Not All Debt Is Bad Debt?!

Contributed by: Cindy Wysong, CFP®

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In my job it’s not uncommon to meet with clients who have a desire to pay down their mortgage faster than the typical term of the loan. They might routinely add extra money to each monthly payment, or they will make one-off lump sum payments toward the balance in order to rid themselves of the debt. Is this a good strategy? Well, it depends.

When weighing the decision as to whether you should pay additional monies to your mortgage, you should first determine your end goal.  What are you trying to accomplish?  Would you sleep better at night knowing you are mortgage-free?  Does retirement hinge on paying off your mortgage?  Or do you do it just because you think it makes the most sense from a financial perspective?

If a mortgage hangs over your head like a black cloud and causes you stress, you should probably make it a priority to pay it off.  Your mental health will thank you.  (So would Dave Ramsey.)

But, if you are making extra payments toward the debt because you feel like it’s the financially sound thing to do, pause and contemplate your alternatives.  Not all debt is bad debt.  In fact, believe it or not, some debt can actually help you build your wealth.  Take, for example, a mortgage that carries a relatively low interest rate (say, 3%).  Rather than aggressively paying down “cheap money,” perhaps consider taking the excess cash you have and investing it in something that could earn you more than 3%.  (As I write this article, even banks are currently paying close to 5% in a savings account!) 

Another point to consider is the tax deduction you might receive on the interest you pay each year.  If you itemize your deductions, the overall cost of the mortgage (i.e. interest rate) is reduced.   

If you don’t pay extra toward your mortgage, over time you can build wealth in a liquid account that affords you significant flexibility in the future (think: emergency funds, retirement accounts, vacation property, etc.). 

What if your mortgage carries a relatively higher interest rate, say 7% or 8%?  Now does it make sense to pay this off sooner rather than later?  Maybe.  The case to do so is certainly stronger here than the 3% example above. And it would be more difficult to find an alternative for your cash that would earn you more money.  That said, if you have built your wealth such that your retirement years are secure and other financial obligations in your life have been met, sure, pay extra toward the mortgage.  But, I wouldn’t make it a huge priority. 

Personally, I value liquidity and, in my opinion, the opportunity cost of aggressively paying down a mortgage is not worth it.  While I can likely always refinance my mortgage to access the equity in my house if I should ever need it, my peace of mind is met knowing I have cash reserves available for any unexpected expenses or investment opportunities.

Plus, if I change my mind in the future and want to pay off the mortgage faster than the loan term, I’ve now got a pile of cash/investments to do so.

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Cindy Wysong is a Partner and Wealth Advisor at BCWM, LLC.

To contact Cindy:

Email:  cindy@bcwm.com

Telephone: (913) 685-2300

www.bcwm.com