Should I pay off my mortgage?

Should I pay off my mortgage?

Here are some of the considerations:

Wealth held in home equity is illiquid, and if your circumstances turn bad, you will not be able to borrow from your equity unless you already have a HELOC in place. Banks grant loans based on your ABILITY TO MAKE THE MONTHLY PAYMENTS, not just on the amount or percentage of your equity.

Home values are established by a “market,” not by you or your realtor. That means that your home is worth what someone is willing to write a check for. Home values only appreciate around 3% annually, depending on location. Plus, when you sell a house, you’ll only end up with about 92% of the sale price, minus any outstanding mortgage balance(s). The 8% goes to sales costs. So piling dollars into home equity, really only gives you 92 cents on the dollar.

If you were to put the money that would accelerate mortgage payoff into a Private Family Bank, for instance, the money would be liquid, meaning you could get it in a matter of days, regardless of your circumstances or income situation. The money would be growing, tax free, at a predictable and dependable rate (currently between 4% and 5%), and you’d have a death benefit, which would give your loved ones an even higher return on your premiums if you pass.

So the question really boils down to, where would that extra money best serve you?

• Locked up in your home’s value?
• In a pool of money that’s growing, that you access at any time for any reason tax-free?

The money in a Private Family Bank can be turned into an income stream in retirement, much like an annuity, which can help offset any continuance of the mortgage payment. That being the case, the actual cash flow cost of the mortgage payment continuing into retirement is lessened…as it  is by the continuance of the mortgage interest tax deductibility.

So, as you see, it’s not a simple black and white issue. Like most of life, it’s different shades of gray, and only you and your family can decide which shade you like better. The word that guides me in these types of decisions is FLEXIBILITY. Which way gives me the most ongoing OPTIONS?

2 Responses to Should I pay off my mortgage?

  1. Thank you for the information. Can you elaborate more on the pros and cons of a Family Private Bank vs an IRA or Roth IRA. Many people claim that the cost of the Family Bank is to high. It would be great to have you clarify the premium cost vs the benefits, compare to other retirement vehicles. I currently have a family bank, but I have a difficult time determining the cost of keeping the plan.

  2. Rudy, thanks for your question.

    When people say anything is “too” something, my first question back is, “compared to what?” There’s more to it than a simple price tag.

    Yes, in the typical banking policy, there are some costs in the first year, but even then around 62% of premium dollars go right into the bank. The next year that jumps up to about 85%, and most policies are at cash flow break even by year 5, where ALL your premiums are effectively going into your bank.

    After that, it just gets more and more profitable, guaranteed, every year…for as long as you live.

    Right now, the typical bank is yielding around 4.5% – tax deferred – and the way we teach people to use their banks, it’s actually tax free. This compares to around 6.5% taxable…and where you going to find that GUARANTEED?

    But, to just cut to the chase. In 2008, IRAs, 401Ks, and the like yielded -50%. So which is too expensive?

    And none of this comparison included the true net worth value of the death benefit.

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