Another favorite finance blog post I'd like to highlight to share some great blogs out there that I enjoy regularly.
www.getrichslowly.org/blog has this great post: Ask the Readers: Is It Better to Invest or to Prepay a Mortgage? JD at Get Rich Slowly has blogged this topic before. He revisited this topic again to answer an email question. I can see why, this is definitely a tough topic to discuss with folks, because it goes against generational pressures, opinions and our instinctual basic needs in life. JD points out how difficult a question and varying the answers of those that discuss it are:
This question has stumped smart people for years. Is it better to invest or to prepay a mortgage? Neither answer is wrong — there are advantages and disadvantages to both. But is one choice less wrong than the other? When I covered this subject a year ago, I shared advice from several personal finance books.
Like everyone else, I've had many varying opinions about this rolling through my head. The safety side of my brain wants to say: "Let's pay off this mortgage, so that we have a sense of security. No mater what, we'll always have a place to live in our retirement". Our parents and their parents will echo this sentiment.
The financial guru in my head says: "Hey, you know that you're only making 5.25% on that principal you pay down, right? No, wait with the tax benefit of interest you can write off, that interest rate is a good amount under 4%! So, how the heck do you think you're going to build wealth like that Mr. Buffet?" Well, that just might make be start wearing a WWWBD bracelet, so I remember to make smart money decisions :-).
This really only hits our Survival and Safety levels of Maslow's Pyramid. Those are the 2 most primitive needs. Ok, I'm an animal, you can't let me fight this fight. I love that JD references Ric Edelman's book and view on this topic:
Ric Edleman (Ordinary People, Extraordinary Wealth): Never own your home outright. Instead, get a big 30-year mortgage and never pay it off — regardless of your age and income. “Every time you send an extra $100 to your mortgage company, you deny yourself the opportunity to invest that $100 somewhere else.”
I'm totally sold on Ric's viewpoint here. I mean he hits you over the head with TEN really good reasons why in his article 10 Great Reasons to Carry a Big, Long Mortgage:
Reason #1: Your mortgage doesn’t affect your home’s value.
Reason #2: You’re going to build equity anyway.
Reason #3: A mortgage is cheap money.
Reason #4: Mortgage interest is tax-deductible.
Reason #5: Mortgage interest is tax-favorable.
Reason #6: Mortgage payments get easier over time.
Reason #7: Mortgages let you sell without selling.
Reason #8: Large mortgages let you invest more money more quickly.
Reason #9: Long-term mortgages let you create more wealth.
Reason #10: Mortgages give you greater liquidity and greater flexibility.
Stop by Ric's article and read all the gory details that he bashes us over the head with to beat the sense into us. So, what are you waiting for? I'm sure Ric would say something like: Run out there and get yourself a big refi and harvest all that equity out of your house, then put it to work building some big time wealth!
I've always loved Ric's radio show and books, I hope you enjoy all the educational resources on his site: http://ricedelman.com/planning/default.asp