Interest rates around the world have been pushed by central banks to all time lows (even negative in some places.)
But what are most people doing? They are wasting what may end up being a once in a lifetime opportunity to change their lives forever.
Let’s say that an upper-middle-class household with solid income should be in a $375,000 home outside a major metropolitan city. Mortgage interest rates are usually 6+% historically. If the household put down $75,000 (20%), a $300,000, 30-year mortgage would result in a principal and interest payment of $1,798.00/month.
But due to a global economy that really is stuck in the mud and upside down with debt, central bankers have pushed interest rates down to all-time lows. Mortgage rates have plunged to 3.5% for a 30-year note, and 2.75% for a 15-year note. That same household now has an opportunity to borrow $300,000 over 15 years that results in a slightly higher monthly mortgage of $2,035.86/month (it is an extra $237.86 that would have to come out of the budget somewhere/somehow. Duly noted).
But that extra $2,854.32 ($237.86 *12) a year would have saved them 15 YEARS of mortgage payments and moved them to be completely debt free on housing that much sooner (in fact 15 years sooner!) They would have owned a home that originally cost $375,000 free and clear.
But that’s not what people are doing. Rather, they are using the ultra-low interest rate environment to leverage up and borrow even MORE money and into bigger homes that come with higher taxes, insurance, maintenance, and utilities.
They don’t take the opportunity to become debt free in 15 years and live the rest of their lives without a mortgage payment. They go shopping for a much bigger house that just shackles them with even more debt. They will go and borrow $400,000+ of debt over 30 years rather than $300,000 over 15 years.
The difference over those years is so dramatic;
If times were normal, they would have to borrow $300,000 at 6% for a 30-year mortgage. Over the life of the loan, their monthly principal and interest payments would equal $647,514.57 in total payments with total interest being $347,514.57.
If they used the low interest rates to borrow the same $300,000 at 2.75% for a 15-year mortgage, their monthly principal and interest would increase to $2,035.86. But they would own that same home outright in 15 years. Over the life of the loan, their monthly principal and interest payments would equal $366,455.68 in total payments with total interest only being $66,455.68.
The difference in total payments is $647,514.57 versus $366,455.68. The difference all stems from the change in lifetime interest which goes from $347,514.57 down to $66,455.68 for a difference of $281,058.89.
What could you do for fun (or in retirement) with an extra $281,058.89? Not to mention all of the peaceful years of knowing that you own your house outright and never have to make a payment again. What kind of job change could you make if you didn’t have a house payment? What kind of things could you do or try if you didn’t have to pay the bank for the rest of your life? How many awesome vacations could you take? How much healthier could you live if you spent that on your wellness and nutrition?
You may at times believe that you will be happier in all areas of life if you lived in a bigger home. But is that actually true? How much happier would you be with more spending money, more savings, more peace of mind, more life experiences, more travel, more healthcare, and more to spend on loved ones?
Borrowing money is just front running your future earnings. The problem is, your future earnings are becoming more and more uncertain as this global economy continues to evolve and more people around the world want your job (and can do it for a fraction of the price). It may turn out that a computer or a robot can do your job. And if you still have a 30-year mortgage, your goose is cooked! What are you going to do then other than keep sending your money each month to the bank wondering when your life will be “more fair?”
Wealth builders have a natural ability to “THINK AHEAD.” Most people are so focused on today that they don’t realize that the decisions that they are making will impact them years (if not decades) down the road.
This is one of those items in your life that you have 100% control over. You may not have total control over your health, or your job, or what happens to loved ones. Life is often full of uncertainty. But strategic wealth planning is about obtaining certainty in certain circumstances. When you pay off debt, it becomes certain. You simply don’t owe anybody anything.
Your job is to think about the ways that you could structure your life so that your life keeps getting easier each day, not harder. You’ll thank yourself.