Financial & Insurance Advice Blog

Two identical houses sit across from each other divide by a common driveway. They are identical in every way. They were bought at the same time by twin brothers for the same price. They differ in only one way. Both brothers had the same amount of money. The first brother decided to pay cash for his. The second brother put a down payment of 5% and took a mortgage of 95%. Which house do you think appreciated more in value?

Of course, the houses appreciated the same amount at the same time. The way you structure the debt on your real estate does not influence value. What it does influence is your ability to save.

The first brother put all his savings into his home. His equity in his home is not going to grow any faster or greater because of this. The second brother put very little into his home. His equity is going to grow the same as his brother. However he can invest what he did not put into his home somewhere else. He can watch not only his home but his investment grow and appreciate. At some point his mortgage will shrink and his investment will grow so that they will equal each other. He can then pay off his mortgage or continue saving. The first brother has a non liquid asset while the second brother has the same but also a liquid investment which he is controlling and available if needed.

So what is the rush to pay off your mortgage? If anything, the rush should be to save. Too many people decide to pay their mortgages every two weeks instead of monthly. This means 26 payments of half of what you would pay monthly. This works out to a total of 13 monthly payments instead of 12. You should explore how much you would save by investing the 13th monthly payment instead. You would be surprised how much would be saved over the course of your mortgage.

So what the rush? Well I am told all too often that “we will be able to do things once we get our mortgage debt off our back. We will be more secure.”

By constantly paying the minimum required and by saving the extra you would have paid to retire that debt “earlier”, you will accumulate the funds to do exactly that faster.

You have to decide whether security to you means no debt or it means debt with enough money accumulated to pay off the debt at any time of your choosing.

I want to be known more for the problems that I solve than the products I sell.