Friday, May 4th, 2012
As some of you might know, I have had a frequent battle with myself about whether or not to pay off my mortgage early.
Because I was paying just 2.5% on the mortgage proceeds, it was a very difficult decision to sell off some of my equity holdings and liquidate some of my savings to pay the mortgage out completely.
At the beginning of March 2012, I started selling off some stocks and finally paid out my mortgage on March 16, 2012.
Why Paying Off The Mortgage Was Right For Me
The one constant that we have in personal finance is that everyone’s situation is different. That is, in effect, what makes personal finance “personal” after all. 
In my particular situation there were a few things that seemed to align, leading me to the conclusion that paying the mortgage off completely was the right thing to do.
1.) Variable Rate Mortgage
While I was paying just 2.5% on my mortgage, it was a variable rate mortgage (Prime – 0.50%). This means that the rate could change in the future, and at this point, rates really have nowhere to go but up!
That said, I had paid down the mortgage enough that even a sharp increase in the rate wouldn’t make or break my ability to service the debt. However, any increase interest rates would result in me sending more money to the bank – I think we can agree that sending more money out is not the ideal situation.
2.) Cash Flow Analysis
Cash flow is the ticket to play the game!
You may have heard me say that before, but it is absolutely true. Regardless of your balance sheet, if you are not generating enough cash to service your expenses (liabilities) then you are drowning.
In this case, it wasn’t that I was not able to service my expenses, but the fact that the amount owing on my mortgage balance required more in cash out-flow each month than the corresponding savings/investments were producing. Put another way, my monthly mortgage payment was higher than my average monthly income stream from my savings and equity holdings.
3.) Emergency Fund
As you know, it is very important to have an Emergency fund. Many financial gurus suggest 3-6 months of living expenses. I am more conservative than that and preferred to wait until I had an emergency fund of 12 months of living expenses.
What is important to note is that my mortgage payment was my largest monthly expense. Once I had amassed enough to pay off the mortgage and still have 12 months of living expenses covered (not including the mortgage payment, obviously) I felt I would have enough liquid cash available for emergencies to pay the mortgage off completely.
4.) Stock Market Rally
Over the course of the previous several months, the stock market had been rallying without any signs of retraction. Many of my holdings had been reaching 52 week highs or all-time highs and the metrics did not seem to justify that kind of steep advance in price. In addition, any rally of several months without a pause or retraction is generally unsustainable.
Note: I am far from a successful technical analyst or market trader, but the length of the rally and the fact that I was finding it hard to justifying adding to existing positions or entering in to new ones, led me to believe that the market may be over extended and it might be a good time to cash out and pay off the mortgage.
As you can see, it wasn’t just one factor, but a number of factors that came together at the same time that led me to believe that paying off my mortgage was the right decision.
It should also be noted that none of the equities or savings that I liquidated to pay off the mortgage came from retirement accounts or my retirement pension/employee savings accounts. It is of the utmost importance that those accounts stay in tact.
As with all decisions related to personal finance, everyone’s situation is unique. This post is not advice for you to pay off your mortgage, or follow the same path that I took. The above set of circumstances just happened to come together for me and led me to the decision to pay off my mortgage.
If there is enough interest, I will provide a follow up post with the dates, prices and names of the stocks that were sold to pay off my mortgage.
If you have paid off your mortgage, or are planning to in the near future, I would love to hear your story in the comments!
Cheers!
Posted in Real Estate | 2 Comments »
Friday, September 5th, 2008
How about doing both at the same time
Many financial writers will claim that everyone needs to build and emergency fund of some kind that is kept in a liquid vehicle such as a high interest savings account ( I prefer ING DIRECT ) a money-market fund, or some other readily accessible investment like a cashable certificate of deposit.
While I am a fan of financial leverage and will swear up and down for as long as I live that leverage is the ONLY way to build exponential wealth, I still believe in making extra payments on my mortgage versus having excessive funds in a savings account.
First off, I do have a savings account but it is hardly at the level of 6-12 months of living expenses. In fact, it consists of about 3 months of living expenses and possibly less from time to time. What I do have is a mortgage with an attached revolving interest-only line of credit.
The reason that I make extra payments on my mortgage (after funding all of my tax advantaged investment accounts) is that I reduce the amount of interest that I pay on the principal of the mortgage amount. My mortgage interest rate is currently at 4.25%, while my savings account interest rate is just over 3.0%.
Therefore, because all payments made against my mortgage simply increase the amount available to me through the line of credit, it is financially smarter to pay down the mortgage and borrow the money back for investing (When and if I find an appropriate investment) rather than pay the 4.25% interest on the mortgage and collect 3+% interest on my savings.
P.S – In Canada Interest paid on loans for investment purposes is tax deductible, while mortgage interest on a principal residence is not. Check with your personal tax advisor for an explanation of the advantages.
