Most Americans have the goal of owning their home free and clear. The “benefits” of eliminating their mortgage as quickly as possible have been programmed into them for generations. Many prefer 15 year mortgages versus 30 year terms, and they eagerly accelerate paying off their mortgage by sending in extra principal payments whenever their budgets allow.
Unfortunately, most Americans don’t realize just how flawed – and even dangerous – this financial strategy can be!
Unemployment today is at a 20-year high. What happens if you lose your job? Do you have the cash reserves to carry you through until you regain employment? Having equity in your home means nothing if you can’t afford your housing payments.
Many people losing their homes today are learning this hard lesson. They have plenty of equity in their homes, but can’t access it because they can not qualify for a loan. However, if you have a strong cash position, when times are tough, you have options. And when times are good, your money is working for you.
By taking a shorter-term mortgage or prepaying principal, you are saving large amounts of interest. That’s true. But most people forget that mortgage interest is typically tax deductable. If for example, you have a 5% interest rate on your 30 year fixed mortgage, depending on your tax bracket, your equivalent, after-tax interest rate might only be 3.3%. Even in today’s tumultuous market, it is possible to earn a tax-free 3.3% on your money. By paying the minimum on your mortgage and investing the balance, your money can be working for you. Your money can be earning more that the interest you are paying!
The financial goal for many people should NOT necessarily be to pay off their home as quickly as possible. Instead, it should be to build a wealth plan that optimizes the use of their assets, equity, and tax deductions. By taking full advantage of the tax laws, you can minimize your tax liability, while maximizing your wealth accumulation. When done properly, the result will be an investment portfolio that’s earning income for you, while large enough to pay off your mortgage if you chose to.
If you would like to explore these concepts of Debt and Equity Management, let’s invest 15 minutes in a phone consultation. I’d be happy to discuss this with you and coordinate with your financial advisor in creating your plan for wealth accumulation.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.
 Consult your tax advisor for your specific situation.