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MONEY DO’S AND DON’TS: Stop managing your money like it’s the 50’s!


Work Up Some Numbers For Me

My last two pieces may have shocked your current thinking. “How in the world does it make sense to consider NOT paying off your home?” I’m hoping to make my final case here.

Begin with the example I used previously: A $400,000 home requiring 20% down, leaving a $320,000 mortgage. Today’s interest rates are ABOUT 5.5% for a monthly payment of $1,816.92. I use calculator.net for these examples so you can go there to check my math.

Making no extra monthly payments, it’s easy to see the principal and interest payments over the life of a 30-year mortgage. And it does in fact take thirty years to pay off.

“But ALL of that INTEREST!”

So, to avoid paying more in interest, a person sends an extra $1,000 monthly payment to principal, reducing the mortgage to 14 years, in effect self-amortizing the mortgage in half. The amortization schedule(1) shows how the payments play out over 14 years, obviously paying off the home in fewer years for an additional total outlay of $160,458.

But you own your home!

Consider this alternative: Over that same 14 years, what if you put $1,000 a month away into an account earning just 3%? At the end of 13 years, you would have $187,413 of CASH sitting in that account.

“But I still have a mortgage.”

Yes, of course you would, with a $240,458 balance remaining. But you also have $187,413 of SPENDABLE DOLLARS (with an effective remaining mortgage balance of $53,045(2)) for your future not sitting in the equity of your home that you cannot spend until:

  • You sell it
  • Or get another loan against it.

Now imagine that you got a higher rate of return in your cash account, the type you might expect from a long-term investment into your 401(k). At just 5% in 13 years, you would have over $212,000 of spendable dollars not sitting in your illiquid home equity. Add to that any odds that you and your family may not stay in that home for longer than 13 years, when you would sell it anyway, and the math is undeniable:

You can’t eat your house.

The key here is liquidity in your future. Pensions are all but extinct, and if a pensioner needed additional money pensions do not send extra payments because you need $10,000 to fix the transmission in your car.

Links and references:

(1) https://www.investopedia.com/terms/a/amortization_schedule.asp

(2) Current mortgage $240,458 – cash $187,413 = $53,045, only you have kept the extra payments.