We get asked by our members a lot whether they should make extra mortgage payments. Our answer is always a vehement “no”.
First, you need to understand how your mortgage works, which we detailed a couple of weeks ago. You can catch up here.
Then you need to understand the opportunity cost of extra payments vs. extra savings. You can catch up on that one here.
This week, we’ll break down why – even after you have the money to pay it off – you still should NOT pay off your mortgage.
A dead asset is an asset that is either dying or only worth something after you’re dead.
A working asset is an asset that is alive and growing and bearing fruit in your lifetime. It’s literally working for you.
Grandma’s brooch is a dead asset. Your engagement ring is a dead asset. Your car is most definitely a dead asset.
Your investments are a working asset. Your rental property is a working asset. Your small business is a working asset.
But what about your house?…
Sorry, I’m not sorry. I know some people don’t want to hear that. But if your house is paid off, it’s as dead as a doornail.
All you have to show for all those mortgage payments is home equity. Equity can’t buy you groceries. It can’t pay for Hawaiian vacations. It’s only worth something to you if you sell your home.
Very few people will actually tap into their home equity in THEIR lifetime. It will be worth something when you leave your house to your kids and THEY either sell it or rent it out. Then it will be a working asset for them.
And I can hear you saying “But we COULD sell it while we’re still alive.”
Yes, you could. But will you? With very few exceptions, I’ve only seen people upgrade. And once they stop upgrading they almost always hold on.
Maybe you’re the exception to the rule, but I’d take the other side of that bet every time.
A paid-off home is a dead asset, and paying off your mortgage puts the nail in the coffin.
The same reason you don’t want to make extra payments on your mortgage is the same reason, you should NEVER pay it off.
A mortgage is just a loan the bank gives you with your house as collateral.
That’s the part that makes people nervous, but if you have enough money saved to pay it off then it changes the dynamic.
NOW it’s not a matter of losing your home, but how to best use your capital. Is your capital best deployed paying off a 4% loan at the sacrifice of 10% returns?
Of course not.
A CEO that made that decision should be fired by the Board of Directors immediately.
You’re the CEO of Your Family, Inc. Don’t misuse your capital. Don’t get fired.
But what about when I retire?
When you transition to living off your savings instead of living off your paychecks, do the rules change?
We’ll answer that in our conclusion next week.