3 Reasons Not to Pay Off Your Mortgage . . . YET!

Look I get it, there is something about the peace of mind that comes from not having a mortgage on your primary residence to worry about; it's a good feeling to know that should you lose your job, or should something happen to you, you have one less (and very important) thing to worry about – the mortgage payment.

But bear with me for a minute to explain to you why you should not pay off the mortgage on your primary residence YET

Guaranteed Return on Investment (ROI)

Imagine someone came to you and proposed that you should invest in an opportunity that will earn you less than a 0% return; stated differently, someone tells you that you are guaranteed to lose money on an investment opportunity, would you do it? My hope is that at a minimum, you will think long and hard before committing to such an investment.

The real estate analogy is this – as you pay down your mortgage and ultimately pay it off, you are tying down the capital that you could have deployed somewhere else for a ROI. This by itself just means your ROI is 0%. Even worse is when your ROI goes negative because of fees you pay to your lender to get YOUR capital out via a refinance.

In essence, your capital is tied down in an asset that earns you 0%, and you will be penalized if you attempt to take out the capital to invest elsewhere. I understand the need for the peace of mind, but the key here is balancing emotional and rational decision-making.

Legal Troubles Could be Lurking

Imagine you make a living as a treasure hunter. You are about embarking on a treasure-hunting adventure when a friend tells you that there are two locations you could visit. He tells you that while there is no guarantee of success in either location, one of the locations is known to have small deposits of treasures, while the other location has large deposits. With this information, which of the locations are you most likely to visit?

Real Estate Analogy: As you pay down your mortgage, you increase your equity on that asset. This puts you in a situation where you can become a lawsuit target should something bad happen to someone on your property and they decide to sue you. An attorney’s time is valuable; hence the attorney is more likely to work with a client where there is more financial reward because of the equity in the asset than otherwise.

 I agree that the chances of something happening to someone on your property and being sued are minimal, nonetheless the chance exist. While there are other ways to protect yourself and your assets, this one is perhaps less expensive, easily accessible and the legal landscape of the US not only allows it, but almost promotes it.

Your Wealth Could Be “Gone in 60 Seconds”

The movie, “Gone in 60 seconds, features Nicolas Cage, who is tasked with stealing 50 exotic cars in one night. He has to contend with rival band of thieves who also wants the cars and the local police who is bent on stopping him and his team. Despite what looks seemingly impossible, he was able to pull off the feat. I know that you are going to say it was just a movie, but the point here is the impossible is sometimes possible

Real Estate Analogy: Paying down your mortgage debt increases the equity in your property. The equity on your property is the market value less the amount of debt you have in the property. The equity will always be unrealized until you sell or pull out the equity from the property. This equity rises and fall with the market, a force that you have no control over. By paying down your mortgage debt, you willfully relinquish control (the capital you controlled) to the market (a force that you have no control over)! Though it may seem impossible to you now, 2007 – 2008 is a very good indication of how powerful the market forces are. Your supposed equity in the property could be gone with the wind!

Here is a simplified example that will help you understand just how risky “building” equity can be:

Background: You owe $100K on a property that is valued at $200K. Your implied equity is $100K

Scenario 1: No cash-out refinance and the property value drops to $150K because of a market crash.

Scenario 2: You do a cash-out refinance on the property, taking out $60K in cash and increasing the loan amount to $160K just before a market crash caused the property value to go down to $150K

Outcome 1: From scenario 1 above, your unrealized equity reduces from $100K to $50K

Outcome 2: From scenario 2 above, your unrealized equity reduces to negative $10K, but you have a cash position of $60K. Your net equity is still $50K, but you are in control of $60K. The best part is that you can now purchase discounted real estate to add to your portfolio.

Conclusion

As an alternative to paying down your mortgage debt, you should use that capital to grow your income-generating real estate portfolio. Contrary to popular belief of trying to be debt-free, embrace debt, good real estate debt. The combination of time and good debt is a sure pathway to financial freedom – INCREASE YOUR DEBT, INCREASE YOUR WEALTH!

It’s important to mention that this strategy may not work for everyone. Time is your most important resource in making this strategy work. So, if you are closer to retirement, then this is definitely not the strategy for you. However, if you are relatively young, have some “time” and still have some working years ahead of you, then stop trying to payoff that mortgage – use that equity to build your portfolio.

Please leave a comment below and let me know what you think about this strategy.

Remember, you don’t have to be great to start, but you have to start to be great, so just get started (TODAY!).

Victor Omoniyi is the managing partner of Rigel Real Estate Group, and a real estate investor in the Houston, Texas area. He believes in enriching lives, and sees real estate as the best vehicle to get there.