The goal of most, if not all homeowners, is to be mortgage free someday. We have been taught this from previous generations. It is seen as one of the keys to financial freedom. But is it? Is it good to be mortgage free?
The short answer is yes! You are probably wondering why someone wouldn’t want to be mortgage free. And if the answer is yes, then why write about it?
Let’s take a look at an ordinary couple, Joe and Diane. Joe and Diane bought a starter home, fixed it up and then years later sold it. The equity they gained, they used to purchase a more modern, larger home for their family. They took advantage of bi-weekly payments and making lump sums payments to pay down their mortgage faster. After all, the goal is to be mortgage free.
As Joe and Diane near their 50th birthdays, the kids have moved out, they have down-sized their home and have finally reached their goal. They are mortgage free. They did it. They had arrived so to speak.
Joe and Diane are both still working with good incomes. The money they used to spend on their mortgage is now being used in other ways. Some goes to savings, some to vacations, however, most is unaccounted for. As with most people, when their disposable income increased, their spending habits increased as well.
While they had a mortgage, they were building equity. Now, mortgage free, they are building some additional net worth in terms of savings, but not to the same extent.
Now consider what would happen if they leveraged the equity in their house to continue to build their net worth. Taking equity out of their house, they could invest it in a number of ways such as purchasing an investment property. A good investment should earn them a higher rate of return then the interest paid to finance it. With an investment property, someone else is paying the mortgage. Because both Joe and Diane are working, if need be they could cover the mortgage. Eventually, they will own two properties free and clear, substantially increasing their net worth and the rental income will supplement their retirement income. In addition, the interest paid on their investment may be tax deductible.
So while striving to become mortgage free is a worthy goal, it may not be the final goal. It is important to re-evaluate your financial situation and goals regularly with your financial advisors.
This strategy is not for everyone and should not be considered without proper advice from financial experts such as accountants or financial planners. Everyone’s financial situation is different so consult the experts to see if this strategy makes sense for you.