Should you pay down your mortgage?

I was reading an article written by a mortgage broker that listed 10 reasons on why you shouldn’t pay down your mortgage.  It had the same reasons that most articles have.  Since this article was written by a mortgage broker, it was obviously slightly biased towards getting and keeping loans.  However, one point he argued against was the forced savings that many financial advisors seem to preach. 

One of the main reasons financial advisors give for paying down your mortgage is the forced savings effect.  It seems to me that people who need to have “forced savings” are bad with their money anyway.  If the only way that they can save money is to lock it up, then they’ve got bigger problems.  Once we write that principal paydown check, we change cash into the equity.  There’s no way to get the cash out without getting another loan.

I used to think that if our saved money is earning less interest than our home loan rate that we are losing money everyday.  If we get 5% from ING and our home loan is at 8%, we are losing 3% daily.  The big question is what do we gain by paying down our mortgage?  If I had an extra $5,000 in the bank, what do I gain by sending a check to my mortgage company?

The obvious answer is instant principle paydown thereby shifting the principal and interest ratio on subsequent payments.  Simple math can easily calculate the thousands of dollars saved in interest over the next 30 years from this simple payment.

As many people live using monthly financial budgets, what does this principle payment check do for them?  Your mortgage payment does not decrease due to the paydown.  You have not changed any of your monthly financial numbers although your bank account is lighter by $5,000.   In fact, I argue that sending in that $5,000 check is detrimental to your financial health.  What you have done is you’ve limited your future financial options.

Suppose your home needs repair unexpectedly, a health emergency arises or your car needs a new transmission.  If you were paying down your loan as a means to “save” money where do you get the funds for your emergency?  You’d probably use credit cards, personal loan or even a HELOC.  All of these sources have a higher interest rate than your mortgage loan.  Now you are forced to borrow money which you had available at a higher rate.  Wouldn’t having that $5,000 in your savings account be much more important than saving that 3% a day?

My opinion is that paying down your mortgage locks up your money and the risk incurred by doing so greatly outweighs its benefits.  I do want to mention that this post is directed towards people who tend to use paying down principle as a means of saving money.  People who manage their money and keep adequate cash reserves can choose to pay down their mortgages without ill financial affects.

About Kenric

My blog about living life to the fullest by generating passive income through real estate, business and online investments.
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