Many Americans still believe that paying off your mortgage is the best thing you can do. After all, it is a guaranteed savings, right? Well, let's take a look at it further.
Right now, there is a new craze in the mortgage industry, one that is being marketed heavily and is being presented as the best solution for you to pay off your mortgage in as little as 7 years. But is this the best thing for you, or could it actually be costing you more money?
Those that offer these programs have different names for them, Money Merge Accounts, Mortgage Accelerator, Homeownership Accelerator, etc. All are designed to take the typical thought process of paying off your mortgage as quickly as possible and "sucking you in" to thinking this is the best solution for you. Also, many reps from United First Financial, and others, have used misleading information in order to further show their product is the only solution, so beware.
Now, these programs are not really bad programs, but they may actually be costing you more money over time. Here is a blog post you can use as a reference to learn more about a direct comparison.
The truth is that paying off your mortgage could actually cost you more money over time, no matter how you go about doing it. The time value of money and the ability to grow your money through compounding interest, instead of paying off straight line interest, allows your mortgage to work for you as an integral part of your overall financial and investment plans. The difference can be into the hundreds of thousands of dollars.
In fact, a family who could easily afford a 15 year mortgage, but decides to use their mortgage as a financial tool instead, could actually pay off their mortgage faster using a 30-year interest-only mortgage instead. What's more impressive is that due to the time value of money, if they decided not to pay off the mortgage as fast as possible, in 30 years they could have accrued enough money to pay off the mortgage and still have nearly $400,000 more money than if they used the 15-year mortgage, paid it off, and then invested every dollar they had originally sent to pay off the mortgage. Please refer to this post for the comparison.
What about those who are not in able to get a 15-year mortgage?
Well, many Americans also have a reasonable amount of equity stored up in their homes, so they could take advantage of other strategies. We could go into great detail about different strategies, but let's just look at this one. You could take out equity from their home and invest the money in a safe, conservative investment that can improve their liquidity, safety, and rate of return.
The example I will use is cashing out $100,000 of equity and investing it at the same rate as your mortgage. For this example, I will use the rates as 7.0% and we assume you are in the 34% tax bracket. As the illustration shows, we will be highlighting the difference between the net cost and net gains of the same $100,000, so the difference is pure profit.
After the first year, the net cumulative cost of your mortgage would be $4,620. In the meantime, the net cumulative growth of your $100,000 would be $7,000, so you would already be ahead by $2,380.
By the 10th year, your net cumulative cost of the mortgage would be $46,200, but your investments would have grown by $96,715, so you would have gained $50,515 on your $100,000 so far.