While paying off your mortgage can seem like a huge relief, with many people applauding your effort. But you don’t make money solely for the purpose of becoming debt free.
Here are some of the opportunity costs you could be missing while paying off your mortgage.
Cheapest money you’ll ever borrow
As of late, interest rates have been hovering around the 3.5% mark and are expected to stay around that range for the next year or more. A huge difference when compared with a whopping 18% in 1981.
But that’s the norm, most other types of debt have incredibly high interest rates when compared with current mortgage rates. Federal Student Loans? 6-7% on average. Credit Cards? Anywhere between 14-35% assuming you have good credit.
It’s always going to be the smarter decision to pay off the higher-interest debt, no matter where your finances are in life. No debt? that just means you have more opportunities to invest (which leads to our next point).
Throwing everything at your mortgage
If you’re like most Americans a few hundred dollars left over every month is rare. With that extra money, you may be thinking the smart move is pay off your home as quickly as possible so you can put the money elsewhere.
If your younger the best thing you can do is to invest any extra income. Time is one of your greatest assets.
Whether it’s the stock market, investment bonds, or physical commodities chances are you’re coming out much farther ahead than the extra 1-4% you’d pour into your mortgage.
Mortgage interest is tax deductible
During the first 15 years of your mortgage, your payments are mostly going towards the interest.
And guess what? Come to the end of the year, tax time, all that money you paid on the interest during the course of the year is deductible from your taxable income. Giving you a lowered amount of taxes you pay in or a potential refund.
A 401K or IRA has legal protection… a mortgage does not
In danger of being sued? In today’s society, if you have a heartbeat, the answer is probably yes.
The Employee Retirement Income Security Act of 1974 (ERISA) was made to protect private employer retirement plans, such as your 401k and pension against lawsuits (with the exception of divorces).
IRA’s are in a different ballpark though, as laws change from state to state, the general consensus being “no”, IRA’s aren’t included and can’t be taken.
Squaring away your home loan builds equity as time passes. In the event a lawsuit is brought against you, legal counselors can pull up your list of assets for leverage. Should they locate an enormous amount tied up in the value of your home, you can bet they will come for it.
Inflation devalues your money
As it stands now, you borrow money and then pay it back at a later date, a pretty good deal considering your paying back creditors with devalued currency.
What that means is your $200,000 (or whatever amount) that you agreed to pay back in the future isn’t worth as much as the day you signed the loan. Your dollar today is worth significantly more than it will be tomorrow.
Think of it this way, given our current inflation rate of 2.5% one dollar will be worth less than fifty cents 25 years from now.
You’d have to be crazy not to pay off your lender with cheaper money!
Obviously everyone’s situation is different and there might be some underlying incentive to pay off your loan early. But don’t forget there’s always property tax and homeowners insurance, you are never 100% in the clear.
If you want to retire smart and with a diverse portfolio of cash-flowing assets make sure not to put all your eggs in the mortgage basket.