March 20, 2007, 4:30 pm

Why You should NOT Pay Your Mortgage

by: The Financial Blogger    Category: Personal Finance
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Having a completely paid off mortgage and enjoying “your property” is a part of many financial plans. People are planning to retired debt free in order to decrease their cost of living to a bare minimum. But what if this money could have worked for you during the past 30 years? What if you could benefit from tax deductions during all these years? What if you could be rich instead of being only “house rich”? Making money out of your house is very possible. Here’s how:

For those who are lucky enough to live in the USA, the interest on your mortgage is probably tax deductible. It means that if you are paying $10,000 in interest a year, your income is reduced by that amount. Therefore, you should receive a nice tax return year after years. If you pay off your mortgage, you won’t benefit from this tax return anymore.

For those who aren’t that lucky and live in Canada, just like my case, there is a financial planner that though of you. His name is Fraser Smith and he developed the Smith Maneuver. This technique will be explained at a later time on this site. There is always a way to get some tax deduction from the interest paid on your mortgage. Therefore, the lower is your mortgage balance, the lower your tax advantage will be.

As mortgages represent a significant amount and they are secured debts, you will benefit from the best interest rate given amount the credit products. An easy question for you: “Why pay you less expensive debt in term of interest?” If you have the option of paying interest only, you should concentrate on your other debt first. By paying interest only on your mortgage, you can free up cash flow and apply it on high interest debts like credit cards. Careful planning must be done since you increased your cash flow to pay off your debt faster and not ending by spending this money on other goods.

While you are making monthly payment on your mortgage, your property is increasing in value. Therefore, your debt is decreasing and your asset is increasing. You are then building equity in your house. Another option is to use equity lying in your property to consolidate your debts or to make a big purchase. As you are paying low interest rate, you are better off paying all your existing debts. By refinancing your property, you will benefit from low interest rate and extended term to pay off your debts. It is usually preferable to buy your car through your mortgage for the same reasons.

Another way of making money from you house is to leverage against it. Unless purchasing goods or consolidating debts, you can use your equity to invest in the stock market. If your interest rate is 5% and you can make 8% out of the market, you are making 3% yields on money that would be sleeping within your walls. In addition to that, you can consider the tax deduction related to your mortgage’s interest. There is obviously a risk in leveraging strategy and you should establish a financial plan with a financial planner or a banker before starting to do so. Leveraging is definitely not for everybody!

I hope those few examples showed a different approach and opened your eyes on a complete new world of opportunities. This is why I like personal finance so much; it can make you save so much money!

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[…] a recent post, I explained why you should not be in a hurry to pay off your mortgage. Actually, with some good […]