Let’s talk about homes, mortgages, and if I should pay off my mortgage faster.
Let’s jam!
Setup: The Scenario
In 2021 I bought a new primary home and turned my former home into a single-family rental. I got extremely lucky with my timing and locked in a 30-year interest rate under 3% on my new primary home. And a year prior in 2020 I refinanced my rental into a new 30-year fixed mortgage with an interest rate at 3.2%
The Desire to Be Debt-Free – the Psychology
I feel a strong psychological pull and desire to want to pay off this debt and be completely FREE of all debt. That’s got to be the best course of action, right? Wrong! That’s because debt for this kind of asset and at this interest rate is relatively good. Here’s why.
Inflation is Your Friend
Current inflation rates of 7% in 2021 and 6.5% in 2022 is your friend if you can grow your income to keep pace with inflation. If you can grow your salary to keep pace with inflation and hold your effective buying power, then those home mortgages of practically free money. As your income increases, those fixed rate mortgages keep feeling cheaper as time goes on.
I felt this effect on my first home that I bought in 2016. I remember at the time feeling so much pressure on my cash flow because at the time it felt like it was a HUGE expense. And at the time it was! It’s been 7-years and I still own that house and when I update my financials and see the monthly payment, it feels like nothing. That’s because inflation is our friend, if we are able to increase our income level to at least not lose ground to our eroding buying power.
Benefit from Tax Deductions
There are hidden benefits to keeping your mortgage payments. Tax deductions! Yes, you lose money paid out for interest payments. However, come tax time that expense is tax deductible and can help reduce your yearly tax bill. And remember, over a long-term time horizon of many years, those expenses will feel cheaper and cheaper with every passing year.
Liquidity: Keep Your Powder Dry
The term “Keep Your Powder Dry” mean to always be in a position where you are ready to take action. In terms of money management, this is LIQUIDITY.
If you were to pay off your home mortgage fully, that’s great, but all that equity in your home is not easily accessible. It takes time and expense to sell your house to get access to that equity for other purposes. This is one of the big reasons you probably don’t want to pay down your home mortgage faster. Let the bank keep their money tied up for the next 30 years and keep your own powder dry so you can use that money on other investments.
Credit Score
Let’s face it, the big credit reporting agencies like Equifax don’t care about you or your potential and they certainly don’t care that you are a millionaire and are debt free. The one and only thing that the credit agency cares about is that you have debt, and that you pay off that debt on time every time.
You could take a significant hit to your credit score if you pay off your home mortgage and live a debt-free life. Don’t get me wrong, if you in later stages of your life journey this may be totally okay! But if you’re in your 20s and 30s, you want to have a fantastic credit score to help you get the best loans and credit in the future so that you can leverage and keep your powder dry.
In Sum: probably better off not paying off your home mortgage faster
Reality is that the feeling and desire to be debt-free is completely okay! But if you are emotionally mature enough and detached so that you can step back and look at the situation objectively, you’ll probably find that there are more reasons to keep your primary home mortgage and pay that off as slowly as you can because over a 30-year timespan, those payments start to feel cheaper and cheaper.
Caveat Emptor assumption is that you have a low interest rate. If you have a high interest rate, say anything over 5% or any interest rate that’s greater than inflation, then absolutely pay off that debt faster. Or better yet, refinance into another 30-year mortgage at a lower interest rate when they drop again.
Leave a Reply