Is It Wise to Pay Your Home Loan Off With Mortgage Rates this Low?

I often have conversations with clients about their needs, their wishes, their wants. Many clients discuss how they “wish” to pay off their mortgage sooner than later. For clients who are in their 50’s or 60’s, that makes sense. They would like to have their homes paid for when they retire. However, for most others, there are other opportunities that exist that make far too much sense than to accelerate the payoff of their home loan.
Think of this…you have $10K, $20K, or $50K sitting in a bank earning close to zero percent. What do you do with it? Or perhaps you just inherited those same amounts. What do you do with the money? The stock market can be very risky. Perhaps you can use some of it to pay down your mortgage balance. Is that a wise move? Not if your mortgage interest rate is at 2-3%! There are many, many investments that will earn you much more than 2-3%. Why pay down a rate of 2.5% when you can earn 7%, or 8% on that money?
Take $50,000 for example. Paying down a 2.5% interest rate saves you $1250 per year in interest. However, investing that same $50,000 at 7% earns you $3500 per year! So the smart move is to invest that $50K at 7% and then, if you wanted to, take that $3500 and pay down the mortgage by $1250…thereby pocketing an additional $2250. OR…let it ride and continue earning 7% on your money while continuing to write-off your mortgage interest (as opposed to paying down your loan, lowering your balance, and having less of an interest write-off).
So…where do you find 7% investments? AH…that is the question. I talk to many of my clients about investments in 1st Trust Deeds. Most have no idea about these opportunities. So let me explain. There are lenders who lend to people who buy homes, fix them up, and sell them for profit. Those flippers need capital to purchase and fix up the home, so these hard money lenders provide that capital to them for a very healthy return. Next, the lender then asks investors (you and me) to invest in that first trust deed (we supply that capital and earn interest on that investment). 6, 7, or 8% is very attainable to me as an investor. Remember, this is a 1st trust deed (not a 2nd or 3rd) and most of these type lenders are VERY, VERY CONSERVATIVE on who they lend to and how much they lend (they like to keep the loan to value low…so that the risk is VERY, VERY LOW. If you have any interest or any questions on this type of investment, feel free to call me to discuss further. I am always looking for ways to help my clients! You can reach me at 661-705-2500 or email me at ckravitz@bayeq.com.