Most people believe they should rid themselves of their mortgage before they save for other accumulation goals. However, as Todd Ballenger pointed out in his book “Borrow Smart Retire Rich” this decision comes with hidden costs.
Here is an example, let’s assume a homeowner has $1,000 each month to either save or use to pay down their mortgage. Let’s also assume that their mortgage carries an interest rate of 7.00% and that their savings/ investments will earn an after tax return of 7.00%. Finally, we’ll assume that this homeowner has a 32% marginal tax bracket so their net after tax of borrowing is actually 4.76%.
Here is a breakdown of these two options over 30 years.
Amount invested: $1,000 $1,000
Return: 4.76% 7.00%
Term (years): 30 30
Growth: $796,282 $1,219,971
As you can see the decision to pay off the mortgage would cost this homeowner over $400,000 over the course of 30 years.