the reader, with the knowledge that you need to make informed decisions that feel right to YOU.
And if you’d like my assistance in guiding you down that path, that’s where I can learn about your specific situation and work with you to give you personalized advice & guidance.
If you’d like to contact me regarding my services, you can email me at Ronald.sneller@snellerfinancial.com
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