Have you ever considered paying off your mortgage to be a legitimate
way-perhaps even the perfect way-of transforming your debt into wealth?
Most people live under the misconception that a low home mortgage interest
rate is one of the best ways to pay off their debt and save money in the
long run. They have no idea that certain people completely eliminate all
of their debts, including their mortgages, in seven to eight years. Those
same people are able to pay for everything in cash. They take the money
they were wasting on debt-which according to national averages is $2000
per month-and use it to build real wealth.
Transforming your debt into wealth involves linear math and a
critical path system, not a magic wand. Despite the obvious benefits of
paying off your mortgage sooner, many homeowners still ask, "Why should I
pay off my seven or eight percent mortgage when I can get a better return
by investing in the stock market? I can probably get ten to fifteen
percent or better there." This is one example of the conventional
financial wisdom that so-called experts have taught us, and it's complete
rubbish!
Here are 3 Reasons Why the "Better Return in the Stock Market" Idea is
a Myth:
Reason #1: Comparing mortgage interest rates to stock market
investments is an apple to bananas comparison.
Most investments in the market are simply "paper returns." If the
market plunges, then you lose that investment. When you pay off your home
mortgage, however, you're getting a guaranteed return on that 7 or 8%
interest rate. The closest comparison in the market would be thirty-year
Treasury Bonds, which currently pay less than seven percent, and have no
guarantee. Our faith in the U.S. government makes the investment feel like
a sound one, but feelings should never guide our financial decisions. When
you compare return rates on investments, you must compare guaranteed rates
with other guaranteed rates, apples with apples. Non-guaranteed rates are
bananas, not apples.
Reason #2: Homeowners who have a 7-8% interest rate on their mortgage
have either bought or refinanced a home recently.
If they would take a look at their mortgage payment coupons, then they
would see that what they're paying right now is nowhere near 7 or 8%; it's
really about 85-93%! They disagree, saying, "Yeah, but that's right now,
but over the next thirty years, it will only be 7 or 8 %."
Well, according to the National Association of Realtors, the average
American family moves every 7.1 years. During my seminars I ask the
question, "How many people have moved in the last seven years?"
Invariably, the majority of the people in the room raise their hands.
So, the question is, "What interest rates are homeowners actually
paying those first five to ten years of their mortgage?" I did the math
and discovered that a homeowner paying month to month on a $100,000
mortgage with a 7% fixed interest rate will still owe 94% of that mortgage
at the end of five years. After ten years, that homeowner will still owe
86%!
The next question is, "Okay, so what happens when you move into a new
home?" You guessed it: you start over with a brand new mortgage and paying
an interest rate of 85-95%!
How can your 10-15% return in the stock market make up for the money
you lose to your "great" mortgage rate? Add to this the reality that
people are constantly refinancing to get a better interest rate or getting
home equity loans to consolidate debt, and it comes as no surprise that
only 2% of Americans truly own their homes. 98% own mortgages.
What we've found is that the average American can become completely
debt-free by paying off his or her mortgage in 7.7 years and saving over
$105,000 in interest. $105,000 interest saved is $105,000 earned. That
translates into a 31.32% guaranteed return for those 7.7 years. No other
investment on the market even comes close to that, yet most people never
consider debt-elimination as a legitimate investment. The solution for
transforming your debt into wealth is right under your nose.
Reason #3: Paying off your home mortgage is not only a guaranteed
return, but it is also a guaranteed tax-free return!
Paying off an eight percent mortgage is the same as getting a
guaranteed, tax-free eight percent return. If you invest outside of a
sheltered plan, you are subject to income and capital gains taxes, which
can significantly lower your return. If you're in the 28% tax bracket that
8% guaranteed, tax-free return equals a taxable return of 11.11%.
The idea that you get a better return in the stock market is a myth.
Paying off your debts in general, and your home mortgage in particular, is
the best possible means for transforming your debt into wealth.
