In 2014, The American Community Survey revealed an alarming statistic: Of all mortgage-paying homeowners in the U.S., the median home loan debt was $122,000. Even worse, the study showed that more than 50% of mortgage-paying home-owners had 2/3 or more to pay of their home's value. Little surprise, then, that a lot of people want to know how to pay off their mortgage. But while a home purchase ratchets up debt, it's also likely the single biggest investment you'll make in your entire life. Given the complicated balance of debt and asset that homes account for, I sat down with financial guru Dennis Miller to chat about a very sticky topic: Should we be paying off our mortgages now, or dealing with interest over the life of a 15 or 30-year mortgage? Is it worth paying off a mortgage as soon as possible? Or even just paying a little extra each month? Let’s start with the big picture. If an investor has a $100,000 investment portfolio, and has $100,000 in debt, their net worth is ZERO. I’m 78 years old and my experience, along with my peers, is that we really didn’t begin to accumulate wealth until we were debt-free. Debt is renting other people’s money, and the rent is expensive. If you are borrowing to go into a business you know and understand, your money should work for you. The average working person who says they can invest and earn more money than they pay in interest is naïve. Banks make money on the differential, called the spread. If they borrow at 2% and lend at 4%, their profit is the spread—assuming the borrower does not default, which is always a risk. Back to home ownership, now that I've spelled out the interest game. I like to start by asking people this question: How much is your mortgage interest? Let's assume they say 4%. Then the question becomes: “Can you guarantee that you will earn more than 4% after taxes in your investment portfolio for the next 20-30 years?” Reducing interest cost is a no-risk guaranteed return. Paying off your mortgage is both a financial and emotional decision. I can assure you that you will sleep better knowing you have no mortgage. I have never met anyone who paid off their mortgage who regretted it. But how does building equity in a home help someone build wealth? How can they use homeowner’s equity? The rule of thumb is you should have enough money to live anywhere from 3-6 months (your emergency fund). When you pay off, or pay down, your mortgage, your net worth increases. Banks make it easy to have a home equity line of credit so you can borrow in case of a true emergency. I confess to being the spender in my family for too many years. I learned I needed to make sure money was not sitting there burning a hole in my pocket. Whenever I had extra money, I used it to pay down my mortgage to keep me from doing something stupid like buying a new car when the old one worked just fine. It looks like the Federal Reserve is going to do a couple more rate hikes this year. Does this change whether or not someone should pay off a mortgage? Not in the least. Remember: When you are no longer a debtor, you can become a lender. That remains true regardless of interest rates. I recently wrote an article about Fed rate hikes, which you referenced in your question. In that article, I took an example of a couple with a $200,000 mortgage. Their payments were a little over $1,000 per month. Over the life of the mortgage, they would pay almost $165,000 in interest. But that interest payment could be much higher if the Fed raises rates. Now, if that couple pays off their mortgage sooner rather than later, think of the investments they could make with that $165,000+. They could expand their portfolio or invest in higher-interest CDs, for example. Read on at earlytorise.com: Learn the pros and cons of paying off your morgage... |