The Financial Consequences of Paying Off a Mortgage
The decision to pay off a mortgage is one that stretches beyond the emotional benefit of owning a home free and clear. There can also be a significant financial cost to paying off a mortgage. Depending upon the overall profile of a homeowner, maintaining a mortgage may be the most financially sound option.
Consider the following investment and its characteristics. How much would you feel comfortable depositing or investing?
1. The monies you deposit are not safe from a loss of principal
2. The monies in the account are not liquid
3. Your income tax liability increases with every contribution
4. Your money earns a 0% rate of return
5. When the investment is fully funded, there is NO income paid out
The investment described above is home equity obtained through a larger than necessary down payment or through pre-payment strategies to pay down or pay off your mortgage. The key point here is that home equity is not an investment at all. It does not earn a rate of return and will not increase in value. The home as an asset may increase or decrease in value depending on the market; however, the cash invested into home equity does not.
A $100,000 Investment VS a $100,000 Mortgage
The primary reason homeowners want to pay off their mortgages is to avoid paying interest. As you may know, the interest paid on a home loan over 30 years can be more than the amount of the original loan! That sounds terrible until you consider the cost of liquidating the investment funds. If you are contemplating pulling cash from an investment account to make a large down payment or to pay down your current mortgage balance, consider the following example:
- $100,000 borrowed at 5% over 30 years will require 360 payments of $536.82, or $193,256 over the life of the loan.
- $100,000 invested earning a return of 4% will be worth $324,339 in 30 years. If the rate of return is 7%, the investment would be worth $761,225.
The True Definition of Being mortgage Free
If you have a $200,000 mortgage as well as a liquid investment account with at least a $200,000 balance, then having a mortgage becomes a choice. By building your investment account balance and through the power of compounding growth, you have the ability to reach the point where a mortgage is optional more quickly than by making additional principal payments on your home loan. In essence, your investment will grow at a greater rate than the speed at which your mortgage balance will drop.
If you are considering using investment account assets to pay off or pay down your mortgage balance, I would be happy to discuss the pros and cons of your individual situation and determine the most appropriate solution. We can run specific reports for you that will detail the current and future implications of liquidating investments to pay down a mortgage. Call me at 801-501-7950 or send an e-mail to email@example.com.