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 the American psyche 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!
Even in our improving economy, unemployment is still 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.
Since the economic downturn, many people who lost their homes learned this lesson too late. They had plenty of equity in their homes, but too little in cash reserves and investments. They experienced a cash flow crisis and could not access their home equity because they could not qualify for a loan!
If you have strong cash reserves 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. However, mortgage interest is typically tax deductible. If for example, you had 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’s not difficult to earn a return greater than 3.3% (after taxes). By paying the minimum on your mortgage and investing the balance, your money can be working for you. Your investments can be earning more that the interest you are paying!
The financial goal for many people should NOT necessarily be paying off their home as quickly as possible. Instead, it should be building 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.
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.