If you put pancake batter in a waffle maker, is it a waffle or a pancake? It’s a strong question simply because it always starts a discussion and everyone has an answer. The same result is achieved by asking the question, “Should I pay off my mortgage?”
The explicit danger in giving any financial advice, is to draw from years of experience and give – with great authority and strong conviction – right advice for the wrong circumstances. Therefore the key here is to offer proven strategies for people with a specific set of circumstances and then trust that the reader is brilliant enough to know when the circumstances apply to them. Over 100 years ago GK Chesterton wrote, “the madman has kept all of his reason, but none of his common sense.” Realizing this, the “best way” is 100% symbiotic with your vision for your future along with your priorities on what matters to you the most.
Routinely on a spreadsheet it works better to pay off your house over 30 years and invest the funds that you would otherwise use to pay the mortgage off early. That said, spreadsheets are rather emotionless little things and don’t account for mental capital. So if you are the character who hums happily knowing you have zero mortgage, and your only indebtedness is the inevitable increase in property taxes, then by all means buy with cash or pay it off as quickly as possible. To pay your mortgage off faster, try this strategy: pay July’s mortgage on the 1st and then when it clears, pay August’s mortgage on July 5th. This way your next payment is due in September. In September, repeat. Or do one month at a time but pay half the mortgage in advance on the 15th and the other half on the 1st.
Either way, paying two months at once or paying half twice a month, both keep your monthly mortgage payment the same, but this eliminates a lot of long term interest. It will shave 3-5 years off of your loan. Why does it work? Mortgage interest is only charged on the remaining balance, so every time you reduce that balance early you reduce the interest. Important note: You MUST call the mortgage company in advance to make sure they will apply the second payment to the next month (not to principal). Their default is to apply any early payment to principal. You’ll have to call them every single time, one because they are pedantic and two because you are breaking the norm. Yes, it’s more work, and for that extra work, you literally reduce your mortgage by years all while paying the same amount as a conventional payment schedule.
So now flip the pancake. What if you are the character whose circumstances compel you to take calculated moves? While satisfying to throw money at a mortgage, the problem this creates is your capital is committed to one cause with little flexibility. And you have very little ability to get cash out when you need it. Try this strategy to get more flexibility and more ability: invest the money you would normally use to pay off the mortgage early. This works for selling one house to buy another as well: sell the old house, put a 20% down payment on the new house, then invest the remainder of the proceeds. Invest it conservatively so you get a return that you can depend on. Why is that important? Because each month you can use the interest (the profits) to help pay the monthly mortgage. In essence you have created an income producing machine. It gives you cash flow while you still have access to all the cash.
At this point the waffle says, what about the risk? That is important. My father always said, “climb as high as you want, just be sure of your grip.” How do you invest the dollars so that the risk of investing those dollars matches your circumstances, your vision, and your priorities? Those who try to do it themselves risk missing details, so talk with a wealth advisor and get strong advice on pancakes or waffles…and real estate.
Advisory Services offered through Strong Retirement Solutions; an SEC Registered Investment Advisor.
