This post will be short because the answer is an easy one. If you’re asking yourself either of the following questions:
Should I pay off my mortgage early
Should I make extra principal payments towards my mortgage each month?
The answer is the same. Absolutely not!
Putting extra money towards your mortgage is maybe one of the worst places to put your money. There are a few reasons why this is a terrible idea. When you put extra money towards your mortgage, you’re basically locking in a rate of return that is equal to your mortgage interest rate.
If your mortgage interest rate is 4%, that means any money you put towards your mortgage is guaranteed to get a 4% annual rate or return. We typically advise paying off debt with an interest rate over 15% (typically credit cards or personal loans). If the loan is between 10%-15% we can talk about paying it off, but if it’s below 10% most of the time you can get a better return elsewhere, especially with real estate.
Even if your interest rate is 8%. Right now in 2022 while I’m writing this after you adjust for inflation, that’s a net rate of return of -.3%. Literally a negative return . Not good, you could get WAY better than that pretty much anywhere else (well, maybe not with crypto or NFTs right now).
Plus if you put extra money into your mortgage, it’s stuck there! You can’t ask the bank for that back. It’s like those Chinese finger traps, easy to go in, but super hard to get out. Your extra payments get pooled in there with your equity and the only way to access your equity in a property is to sell the property, do a cash out refinance, or get a home equity line of credit. And all 3 of these cost money, so you have to pay money to regain access to your money. Why would you ever want to lock your money away for 30 years with a guaranteed net interest rate of -.3%.
Do yourself a favor, take that money, and invest it in anything else. Stocks, bonds, mutual funds, even crypto. If you keep it anywhere for 30 years, it’s going to go way up and as inflation comes back down your return will do way better than if it was stuck in your property as equity. Plus if you ever change your mind, you can easily get your money out and move it somewhere else like your next rental property.
Your real estate coach,
Dallas & Greg
