There is a simple and easy investment that is available to
many people that they do not give much consideration. They probably don’t even view it as an investment.
It will give you a guaranteed return and will not generate
any capital gains taxes.
The investment I am referring to is paying down the
principal balance on your home mortgage.
While this is not an option for those who rent or those who own their
home outright, I find a majority of investors are in a situation of owning a
home and also owing on a mortgage.
I don’t think this is a good option for everyone. It depends on your situation.
But I have seen people who have hundreds of thousands of
dollars in investments, with extra liquid money on top of it, and they are
trying to figure out what to do with it.
Yet I find out that they have a house in which they owe $200,000 or more
on the mortgage.
By paying down the principal balance (any payment above the
monthly minimum), you are essentially locking in a return equivalent to the
interest rate on your loan. If you
have a mortgage rate fixed at 4.5%, then any payments toward principal would
earn the equivalent of 4.5% (by saving your that interest) and that would be
with compounding interest.
This strategy is often overlooked where it might serve as a
nice complement to an investment portfolio.
I would not recommend this strategy to someone who is short
on liquid funds. If you don’t have
an emergency fund or easy access to other money, then you should not use all of
your money to pay down your mortgage.
You are locking in this money.
The only time you will see this money again is when you
either sell your house or refinance.
Of course, once you pay off the loan entirely, you will quickly see the
benefit in increased cash flow without having to make a mortgage payment each
month.
If you decide to make paying down your home loan part of
your overall financial strategy, then it is important to realize that it is a
hedge against deflation. By
locking in a guaranteed rate of return and by reducing your debt, you are
protecting yourself against deflation.
Therefore, the rest of your portfolio may want to lean in favor of
hedging against inflation.
I think paying down your home loan and ultimately paying it
off will give most people a powerful feeling. It is nice to own your home outright, knowing that you just
have to pay your property taxes and nobody can kick you out.
Again, this strategy isn’t for everyone, particularly those
low on liquid funds. But if you
have extra money just sitting in the bank, you may want to consider this
“investment”, even if it sounds boring.
It can add up to real savings over time.
If you own a house with a mortgage, consider diversifying
with this simple strategy of paying a little extra on your mortgage each month
or possibly making a big one time extra payment
You can't find a guaranteed rate of return this high anywhere else.