Home Ownership and Real Estate Investment

If you own a home right now that you pay a mortgage on, you likely do not have enough money in the bank to pay off that mortgage. But what if you did? If you had the money to pay off the mortgage and thus free up that money each month, would you do so? Many people that cannot afford to do it say yes. It would feel so good to be able to write that check that will ultimately make you an official homeowner Ð free and clear, no payment books, no bank to answer to. But if you look at the top 5% of the wealthiest people in America, most of them hold a mortgage yet have the money to pay that mortgage in full.

This is because of a process called the “accumulation of wealth”. This is an indication of prosperity in our society, if you can accumulate wealth in your life. Have you ever noticed that when people do something that is going to save them money, they never really get rich? Take this for example: People want to save the interest on their mortgage so they go extra lengths to pay off the mortgage early and get out from under that 6% interest rate that they have been paying. Once they get the mortgage paid, they start saving for retirement. This process could take 15-20 years, but they saved money by not paying that 6% for the entire 30 years.

Now, look at that 6% that we discussed from the mortgage interest rate. This is a fairly average rate for the last 8-10 years in America. Since 1926 the stock market has averaged a return of 10% per year. When you do the math, the person that works hard to pay off their mortgage 10-15 years early is losing out on 4% interest on their money. Giving money back to the bank at 6% keeps you from investing money and essentially the bank giving you money at 10%.

Many young couples struggle to pay off their mortgages early so that they are mortgage free when their kids go off to college. This way, they can borrow against the house to pay for the college tuition. If you stop and think about it, that makes little sense. If you continue to make your normal mortgage and take the rest and invest in something that will likely offer you 10% returns, you will end up not having to borrow any money to pay for the tuition. You will just have to cash in some of your investments, and your home will be paid for in another 5-10 years instead of the refinanced 15-30.

When you purchase a home, there is a great chance that it will increase in value over the next 30 years. This is true whether or not there is a mortgage on a home. When it comes time to sell your home, no buyer is going to care what your outstanding mortgage balance is, nor is the IRS when they go to calculate your capital gains.

Simply put, mortgages do not affect home value, and using your money to pay it off early is not always the best choice for saving money. When you first consider the thought, paying off the mortgage may seem like the most logical thing to do, but carefully consider your options with a certified financial planner before delving in too deep.