Dr. Cory S. Fawcett from Financial Success MD challenges the common belief that paying off a low-interest home mortgage is the smarter financial move. He argues that there are other factors to consider when making decisions about debt-free living, such as life goals and happiness metrics.
The common wisdom about “good debt” might not be so wise after all, as it often stems from only looking at the interest rate as the only valid variable. Other factors include real-life experience, life goals, and happiness metrics.
Dr. Fawcett emphasizes that there is no one-size-fits-all solution to debt-free living, and it is important to consider not just the interest rate but also other factors that may not be considered in book sense. For example, an experienced poker player can spot rookie mistakes made by beginners, which can be attributed to their lack of real-world experience.
To see the whole picture before answering the question about paying off a 3% home mortgage, Dr. Fawcett recommends considering the following additional variables:
1. The mortgage’s original loan was $600,000 at 3% over 30 years with a monthly principal and interest payment of $2,529.62. They still owe $400,000.
2. The tax write-off they need is not a good idea, and using leverage is not a smart choice.
3. The tax write-off they need is not a bad idea, and using leverage is smart.
In conclusion, Dr. Fawcett’s perspective on debt-free living is based on real-life experiences and the importance of considering other factors beyond just interest rates. By doing so, individuals can make informed decisions about their financial future and achieve financial independence.
Toni, a married couple, is struggling to find an investment that will provide the same monthly cash flow as paying off her house. Her current income is at least 33% of her income to taxes, which means she needs to earn $3,794.43 a month to make the house payment. To achieve this, she would need to find an investment that returns a guaranteed 11.38% before tax.
Toni and her husband, who are filing jointly, will receive a $27,700 standard deduction on their 2023 taxes, but they will not be able to write off any mortgage interest. This is because 90% of taxpayers use the standard deduction, meaning they cannot take a mortgage interest deduction. The first $27,700 written off on their Schedule A doesn’t count.
Bankruptcy is not a risk if you have no debt, as it is about debt you can’t pay. Many people believe that keeping your home mortgage and investing in something super safe is better than investing in something that is over-extended. However, some banks may fail, and your savings are FDIC insured up to a point, but they may be accessible after a waiting period as insurance payments get sorted out.
Investing money is not guaranteed, and while paying off your mortgage may provide guaranteed results for many years, it may not always yield the same results as investing money. If you decide to use the money for something more productive than earning interest, it may not be as beneficial as collecting higher interest. Paying off the mortgage locks in a return that investing the money does not.
In conclusion, while investing in real estate can provide a better financial future, it is essential to consider the potential risks and benefits associated with maintaining a home mortgage. By understanding the importance of cash flow and investing wisely, individuals can create a more financially secure future.
The power of now is often argued over the value of later, but it is essential to find a balance between financial effects now and later. Using the $400,000 to pay off the house can immediately increase Toni’s pocketbook, giving her a $3,794.43 a month raise. This raise is $45,533.16 a year, which many people would uproot their family for.
The option to keep the mortgage and invest the money in an investment paying higher interest assumes that the money will continue to be paid at a lower interest rate and the investment will grow at a higher interest rate. However, this assumption may not be accurate as the difference between the two options will likely become so large that the difference will not matter.
Some money needs to be used now for enjoyment and some money needs to be saved for the future when we can no longer earn a living. Using this money to allow Toni to switch to working half-time and enjoy her life and family more by working less will create a huge deposit into her happiness factor with minimal change to her future net worth.
Both options have the exact same immediate effect on Toni’s net worth: it increases by $400,000. Paying off the house will increase her happiness for the next 20 years, while investing the money will likely create a minimal increase in her net worth at retirement.
The “good debt” is not the most important argument, as it can be a burden that prevents people from living a great life now. If you are struggling with the issue of paying off your house vs investing, consider more than just interest rate arbitrage. By including how you want to live your life in the decision-making process, you can make an informed decision and miss out on a great opportunity that could have changed your life.