To pay off mortgage or not?

Should I pay off mortgage?Nothing like a mortgage free life. It is a great feeling to pay off mortgage loan and become debt free. Many people celebrate this event by throwing a mortgage burning party. We have attended a few such events where people pay off mortgage, and raise a toast to that!

Well, however nice it may sound, not many financial experts who we work with, fully agree whether it is good or not to pay off mortgage loan.

Who should pay off mortgage given an opportunity?

As per one of the financial planners, if someone’s income/ cash flow is not in abundance they should use windfall of cash/bonus/lottery prize etc. to pay off mortgage. In this case, person’s income is just enough to pay every day bills. A person who is also not risk averse, or feels happier seeing themselves mortgage free, should also pay off mortgage loan faster.

But someone who is young, debt free (except mortgage loans) and produces enough income to carry mortgage can consider other smarter ways of investing in real estate, only after speaking with his/her financial advisor.

Let’s look at an example:  Property value of a person’s current home is $300K. Mortgage is $150K. Equity=$150K. This person earns $70K and he has no other debts. He has also saved $150K in cash. Banks qualifies him to buy a $350K property. He has many choices.

Let’s discuss only two of them:

  1. He decides to pay off mortgage and live mortgage free. His property grows 30% in 10 years and it can be worth $390K in some 10 years
  2. Based on his mortgage approval he buys a rental property without selling his current property. He puts down $150K and buys a 2nd rental property worth $300K. His expenses on 2nd property are paid from the rental income. He spends zero money out of his pocket, in fact, he is left with some positive cash flow every month. After 10 years his properties are worth $780K, and his mortgage loans stand at $190k (assuming 25 years amortization, 3.5% interest p.a. and accelerated bi-weekly payments). His equity before selling expenses stand at $590K ($780 less $190K).

Can you imagine the kind of possibilities this extra money can be put to use in example 2, when this person decides not to pay off mortgage and invest in real estate instead?

Leveraging has made real estate investing very profitable for many in recent years.

Word of caution: before you venture out to investing your hard earned money, it is prudent to speak with your financial advisor, lawyer, tax consultant etc. first.

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