Mortgage Payments Get Easier Over Time

We’re halfway there!! We have covered the first five reasons why according to financial planner Ric Edelman that you should not pay off your mortgage early.

It's important to reiterate that Edelman is not suggesting that your strategy involve pulling out your equity and investing it. His goal is to teach people about liquidity. Liquidity is very important in today’s economic environment. 

The idea is to have savings that are easily accessible to you so you are prepared for all that life has to throw your way. The idea is to be smart and conservative with any equity that you separate from your house. In other words, you are not shooting for a 20 percent rate of return on your money and as we have discussed, you don’t need that.

In fact, the governing bodies of financial planners and stock brokers actually prohibit them from suggesting that you pull cash out of your house for investment purposes unless the advice meets certain guidelines, and both Edelman and I agree. There are many horror stories about people who have pulled out money and invested aggressively and ended up losing their house.

That said, if the advice being given to you is prudent and suitable for your situation, then, by all means proceed with the strategy. The whole point Edelman makes is that your home and your equity should be part of your broader financial plan and when you make educated informed decisions, you will be able to make reasonable and effective investment decisions.

Reason number six is that mortgage payments get easier over time. Principle and interest make up the majority of a mortgage payment and if you have a fixed rate loan, your actual mortgage payment will never change. Your escrow payments for taxes and insurance can and often do change, but their increase is usually not a major impact.

Usually the most challenging time people have in making their mortgage payment is early on when they first get it, especially for first-time home buyers. The good news is that over time, people get raises, promotions, or even switch jobs or careers to increase their income.

While their income is increasing, their mortgage payment for the most part stays the same. When you look 15-20 years down the road, their payment will be comfortable, especially compared with people who are purchasing at that time. Assuming appreciation returns, home prices could be significantly higher in the future, which, in turn, equals higher mortgage payments.

The point being made is that if you have money to put down and you decide that liquidity is important to you, then don’t put it all into the house. Take the higher mortgage payment knowing that it may be a little tougher to make early on but it will get easier over time.

Take the rest of the money you were going to use and get with a trusted financial advisor and get the money working for you over time in a safe conservative investment. In today’s low interest rate environment, taking into consideration your after tax interest rate and after tax investment rate, you don’t need an unrealistic rate of return on your money to make this a suitable and prudent mortgage planning and investment strategy.

In the next column, we will address reason number seven, which is mortgages let you sell without selling.

Jeffrey S. Garber is a certified mortgage planning specialist with Gateway Funding. In this column, he reports to consumers the realities of the mortgage/credit realm, which is usually very different from the perceived truth.