Well, you may be surprised to find out that a mortgage can be one of the best tools to have in your financial toolbox! After all, a mortgage is just that … a financial tool. When we go shopping for a home, it is the house we want, not the mortgage. The mortgage is the financial tool we need to get it. Used appropriately, it can also be a very useful tool to build a financially abundant future.
Down through the years, Americans have been taught by their parents to pay off their mortgage as quickly as possible. Paying off the mortgage was the brass ring to the American Dream. However, many top financial planners agree that paying off your mortgage is one of the worst decisions a homeowner can make. Even the government is beginning to see it that way. The Federal Reserve Bank of Chicago recently conducted a study to determine whether it is better to pay off your mortgage or instead invest your money in a tax deferred retirement account. Their results concluded that paying off or paying down the mortgage is the wrong choice for many Americans. They reported that about 38 percent of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice. For these households, reallocating their savings can yield a mean benefit of 11 to 17 cents per dollar.
Since most homeowners devote the largest portion of their income to their mortgage, the choices they make about their mortgage have far-reaching implications on virtually every aspect of their life, including their monthly cash flow, their ability to save, take vacations, send the kids to college and plan for retirement. Yet most people compartmentalize their financial thinking by looking at the small individual parts rather than the big picture. Consequently they focus on the goal of debt elimination rather than the goal of wealth creation, and these are two very different goals.
So why should we love our mortgages? Among other reasons, mortgages are normally the least expensive way for homeowners to borrow money and create wealth … for two reasons. First, mortgage interest rates are typically lower than the interest rates for car loans, credit cards, home equity loans, etc. Second, mortgage interest is generally tax deductible, so it lowers the net cost of the money even further. Uncle Sam effectively pitches in and helps us make part of the payment.
Now consider this. Even though mortgages offer individuals the least expensive method for borrowing money, many Americans still insist on systematically paying down their mortgage each and every month while the vast majority of these same Americans also have some level of credit card debt, car loans, college loans, or home equity loans with non-deductible interest at much higher rates. They struggle to save for college and retirement and have little liquidity for emergencies.
Given the typical American household scenario, they would be much better served to establish an emergency fund, then pay off the high-interest credit cards first, the car loans second, and the mortgage dead last.
Integrating a properly structured mortgage plan into an overall financial plan can be the difference between owing money and owning money! It can be the difference between retiring early and possibly not being able to retire at all. It is one of the best ways to build your wealth over the long term. Times have changed!