Is It Smart To Pay Off Mortgage Early?

There is nothing more financially satisfying than being debt-free. For most people, a mortgage is the largest debt that they carry throughout their life, and it is a burden that they probably would be quite happy to get rid of. In fact, knowing that you own your house outright would probably lead to one of the most surefire feelings of financial security possible.

But there are some drawbacks to consider. You should only consider making extra payments on a house if you have a large amount of cash on hand, because if you lack liquidity, you could lose everything in a recession. Let's say you can afford to spend $2000 on house payments each month on a $1500 mortgage. If you throw that extra money into the house, and find yourself laid off in the coming years and unable to make a house payment, than you will run into quite a bit of trouble if the bank doesn't give you a home equity line of credit, and instead chooses to foreclose on your home. Instead, I recommend that you use the extra $500 a month to invest in blue-chip stocks and use the income it throws off to go towards an additional house payment. Think of it like this--that extra $500 a month, or $6000 a year, would give you $180 in dividends that you could use to go towards the house payment.

That way, if you do find yourself in dire straights at some point in your life, you could simply sell off the stocks to meet your needs. If you have to rely on your house as a piggy back, you could find yourself in for a nasty surprise. 

Make Money With A Rental Home?

It seems like an easy extension of the American dream. You take out a $100,000 mortgage on a house, buy a nice suburban property, plop a 'For Rent' sign up, find a buyer, and then watch the money roll in, right? Let's say you can negotiate a $1,200 mortgage payment on the house, and then charge someone $1,500 a month for occupancy. Not a bad deal, eh? Not only would you be paying off a mortgage so that you'd one day have an additional property under your belt, but you'd also make a little something for yourself, right?

Unfortunately, it's not this simple. There are so many caveats with associated with owning a rental property that it's an absolute shame and disservice to the American people that they are not always aware of what they are getting into when they decide to take on an additional home. First of all, what happens if you can't find a renter? Do you have $1,200 in disposable income each month as a back-up to get you through the monthly mortgage payment if you don't have an occupant? What if they occupant doesn't pay one month? What are you going to do? Are you prepared to temporarily bridge the difference, lest you have to pay exorbitant late fees, or, if the situation gets bad enough, eventual foreclosure?

But let's say you are indeed fortunate enough to look in an occupant. What happens when the house needs a new rough? The basement floods? The air conditioning breaks? Basic repairs could not only undo any financial gains purchasing the property might give you, but additionally, they could sink a lot of your time, causing stress and needless headaches. Are you prepared to take on this liability with limited gain? I'd rather soak my money into high-quality blue chip stocks like Johnson & Johnson or Coca-Cola than face the uncertainty of bringing on a rental home. If you want to read a great article on the types of decisions facing home buyers, I'd like to reference you to this gem over at Mint.com by clicking here: http://www.mint.com/blog/goals/home-buyer-beware-pros-and-cons-of-different-property-types/ .