If we logically break this question(Pay off Your Downtown Toronto Mortgage early or invest?) down into pros and cons, let’s see if we weigh more on one side of this argument or the other.
So the first is to reduce the total amount of interest you pay over the life of the mortgage. Remember, in our previous example, when we paid off our mortgage in 6.5 years instead of 30 years, because we were paying $2,000 more per month, we were paying less interest over the life of the loan.
Second, you free up your cash for other things in life, such as investments, travel, and savings for emergencies. It increases the amount of cash you have because you no longer have to pay the principal and interest or pay off a mortgage.
Third, you own your home. When you own your home, you are happy. That means peace of mind and less stress. You don’t have to make decisions, make deals, work overtime, or do certain things because you own your home.
And finally, it increases your credit for ten years. So it’s not a severe blow to your credit score, but it does have a good impact on your credit score for ten years.
Let’s talk about some of these disadvantages.
The first, of course, is the low-interest rate now. Mathematically, it doesn’t make sense to pay off your house now.
The second is that you may lose some tax breaks. You have to itemize the interest now, but if you do that, you can deduct the interest payments from your taxes, lowering your taxable income.
The third point is opportunity cost. For example, if a good deal or investment opportunity comes up and you just don’t have the cash because you used every extra penny to pay off your mortgage earlier than you planned instead of investing it, the opportunity cost is huge.
Finally, you have equity in your home. Equity is the value of your home minus what you owe on it. So if you owe nothing, all of your equity is buried in your home. You can get it through a HELOC, a loan on the net property value, or something similar. However, in most cases, once you pay off your house, it’s not like you have cash in the bank, it’s buried in the walls of your house.
Many people feel the same way about the following three points.
Some people want to increase their net worth, they know they can do that through investments, and if those investments are successful over time (knock on wood). Others, however, value peace of mind. Some people believe they can think more clearly when they’re not under pressure or when they don’t have mortgages or debt over their heads. Others want to take full advantage of cheap money in the form of credit. No one is wrong because it is a personal matter. Someone may be mathematically wrong, another emotionally.
Second, it’s about building a solid foundation. Imagine there is no debt. Imagine there are no mortgages, no car payments, no credit card payments, no student loans. It’s about building a solid foundation that you can build on. So when you build a skyscraper, you dig deep, build a foundation, and then build upward.
Third point: compound interest. The later in life you start investing, the shorter the time your money is working for you. Einstein called compound interest the eighth wonder of the world. Compound interest allows your money to compound itself, grow exponentially, and spawn other funds so that they combine and make you very rich over time.
It is up to everyone to decide what they want to do with their money, my point is that if you can borrow extra money each month, and invest that money in a 7% investment return, then this return will help you to pay your mortgages faster. I have never heard of anyone regretting paying off their mortgages early. An extra investment outside the mortgages will help you do that.
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