Surprise! It's A Bad Idea To Use Your Own Money To Pay-Off Your Mortgage

Why it’s trash if you pay the extra payments to pay down your mortgage

If you follow the status quo advice from so-called financial experts, you’re going all in on making extra payments using your own money, hoping to pay it off or enough of it down to allow you to retire with a decent amount of equity after years of hard work.

We spend a lot of time teaching clients about how costly mortgages are (and debts like them around the world) are for borrowers. Besides the fact that you have little control over mortgage payments, refinancing isn’t a gain, and personally making out of pocket extra payments eat away at your limited savings (if you have any), there is one assumption when it comes to paying off a mortgage early that is fundamentally flawed.

That assumption is that it’s better to use your own money and time to do it than someone else’s.

Becoming poor?

The general logic is that if you do a refinance or a refinance cash out and reset your mortgage, get a lower interest rate, pay off some debts, and keep saving, your putting yourself in a better financial position.

To me, that sounds like formula for becoming poor. While it might be true that you have a lower interest rate, less credit card debt and some money in the bank, it’s turning short-term debt into long-term debt, if you plan on using some of your equity to pay-off credit cards. It becomes a slow downhill slide into more bad debt and financial ruin.

I’m in my fifties and have no desire to refinance to lose hard earned equity, create longer-term debt or put myself in weaker financial positions. I want to strengthen my financial footholds. I couldn’t imagine giving up my wealth to the bank, using my own hard earned money to make extra mortgage payments in a time of so much financial insecurity. In my opinion, that’s becoming poor. And history proves it. Most borrowers who used their house as an ATM during the 2007 real estate market crash or used their own potential savings to make extra payments, lost their home to foreclosure or lost equity. I was one of them.

Truthfully, your playing a zero sum game

Today the logic that you should make extra payments towards your mortgage with your own money is slow financial suicide advice, if you just comprehend the fact that wages and savings lag behind the cost of living. According to a 2018 Pew Research Report… American’s paychecks are bigger than 40 years ago, but their purchasing power has hardly budged, as you can see in the graph below.

The conclusion of this report is that most borrowers who make extra payments towards their mortgage, using their own money end up financially over exposing themselves on the back-end to the risk of unforeseen increasing cost of living expenses. Money they could have reserved for emergencies or reinvested somewhere else to diversify their income —at minimum to protect it from the cycles of the housing market and wealth robbing inflation.

As PEW reports, “Sluggish and uneven wage growth has been cited as a key factor behind widening income inequality in the United States.”

This speaks to what is a reality for all of us in the working classes, once we earn a dollar, the last thing we can afford to do is unintelligently reinvest it. But unfortunately too many of us are. That is why I see the average advice of “use your own money to pay-off your mortgage with spreadsheets, a calculator, a pencil and a piece of paper,” to be slow out-dated high risk financial advice.

Lower Unemployment

The report also says, on the face of it, these should be heady times for American workers. U.S. unemployment is as low as it’s been in nearly two decades (3.9% as of July) and the nation’s private-sector employers have been adding jobs for 101 straight months – 19.5 million since the Great Recession-related cuts finally abated in early 2010, and 1.5 million just since the beginning of the year.

But according to the report, after adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms average hourly earnings peaked more than 45 years ago: The $4.03-an-hour rate recorded in January 1973 had the same purchasing power that $23.68 would today.

Why would it be too risky to pay extra towards your mortgage using your own money even as it’s going down and your compounding equity? Because your not taking into account future costs that you aren’t experiencing today and that real estate values don’t always stay up or rise.

As MarketWatch reports, starting in your 70s, your healthcare costs will rise 30% on average, reaching $48,400 (with $8,100 in prescription costs on top of that). If you make it to an active 80, which today most do, your health insurance costs end up being 57% higher, and in your 90s you might need assisted living, which comes in at a whopping $89,000.

The long and the short of it is that the older you get, it won’t cost less to live, you just have different costs. The fun goes south and the healthcare goes north.

Most young and older mortgage borrowers won’t be able to afford to retire or stay retired. This is bad news for the majority of borrowers who don’t build or maintain enough equity or money to retire even with a frugal or lower quality of life, they won’t be able to afford to retire or stay retired.

“The median family of retirement age has $12,000 in savings. That is a terrifying figure for a country where Social Security, the state pension, pays out a maximum of roughly $2,500 a month, and pensions for both public and private employees are underfunded,” according to The Economist.

If that’s not enough to motivate you, check these stats from a survey of 1,007 Americans by GoBankingRates:

49% of Americans are currently living paycheck to paycheck

61% do not have enough money saved to cover six months of living expenses

64% do not have multiple streams of income

68% say their investment strategy does not account for a recession

America is facing a retirement crisis. It is a ticking time bomb and most people have their heads in the sand. The conventional advice on retirement is wrong, not helpful, and gives a false sense of security. It’s time to face the reality that life will only get more expensive, and the only way to thrive during your retirement years is to think differently about how to accelerate the pay-off of your mortgage.

Retire richer with OPM (other people's money) Mortgage Acceleration Strategy and Financial Freedom Education. As more and more borrowers plan for and reach retirement, there will increasingly be two kinds, the poorer and the richer. Those not using OPM Mortgage Acceleration Strategy and financial freedom education will be poorer and those who are financially intelligent to invest in them will be richer.

Plus simply, those who understand the importance of cashing out equity to invest for cash flow from assets (assets like rental properties) that hedge against inflation will prosper. While those who take the easy route of unintelligently throwing their own money at their mortgage, will face poverty as the costs of retirement far outpaces their meager earnings, savings on paper equity. Especially as the trade war between the U.S. and China heats up.

Today is the day to start and improving your financial management and picture.

Are you on the road to a brighter financial future? If not, what have you not been doing good enough? How will you begin to fix your path to a brighter financial future, so that you can have more free time, more money and more of a stress free lifestyle and retirement?