Should You Pay Down Your Mortgage Or Leverage The Payments

Mortgage and Lending with Bridgewater Funding


There is a great debate within the inner-mortgage circles these days. Should we, as loan professionals, encourage clients to borrow as much money as possible? Or would consumers benefit more if we helped them to understand the advantages of 15-year amortization schedules and pre-paying principal? Let's examine the pros and cons of both strategies.


Leveraging Your Property. In order to understand why you'd want to borrow as much as possible for your home purchase, you must first grasp the concept that equity has a zero rate of return. Here's an example:
If Consumer "A" buys a home for $300,000, and puts 20% down, then they have $60,000 in equity. Over the next 5 years, the property appreciates $100,000 in value. Consumer "A" now has $160,000 in equity.
Consumer "B" buys a home for $300,000, and puts no money down. At the end of 5 years, that same home is now worth $400,000. Consumer "B" has $100,000 in equity, which is the same appreciation as Consumer "A", a net $100,000.

As you can see, your down payment has nothing to do with your rate of return. What becomes important is how you choose to manage the $60,000 you didn't use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest rate.


However, if you were to invest the $60,000 in a vehicle that can out-earn the cost of that debt, then this could be a formula for success. This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest. This principle has been applied for many years in the life insurance game. The old saying goes, "Buy term and invest the rest." The key component is taking the money you would have used as a down payment and creating an asset accumulation account. This account should earn a significant enough rate of return to enable you to pay your mortgage off entirely and achieve the ultimate goal of being debt-free.


Paying Your Home Down Rapidly. There are very few times over the course of my career that I have seen a client with zero debt and no financial difficulties. Choosing to pay off all of your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage or a bi-weekly payment strategy provides structure. It can also put you on track to have your mortgage paid off within a set timeframe. Simply put, it contains built-in discipline.


It's important, however, to understand that regardless of how rapidly you pay your home off, you're not getting any greater rate of return on your investment than if you paid it off slowly.


Conclusion. So how does one determine which scenario is best? The choice depends entirely upon the individual. Savvy consumers who are disciplined, and are comfortable taking chances from an investment perspective, would do well with the first scenario. Over the course of time, it's been proven that your rate of return over the long-haul will be far greater than the rate you'd pay for a mortgage in today's rate environment. It's important to seek the advice of a skilled investment advisor to ensure success with this strategy.


The second scenario is best for those who have a difficult time managing their money or who'll sleep easier at night knowing they have a plan in place to pay their loan off more rapidly. Be sure that your budget can handle accelerated payments. When consumers "bite off more than they can chew" with a 15-year mortgage, they frequently end up having to refinance back into a 30-year schedule.

If you find this subject intriguing and would like to know more, I recommend that you read a book titled, Missed Fortune 101, by Douglas Andrew. It's an outstanding read that is very simplistic and goes into far greater detail than I can cover in this column. Douglas is a financial planner who advises safe-structured investments such as whole life policies and tax-free fixed income instruments.

Comments (9)

Armando Rodriguez
Orlando Homes 4 Sale, Real Estate Broker-GRI

I think you have to consider what tax bracket you're in.

But having a paid off mortgage lets you sleep a little better at night.

Jul 16, 2007 05:03 AM
Chuck Christensen
Your Financial Coach - Bellingham, WA
Buy term and invest the rest was an outdated term...also used by Primarica because their agents were not licensed to sell variable products. That was before Variable Universal Life...but you have the rest hit right on the nose.
Jul 22, 2007 03:41 PM
Angie Vandenbergh
Crye-Leike, Realtors - Memphis, TN
A Crye-Leike Blogger

Just in case you didn't know... this post was featured in the Active Rain Week in Review 7/15/07-7/22/07, written by Toby Boyce. Congratulations!

Jul 22, 2007 11:51 PM
"Tommy" Decebal
HomeSpector Inc. 516-851-5833 - Farmingdale, NY
Adamescu Long Island NY MASTER Home Inspector
  • Hi I just Wanted to say Hello and To Introduce Myself.
  • I'm Tommy A Certified Home Inspector here in Long Island. 
  • We're neighbors. I'm located in Farmingdale. And you?
  • Can you introduce your company?I would like to meet my neighbors.
  • Thank you,
  • Tommy
  • Oct 27, 2007 10:39 AM
    Seth Bazwald

    Plagiary!!!  What was that thing about honesty and integrity in your profile???

    If this were High School you'd be expelled...

    How embarrasing for you....

    Dec 04, 2007 08:32 AM
    Damien Bonner
    FYI...This was what is known as a "Ghost Written Article".  I apy for a service which entitles me to use their articles as I please.  Before you make accusations of plagiarism you should know the facts.  Anything else you want to add?
    Dec 04, 2007 08:40 AM
    Seth B Again

    Yeah I know you "apy" for this service just like the other hundreds of people who posted this article on the net and passed it off as their own words... Here's just a couple:

    Plagiarize \'pla-je-,riz also j - -\ vb -rized; -riz·ing vt [plagiary] : to steal and pass off (the ideas or words of another) as one's own : use (a created production) without crediting the source vi: to commit literary theft: present as new and original an idea or product derived from an existing source - pla·gia·riz·er

    Just because it's a pay service doesn't mean it's not still plagiarism if you pretend like you wrote it....

    Next time try paraphrasing a bit and change the title of the article so you won't be lumped in with all these other dopes that posted the article EXACTLY WORD FOR WORD....  pretty funny actually

    And so you ask, I'd like to add this:  Obviously now you realize that I KNOW the facts , I'm not accusing you, I'm exposing you...

    Dec 04, 2007 09:48 AM
    Damien Bonner

    Where did I sign that I wrote this?  I posted it yes, have I made a claim that I wrote this?


    ghostwriter -   n. -

    One who writes for and gives credit of authorship to another.


    Im glad you know how to use the internet and look up where this article has been posted.  This "ghostwritten" article may have some useful information for some people, if you dont like it then dont read it, enough said.  Why dont you do something more productive with your time rather than searching around the world wide web for ghostwritten articles....get a life.


    Dec 04, 2007 09:57 AM
    Seth B Again

    Actually a Google search took about 1.2 seconds to turn up your article on about 1.5 million sites so I really didn't waste too much time on it -  probably less than the time it took you to copy and paste it from wherever you got it... 

    And yes I DO know how to use the internet thanks - You know what else I know how to do??  I know how to explain IN MY OWN WORDS the pros and cons of paying down a mortgage loan early versus increasing your liquidity and investing.

    Oh yeah almost forgot - Are you actually gonna try and claim you never signed that you wrote the article even though it's posted on YOUR blog with YOUR name under it, it's written in the FIRST person, and you offer NO citation of credit to anyone else??  And then in your next sentence claim that you have credit of authorship based on a misapplied definition of "ghostwriter"???  Start making sense please.....

    And to clarify, so you understand, ghostwriters are hired by one person to write for one person - "One who writes for and gives credit to another" - most commonly used in celeb autobiographies and such.  You definition doesn't really apply here, If it did, it would say, "one who writes for and gives credit to 10,000 others for same piece of material...  Imagine if the same exact book word for word got published by 10,000 different authors using the same "ghostwriter"??

    You can get pissed at me all you want but I'm just trying to help you out - As I said in my previous post, you can't just take these things and post them word for word on your own otherwise you are going to look foolish when someone finds out that there are 10,000 other people out there passing off the same article as their own as well.  A little paraphrasing, a thesuarus, and a change in the title would go along way to avoiding future embarassment for you....

    Dec 04, 2007 11:09 AM