I often find myself in long conversations with my borrowers over the best way to pay off mortgages early. Do I recommend the “Bi-Weekly Payment” plan, the “Extra Payment Each Year” plan, or the “Pay A Little Extra Each Month” plan? Since it is “assumed” that paying off a mortgage early is a smart financial strategy, people are often surprised when I don’t have a favorite strategy to recommend.
When I get this question, I try to shift the conversation away from “Which strategy is best?” and towards “Are you sure you want to pay off your mortgage early at all?” While I think it’s admirable to get out of debt and stay out of debt, I don’t believe “paying off your mortgage early” should be your number one financial priority.
Instead, I believe you should use your financial resources to prepare for the future and all those mean, nasty twists and turns that life can throw at you. I’m not suggesting a gloom-n-doom approach to the future, but we just don’t know what will happen, and paying off your mortgage early may NOT be the smartest financial strategy for you.
My advice is to focus first on building safe liquid assets (resources you could access with little difficulty to pay for stuff) vs. paper wealth (resources that cannot be accessed easily but look really cool on your financial balance sheet). Equity in your home falls under the “paper wealth” category because it is difficult to access in an emergency and you may not be able to access it at all when you really need it.
An example of what I’m talking about came across my desk recently. The applicant wanted to refinance his home to access some of his paper wealth. For several years, he had been paying extra on his mortgage and only owed about $70,000 on a home worth around $400,000. On paper, things looked good, but...
I’ll leave the gory details of his set-backs out of my story, but when he came to me for help, his wife had left him and the divorce had drained his liquid assets after he paid her half their paper wealth out of his savings and retirement; he had lost his ability to work due to an injury and lost his business; he was 6 months behind on his mortgage payments; and he was facing total financial collapse. He needed me to help him access some of his $330,000 in equity (paper wealth) to live on.
But because his credit scores were bad and his income was gone, he didn’t qualify for a new loan. The bank who owned his mortgage – that same bank he had been paying extra to all those years – wouldn’t help him. I’m sure they saw his home as a great foreclosure opportunity – all that “paper wealth” made his home an enticing target.
His only solution was to try to sell the home before it was foreclosed on in order to keep some of his “paper wealth”, but since he had been so determined to keep his home – not wanting to uproot his children whose mother had just abandoned them – he failed to act quickly enough and now it was too late.
I wish I could tell you his story had a happy ending, but it didn’t. What I can tell you is that if this man had had $330,000 of “liquid assets” instead of $330,000 of “paper wealth” – his story would have turned out much differently. So if you are prepaying your mortgage now, but don’t have enough liquid assets available to handle life’s emergencies, please remember:
You cannot go grocery shopping and tell the cashier, “I don’t have any money, but my
mortgage is paid off”. Even on double coupon day, that won’t buy you any fruits or veggies.
- Bank Owned Photo by Mike Licht, NotionsCapital.com
- Onion Photo by Vancouverbcfoodbank
