Paying off your home is deeply ingrained in American culture. It’s as American as apple pie and baseball. Many people assume that paying off your home as fast as possible is a good use of your money, but it’s not always healthy.
Don't have time to read or listen? Here's the main practical takeaway:
Many people have loans with 4% interest or even lower, when in the past you could have had a mortgage rate of over 18%. The dream of paying off your home needs some perspective because it may not hurt you to pay that 4% interest when there are better investment strategies for your money.
I saw a tweet this week from a well known financial expert that said:
“Your mortgage shouldn’t follow you into retirement. Refinancing your home can help.”
Refinancing your home can shift your home loan from a 30-year mortgage to a 15-year mortgage.
There’s some great things about refinancing! But there are some things we need to talk about first.
Three Big Red Flags About This Tweet
Red Flag #1 - Black and White Language.
If someone says you should ALWAYS do something or NEVER do something, RUN. I’ve talked about this before, but "Black and White Language" is so dangerous for people looking for financial advice because everyone’s situation is wildly different. What works for you may not work for someone else and visa versa.
Refinancing your home loan may be a great choice for you or it may make things worse. It all depends on your circumstances.
Red Flag #2 - The link in his tweet lead to a mortgage sales page.
You might expect it to take you to an article, much like this one, telling you about the benefits of refinancing your loan or explaining how your retirement will be affected by having a paid off home. Instead, it sent you to a sales page.
This tells me that this isn’t helpful advice. It's a sales gimmick. He most likely will earn a nice commission from the mortgage company, but people will still take his advice seriously.
Red Flag #3 - He Is Only Telling half the story.
Is it a good idea to refinance your home loan? Maybe. If your loan has extremely high rates, then yes!
Even if you have lower interest rates, it may still make sense to do it. And there’s really nothing wrong with paying off your home early, but there’s also some down.
Telling half the story is a popular sales tactic. When you’re trying to sell a product, you tend to hide the not-so-nice details.
Here's The Other Side
Will refinancing save you money on your loan? Yes!
Will it save you money overall? Probably not.
All the extra money you’re paying every month could be going towards something that would benefit you even more: investments!
Say you’re a homeowner who is 5 years into your 30 year mortgage with a 4% interest rate.
You read this tweet and think, “Yeah! Switching to a 15 year mortgage would help me pay off my house faster.”
Now, you’re putting a lot more money into your home every month, which is extra money you could have invested.
The question you have to ask yourself is, could you have made more investing over the next 15 years than you saved from refinancing? To do that you’d have to make more than 4% from your investments.
Refinancing VS. Investing
While it’s impossible to know for sure, it’s wouldn’t be at all surprising that you could make more than a 4% return.
Refinancing would help you save 4% on your loan, but you could have made a lot more money if you had invested it. Then, you could even use your returns to pay off large chunks of your home loan.
Worst case scenario, rushing to pay off your home could lose you money that you would have gotten back from your investments.
Paying off your house is a great accomplishment and in some situations, it may even be the right decision.
Maybe having that large home debt is looming over your head or holding you back from something you need. Your peace of mind and quality of life always come first, so it may make sense for you to hurry to get your loan paid off.
The reality is though, we’ve never had lower interest rates than we do now.
Many people have loans with 4% interest or even lower, when in the past you could have had a mortgage rate of over 18%. It doesn’t hurt you to pay that 4% interest when there are better uses for your money.
Do you still have questions about your mortgage and paying it off?
Want to know what the pros and cons would be for your specific situation? Of course you do -- reference my frustration with Black and White language and the need for highly specific evalauations! I’ll look over everything with you, at no cost. We’ll see where you’re at and weigh the good and the bad of paying off your home so you can be confident you’re making the best decision for you and your money.