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Turn Your 30 Year Mortgage Into $2 Million!
September 9th, 2013 12:32 PM

Buying a home is often times an exciting time for new home buyers; however the mortgage payment is a different story.  The thirty year mortgage although the most common, can also be thought of as a retirement account.

Paying your mortgage off early is not a new idea and not the strategy for everyone, but is a conservative approach and may not be for those who are looking for larger returns.  Age may also be a factor in whether a homeowner would like to continue paying a mortgage for a full term.

 

The idea is simple in itself; a borrower with a 30 year mortgage at a fixed rate could pay the balance off in less than half the term, by simply doubling the scheduled payment.  The mortgagee would pay less interest over time and the money that would typically continue going towards the mortgage could go directly into a retirement account.

Market Watch provided us with a great example.  A $400,000 mortgage for 30 years and a 4.5% fixed rate will come to a little over $2,000/mo. payment.  Let’s say the homeowner was in their mid 42’s and capable of paying $4500/mo. towards the principal. He or she could pay the mortgage off in eight and a half years, 104 payments.  The borrower would make 4.5% on their money by avoiding the interest that would be paid over a 30 year term.

Now, the mortgage is gone, the homeowner is in their mid 50’s now.  Consider this… if they were to continue to pay that same $4500/mo. into an individual retirement account, IRA, or in a growth stock mutual fund at conservative return of 7% annually, for the remaining 21 years, they will have saved nearly $2,000,000.  That’s incredible!

This is just one example, but one can see how that can work powerfully for any homeowner whether your loan is for $400,000 or for 200,000.

This strategy is taught by many financial gurus, like Dave Ramsey, who has been a proud spokesperson and teacher of managing debt properly and how to own your home without a mortgage. 

Of course let’s look at some mental hurdles to overcome, one being the ability to write off the mortgage interest as a tax deduction.  This is based on the assumption that mortgage interest payments will always be tax deductible and that the interest will decrease faster by sticking to the regular scheduled payments.  Although that is a great point, the benefit on the other side is a guaranteed return as long as there isn’t a period of high inflation.

So one can see how paying off their mortgage can position them in very different place financially for their future.   I would encourage anyone to really look at their mortgage, the rate they are paying and consider paying down the balance at an accelerated pace, after all, it is virtually risk free.

 

 


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Posted by Michael Hobbs on September 9th, 2013 12:32 PMPost a Comment

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