Why I Didn't Pay My Mortgage Off In Full
Getting out of credit card debt, paying off all student loans, and paying off their mortgage in full ASAP is the #1 goal of almost every personal finance blogger on the Wise Bread Top Personal Finance Blogs List, but what if they have it all wrong?
OK, as the owner of Credit Card Chaser, I will be the first one to admit that going into credit card debt = bad. Why? As you can tell from the true cost of credit cards calculator, if you buy something with your credit card and don’t pay off the balance in full the first month, then that $50 tank of gas can start to balloon to close to $60 (and you’ll make payments on your 20% interest credit card for a year and a half). If you fill up your tank every week, before you know it, you are essentially tacking on an “I like to carry a balance” surcharge onto every tank of gas you buy.
If carrying credit card debt is so bad, then why did I pass on the opportunity to pay off the $270,000 that was (and still is) remaining on my home mortgage last year? Isn’t the Holy Grail of all personal finance bloggers to get to the place where they can say that they are “100% debt free” and then put up all kinds of fancy progress bars and charts and graphs on the sidebar of their blog boasting about their “freedom from debt” and their ever increasing net worth?
For many people, it’s a noble and wise goal to pay down their mortgage as quickly as possible. For many others, however, paying off their mortgage in full earlier than they have to could be a huge mistake.
“LOAN” — The 4 letter word that shouldn’t be a 4 letter word
When you read the word “loan” on many personal finance blogs, the word is treated as either a necessary evil at best (i.e. “I was approved for my home loan, but I am going to make extra payments so I can pay it off as quickly as possibly”) or the spawn of “you-know-who” from “you-know-where.”
I would submit that getting a loan can be a great tool for building wealth, if and only if, the loan is used in the right way and for the right things.
What is the right way and what are the right things? I am glad you asked.
Arbitrage, ROI, NPV, WACC, & other fun stuff to bore a date with
Just in case you have never bothered to read the Wall Street Journal, perused Yahoo Finance, or spent a quiet relaxing night at home curled up on the couch reading the latest SEC filings (or if you have never taken a basic business class, for that matter) then you will not know that almost every company whether public or private, large or small, usually uses some sort of debt in order to increase its profit and build long term wealth.
For everyone else that has done any of the above things, you will admit that debt can be a powerful tool for many companies to use in accelerating their profit potential. For anyone that has taken a finance course, then you have likely heard more than you care to know about calculating the ROI, NPV, WACC, and other measures commonly used to help make business decisions that often include debt financing.
If many financial experts, analysts, and personal finance bloggers alike are quick to applaud the numerous ultra profitable and ultra successful companies that use debt as a means to build wealth, then why on the micro level is debt viewed in an entirely different way?
The Business of “YOU”
I own 4 different businesses that generate a very healthy ROI, so when one of my businesses was fortunate enough to sell a business asset in the high 6 figure range this past year, I was confronted with the fun situation of deciding how I should best put that large (for me) amount of cash to work.
I could take the advice of most personal finance bloggers and pay off the approximately $270,000 that was left on my mortgage and costing me somewhere in the neighborhood of 5% or a little less (after factoring in the tax savings of the home mortgage interest deduction) with one fell swoop and still have almost 2/3 of the lump sum of cash to use for other purposes. OR I could invest that money back into my business that was currently generating an ROI of much higher than the 5% my home mortgage was costing me and make that home loan accelerate the creation of wealth.
As you can already guess from the title of this article, I chose not to pay off my mortgage. I used the majority of the money to re-invest back into my business, because yes, I could essentially “make” 5% by paying off my mortgage in full early but if the ROI of my business was 20% (not the exact number, but just chosen for illustration’s sake) then even after factoring in the cost of the debt, I would still roughly net 15%.
Yes, there are many different things to consider before making a decision like this because risk tolerance, the certainty of future cash flows, the confidence that one has in their ability or their businesses’ ability to maintain a certain level of performance, and even the availability of investment/business opportunities yielding a comparatively high ROI are all a factor — among many others.
My challenge to you is two-fold.
First, understand that personal finance is, in fact, very personal. Just because 9 out of 10 of your favorite personal finance bloggers or “experts” tell you to do something because generally it is the best advice for most people, that does not mean that that is the best thing for you to do.
Second, calculate how much your money is worth to you. What is the opportunity cost of “doing the safe thing” and paying off your mortgage early? What is the ROI of investing into your business or investing into yourself (via education, training, etc.)? Are there arbitrage opportunities or even simply good uses of debt where you can earn a positive ROI by using debt to your advantage?
What do YOU think?
BONUS: If you are one of those people that are just looking for an excuse to think that it’s OK to go into debt so that you can buy a big screen TV or a Jet Ski then stop, do not pass go, do not collect $200, and immediately re-read this entire article and then write on the chalk board 100 times: “I will only use debt to buy appreciating and/or income producing assets. I will only use debt to buy appr-”
Well, you get the picture.
This is a guest post by Joel Ohman, a Certified Financial Planner™ and the owner of a credit card website with some really cool (or so he likes to think at least) credit card calculators and other tools for finding the best credit card. Read more articles by Joel: