3 Reasons You Shouldn’t Pay Your Mortgage Off Early

A lot of people plan to accelerate their mortgage payments in order to pay off their mortgage quicker, or even to pay cash for the home in the first place. Here's why this may not be the wisest financial decision.

Jul 20, 2014 at 1:00PM

Flickr / Mark Moz.

For most homeowners, their mortgage is the biggest single debt hanging over their heads. A lot of people can't wait to live mortgage-free, making additional payments and even using savings to pay off the loan entirely.

However, keeping your mortgage for the full 15 or 30 years might not be such a bad thing. It may actually make a lot more sense to your long-term financial plan to put your extra cash to work elsewhere. Keeping a mortgage allows you to take full advantage of the low interest rate environment, as well as the concept of leveraging your investment dollars, while maintaining the financial flexibility to deal with whatever life throws at you.

Consider these three principals before deciding to accelerate your mortgage payoff.

Low interest rates
Even though mortgage interest rates have risen from their all-time lows; they are still at some of the lowest rates in history. So, instead of using your extra cash to pay down your mortgage early, you can do better in the long run by putting you money to work elsewhere.

Let's say you want to buy a $250,000 house, and that you have that amount in savings. Why not simply buy the house in cash and be done with it?

Well, if you put 20% down ($50,000) and finance the other $200,000 with a 4.25% interest 30-year mortgage, you can expect monthly payments of about $984 per month. So, over the 30-year life of the loan, you'll end up paying nearly $355,000 to pay for the $200,000 mortgage.

However, in the meantime your $200,000 is free to be invested for your benefit. The S&P 500 has averaged a total annual return of about 9.4% since 1929, and $200,000 invested at that rate of return would be worth about $3 million after 30 years.

So, it makes sense to take advantage of the low interest rates being offered on mortgages right now. By saving your money instead of paying for your home in full, it could literally mean millions to your retirement savings.

Use leverage to your advantage
Buying a home with 20% down is essentially using your credit to invest in your home's value at four-to-one leverage. That is, for every dollar you put down, you are buying $5.00 worth of house.

So, if the value of your home appreciates by 4% per year, which is a pretty conservative estimate on a historical basis, you are actually getting a much better return on your initial investment (your down payment).

If you put $50,000 down on a $250,000 home, a 4% annual rise in value would mean a $10,000 increase the first year, or a 20% gain on your original investment.

Flexibility and security
Finally, consider the peace of mind you could gain if instead of putting your extra cash into your mortgage, you used it to build up your savings.

As a rule of thumb, you should aim for six months of expenses in a readily accessible account. Until you have that, you shouldn't pay more than you need to on your mortgage, regardless of what you think of the other reasons I mentioned.

Choosing to finance your home instead of paying it down quickly provides an opportunity to build up savings and take better advantage of long-term investment opportunities, while also putting the awesome power of leverage to work for you. In today's low interest rate environment, it pays to borrow in order to buy your home.

How to put your extra cash to work
So, we've seen that it pays to keep your extra money invested instead of paying off your house. But what should you invest in to maximize your long-term gains? The answer is a basket of safe, high-paying dividend stocks. A well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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