As a homeowner the thought, Should I pay off my mortgage often enters the mind. For various reasons you may think it makes more sense to just pay it off. There are several key things people fail to take into consideration. This is best described by Rick Edelman in his book “The Truth About Money”. Here is a quick review of Rick Edelman’s 10 Reasons to Carry a Big, Long Mortgage with his updated 11th reason. Visit Edelman Financial to purchase the book. The truth is you should never pay off your Mortgage!
Reason 1: Your mortgage doesn’t affect your home’s value. You believe that your home will increase in value over time, or you probably wouldn’t have bought it. The truth of the matter is your home’s price is likely to rise and fall over the course of a 30 year mortgage and your mortgage has no affect on it. It makes sense to hold a high mortgage value and invest the rest of the money in something else.
Reason 2: A mortgage won’t stop you from building equity in the house. The price of the property is likely to increase over time, this in effect ads equity to your home with or without a mortgage
Reason 3: A mortgage is cheap money. Mortgage have and continue to be the cheapest money you can borrow. This is determined your credit score but is almost always lower than any other loan you can find for an extended period of time.
Reasons 4 and 5: Your mortgage interest is tax-deductible. And mortgage interest is tax-favorable. Real estate is one of the most tax preferred investments you can make and your mortgage interest is a direct deduction from your top tax bracket
Reason 6: Mortgage payments get easier over time. The time value of money at work right here, your income will likely rise slightly to keep up with inflation, but your mortgage payment will stay the same.
Reason 7: Mortgages allow you to sell without selling. If your home has increased in value you can essentially sell without selling by refinancing a higher amount on the property. You get the benefit of selling the house without selling and potentially cashing out the equity in your home.
Reasons 8 and 9: Mortgages allow you to invest more money and to invest it more quickly. Mortgages allow you to create more wealth than you otherwise would. Could you purchase your house for cash, maybe if you have that cash readily available but would it even make sense? Probably not, you can easily mortgage a property and invest the cash you would have put towards the property to increase returns and build wealth faster.
Reason 10: Mortgages give you greater liquidity and flexibility. Having a mortgage means you don’t have all of your equity tied to a property, this gives you the ability to move on from that property more easily. Should something happen to your income a longer term mortgage will be easier to pay than a shorter term.
Reason 11: You’ll never get rid of your monthly payment, no matter how hard you try. Bundled with your monthly payment to your mortgagor is principal and interest as well as your escrow payment for Taxes and Insurance. Even if you pay off the principal loan you will still have to pay or hold your own escrow to pay the annual Taxes and Insurance on the property.
This is just a brief overview of Edelman’s 11 Reasons for having a big long mortgage. Check out his site to learn more and be sure to consult with your legal and tax advisors to make sure it fits with your goals, but it is clear to the author you should never pay off your mortgage.
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