“Good debt is a powerful tool, but bad debt can kill you.” — Robert Kiyosaki
Should you pay off your house?
Or should you just make minimum payments?
I get this question a lot.
Over the years, I’ve talked individually with over 1,300 investors.
Doing that has given me a very strong opinion about this.
In general, I think you shouldn’t pay your house off.
There are some situations when it would make sense to do the opposite.
But overall, there are many reasons to not pay off your house right away.
Let’s get into it!
1. Why Not Pay It Off?
Some people might say paying off their house gives them a degree of comfort.
If that’s the case, that’s great!
However, as an investment, it may not be the best rational business decision.
Right now, interest rates are still below actual inflation.
We’re in a negative real interest rate environment.
That means with current interest rates, you’re getting a deal!
This is true if they’re the official CPI of 7% or higher at 15% (according to Shadow Stats).
If you own now, you likely have a low interest rate on your home.
The asset now is actually the debt rather than the house.
If you have a 3% loan and inflation is at 15%, hold that loan as long as you can.
You’re basically using other people’s money to buy the house.
And the rate you’re paying back that loan is very low.
The house’s value will be worth more in 30 years due to inflation.
We know the value will go up over the long term.
We also know the dollars you’re using to pay back the loan will be worth less the longer you take to pay them back.
So if you wait and make minimum payments, it’ll be better all around.
You’ll have more money you can hold onto rather than paying back on a loan.
It’s called inflation debt destruction.
You’re paying off with future dollars that are worth less than the asset appreciates.
Sometimes, it can be really good not to pay off debt.
2. If You Pay It Off
What happens if you actually pay off your house?
Let’s say you pay off a $500,000 house instead of paying the minimum amount and 3% interest.
The good news is that you don’t have a mortgage payment anymore.
You still have to pay the taxes and the insurance, but the $500,000 cash you had is gone.
You’re missing all that money.
It’s almost like you locked in a 3% return versus being able to use that money.
Now, what could you have done with that money?
I calculated what a $500,000 deal would get back over the next 25 years if you were able to procure a 15% return.
What I found is shocking.
The deal would total $16.4 million with no additional investment.
That’s a huge jump!
You would have an increase in money because you’re investing at a higher rate.
It becomes an arbitrage.
You’re borrowing at a lower return and able to invest at a much higher return.
3. When You Should Pay It Off
There are some situations when you should pay off your house.
If you are someone who likes having financial security, or maybe you have a lot of other money, you may find paying off your house more beneficial.
There’s also a situation where your interest rate is higher than actual inflation.
Then, it would make sense to pay off your house if you can’t:
- Find a way to refinance
- Find other investing options that are higher than the rates you’re paying
Obviously, we’re not in that situation right now.
But in general, I would encourage not paying off your mortgage.
Holding off would allow you to have the cash to invest in other deals.
I do this myself by renting in Los Angeles.
I think it’s a better financial decision for me and it could also work for you!
Now I want to hear from you.
If you have a mortgage, will you pay it off?
Will you invest the money?
Let us know in the comments below!
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.