Is there way to pay my mortgage off in 5-7 years?

Is there way to pay my mortgage off in 5-7 years?

07.10.17  |  Uncategorized  |  By: Oscar Veloz
Is there way to pay my mortgage off in 5-7 years?

Of course. The better question is, “Should you pay off your mortgage in 5–7 years?” If you understand finance and are anything but the most extremely conservative with your money, the answer is no. In fact, in order to maximize your wealth, you should borrow as much as you can for as long as you can.

Let me explain. Mortgage interest rates are low…extremely low. It’s usually the cheapest money available to most consumers because it is secured by an appreciating asset and most often backed by the government in some way. Current rates on a 30 year fixed rate mortgage are around 4%, depending on your credit. Mortgage interest is also tax deductible (in the US). So, if you are in the 25% tax bracket, the 4% mortgage only costs you 3%!!!

The question to ask yourself is, what can I earn if I invest my money instead of paying off my mortgage. If the answer is anything higher than 3%, paying off your mortgage is a bad idea. This is the concept of opportunity cost. You can only spend each dollar you have once. You can either pay down your mortgage balance, or you can do something else with it. You cannot do both.

Now, if you are going to buy a car or blow it on something, you’re better off paying down your balance. However, if you invest it and get a 10% return (the average long-term annual return of the Dow Jones), you would be a fool to choose to pay down your mortgage balance. That 10% return compounds annually. So in year two, you make 10% on what you invested, but you also make 10% on the 10% you earned in year one, and so on. Over time, this equates to huge sums of money.

Warren Buffet took out a 30-year mortgage to buy his second home in 1971, for which he paid 150k and borrowed 120k (recently listed for 11 million, btw). Though he could have easily paid cash for the house at the time, he had better uses for the money than to save a few bucks in interest. He used the 120k he borrowed to buy more Berkshire stock. Today, he estimates that 120k investment is worth $750,000,000!!! Now I’m not saying you’re Warren Buffet and can turn 120k into $750M in 50 years, but if Warren Buffet thinks mortgage money is cheap and you should take advantage of it, who are any of us to argue. Especially when basic math backs it up.

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