What if the smartest financial move you could make didn’t have anything to do with stocks or bonds? And what if it virtually guaranteed you at least a 3.5% annual “yield”?
Would you be tempted?
I think you probably would. In fact, despite dedicating most of my time to chasing down stocks with “double” potential, I’ve been committing more capital to this nearly zero-risk investment.
So what is it?
Paying off your mortgage.
I know, I know. It seems horridly boring. And you may be wondering why it’s worth paying down something that has tax advantages and a low interest rate. Valid points, for sure.
But consider the positives for a moment.
With the broad market breaking out to all-time highs and interest rates near record lows, one can make the case that neither stocks nor bonds are exceedingly attractive. Conversely, paying down the principle on your house has very defined results.
You’ll have less debt and more equity. Pretty simple.
Let’s also not forget that living without a mortgage gives people a lot of financial freedom, which likely results in less stress. Wouldn’t it be nice to eliminate that massive monthly expense sooner rather than later? Not to mention have that huge nest egg that you could tap into at any time if you needed to? I think so.
According to a Harris Interactive survey from a couple of weeks ago, a lot of middle-aged people agree.
Of 1,540 people polled, 40% that were 55 and older said that paying off their mortgage was the best financial decision that they ever made.
Interestingly, younger people – ages 25 to 54 – didn’t consider the mortgage important, and were more inclined to focus on saving early.
But I think that “focusing on savings” and “paying off the mortgage” are essentially the same thing; it’s just a matter of perspective. Paying down a mortgage is a form of savings, which at its essence is just deferred consumption – putting more aside now so you have more later.
Consider this simple example:
A $250,000 mortgage with a 4.0% interest rate over 30 years costs $1,193.54 per month ($833.33 in interest and $360.20 in principal in payment 1).
It will cost a total of $429,670 over 30 years.
But paying $200 extra per month reduces the total cost to $381,610, and the house is paid off in only 22 years and 10 months.
That extra payment of $200 per month saves you $48,060 in interest. Not to mention that for 7 years and 2 months you’ll have no mortgage payments. That amounts to over $100,000 in expendable income that you wouldn’t have otherwise had, all things being equal of course.
The easiest way to see how extra mortgage payments could be the “best financial decision you’ll ever make” is to plug the details on your mortgage into a free mortgage calculator. You can find one here. Then play around with the “additional payments” field to see the impact. You can view an entire amortization schedule so you can see how it all works over time.
Another option is to call your financial advisor and ask him to provide the same information to you.
It’s worth looking into. It doesn’t cost anything, but can end up saving you tens of thousands of dollars over the long run, and with essentially zero risk.