Should you make extra principal payments on your mortgage?
This came up in a conversation with a good friend of mine just the other day. He mentioned that he was making extra principal payments on his mortgage in order to pay off his home quicker.
My friend is proud of the fact that he will pay off his home earlier than the advertised 30 years the bank told him it would take. And, I’m proud of him for having the discipline to not spend those extra dollars on random stuff every month.
However, is there a better place to save those extra dollars, rather than making extra mortgage payments?
Two important principles of financial strategy are control and liquidity. If money that is flowing from you to other entities is redirected back into your personal economy, you will grow wealthier. The key point is knowing where to redirect that extra cash flow for control and liquidity.
This is important when considering what to do with the extra cash flow that a 30 year mortgage will provide relative to the 15 year.
When you pay down your mortgage principal more quickly, the money is tied up in the walls of your home.
The only way to access your equity is to sell the house, or through a home equity loan, refinance, or line of credit. All of these options involve significant expense and potential underwriting hardship. Underwriting that may prevent you from qualifying, depending on the market and your employment situation.
Why not save your extra cash flow somewhere that offers greater control and liquidity? Then, after 15 years, if you’d like to pay off your mortgage, you can. In the meantime, you’ll have control and access to your money for life’s opportunities and emergencies. Whole life insurance offers these benefits and many more.
That’s peace of mind.
Here’s an example using the Truth Concepts (www.truthconcepts.com) financial calculators. As a baseline, it shows a $100,000, 30 year mortgage, with a payment of $477.42. For comparison, a $100,000, 15 year mortgage, would have a payment of $739.69.
The left side shows the 30 year mortgage with $477.42 going towards the required principal and interest, and an extra $262.27 going towards extra principal payments–the equivalent of a 15 year mortgage.
The right side shows the same required $477.42 payment and the extra $262.27 going into a whole life insurance policy earning 4%.
At the end of 15 years, the left side shows the house paid-off with a mortgage balance of $0, and nothing in savings. The right side shows a remaining loan balance of $64,543 with a balance of $64,543 of cash value whole life insurance.
On the right side, You could pay off the mortgage if you want, or you have the option of using that money for whatever life throws at you. No questions asked, and no underwriting.
You’re in control. How comforting is that?
The situation is even better if you factor in the tax benefits of real estate.
This calculator shows the same scenario as above with the assumption of a 22% tax bracket.
Now, even the left side shows a $0 loan balance with almost $11,000 worth of savings from those deductions going back in your pocket.
But take a look at the right side. Because a greater portion of each payment on the 30 year is going to interest, there is a greater tax advantage. That extra cash flow is freed up to go into your whole life policy as well, creating over $80,000 in liquid savings.
You could pay off the mortgage at 15 years and have $15,496 left over if you so choose, or you could choose to continue controlling your equity outside of the home.
Now that’s control over your cash flow!
And, we haven’t even talked about all the other benefits of whole life insurance, to include:
- Guaranteed, tax deferred cash value growth
- Tax free loans
- Tax free withdrawals to basis
- Cash flow from dividends (dividends aren’t guaranteed)
- Death benefit passes income tax free to beneficiary
When considering this strategy as an alternative to paying off your mortgage quicker, the whole life policy you set up needs to be properly designed to focus on quicker cash value growth. An ordinary whole life policy will not build cash value as quickly as depicted in this example.
Designing policies this way and helping you with your overall cash flow strategy is what we do.
Please reach out with any questions and share this with anyone you think would find it of interest.
The calculations above were derived from TruthConcepts financial calculators (www.truthconcepts.com). You should speak with a financial professional whom you trust prior to making investments or purchasing financial products. Please share this with anyone you think would find value in it. If you have further questions, please feel free to contact us at: firstname.lastname@example.org.