Psychology of Money
Of course there is the psychological factor of knowing you have cash in the bank in case of an emergency. However, there is also a psychological advantage to reducing your mortgage (or other debt – I only have mortgage debt left).
For most folks it is a good idea to have a “rainy day fund”. However, if you can mange credit wisely it may be in your best interest to set up an appropriate line of credit for emergencies. In addition, you will then also have the ability to pounce on investment opportunities that might come out of the blue.
Remember, strike a balance that is right for you and always due your due diligence!
Posted in Investment News, Investor Education | 1 Comment »
Monday, May 5th, 2008
The “opportunity fund” is a concept that I have used for many years now and, only recently, did I discover the name for it. Jim at Blueprint for Financial Prosperity coined this term over at his site and it struck a chord with me.
What Is An Opportunity Fund?
An opportunity fund is simply a stash of money that I set aside for investment opportunities that are almost certain to be profitable, but come about unexpectedly. They also usually require that the cash be accessible in a short period of time.
Jim outlines the opportunity fund as akin to the emergency fund, which I have talked about as well. Many folks like to keep their emergency fund and “opportunity money” separate. This is probably the ideal situation for most. However, over the past several months, I have been raising cash awaiting investment opportunities. I have also sold a condo in March for a nice profit and needed to store the cash until another opportunity came along.
Instead of opening an additional account for this opportunity money, I simply added it to my ING Orange Savings Account 
where it earns higher interest as part of my emergency fund.
How Much Opportunity Money Should I Have?
That depends.
The amount of money in your opportunity fund should not be a significant portion of your net worth and it certainly shouldn’t be more than your emergency fund! My rule of thumb is that I like to have about 1-2 months of net salary in an accessible account for opportune investments.
For instance; after I sold a condo in March I kept the profits available and liquid while searching for another opportunity.
Normally, I would have invested the majority of those funds in dividend paying stocks. However, I didn’t like the way the market was performing at the time and I am overly invested in the stock market as a whole.
Why Not Use A Line Of Credit
While I do have a large line of credit on my home that I use for quick purchases of undervalued real estate, I don’t advocate that the average person do so. My home equity line of credit is used in the same fashion that my opportunity money is, but it takes on a lot of risk. I only use this type of financial leverage when I have done some serious homework and the asset is very undervalued.
My most recent purchase as an example:
I just purchased a 2BR condo in a growing community for $89,000. Comparable units have recently sold for between $104,000 and $124,000. As you can see the asset is at least 15% undervalued.
(More on this in a future article)
Using financial leverage like a line of credit or mortgage can be an excellent tool to building wealth, but it can also make you poor in a hurry if things go wrong. I have written an excellent example on this subject in the past and I strongly suggest that you read it if you have not already.
Here is the link to the article:
http://dividendmoney.com/understanding-mortgages/
For Assets Only
Opportunity fund money and money borrowed (credit) should only be used to purchase assets. That is, if the object purchased does not appreciate in value or put cash flow in your pocket, then it should not be purchased using a line of credit or opportunity money.
This is where the average person is steered wrong by the pressures of consumerism in our society. Many folks see money in their account as “extra” money that can be spent on anything. It is up to use to develop our own financial will power to make sure that we are investing our “extra” money for a more prosperous future.
How do you fund opportunity investments?
Posted in Investment News | 1 Comment »
Monday, April 21st, 2008
As many regular readers know, I have just become a father for the first time. When my wife and I first found out about the pregnancy, the “financial manager” in me quickly listed the following things off in my head as financial “to do” items:
- Update estate plan and will
- Increase life insurance policies
- Start education savings plan for child
- Increase monthly expense budget
- Increase emergency cash fund
Where To Start?
The biggest thing on my list of to-do items was to increase the amount of money that we saved in our ING Orange Savings Account 
cash reserve fund each month.
The reason that this was the most important thing was because the money in a high yield savings account could be easily re-directed where it was needed most. There were several larger items that we had to purchase. We tried to purchase the majority of the required items second hand (except for a car seat for safety reasons).
In addition to physical items for the baby’s care; we also had to do some minor renovations to our house such as painting the nursery room, decorating and updating the air exchange system. All of these require cash!
New Financial Territory
While I am OK with the increased spending due to the addition of another member to our family, it is very unfamiliar territory to me financially. Because it is such new territory for our family, we are going to begin tracking our monthly expenses even more closely(using Quicken) until we can determine the actual additional requirement. Prior to that, we have decided on a relatively arbitrary amount to add to our cash reserve.
We decided to add an additional 5% of our net income to our emergency fund due the arrival of the baby. This figure was arrived at by using a rough estimation of the added cost of the baby’s essentials to our own essentials. Of course everyone has a different interpretation of “essentials”, but I am still wondering if this amount is enough?
I will certainly find out how close my estimates have been after a couple of months of tracking the expenses in our new catgories…What do you think of my estimates?
Posted in Saving Money | 9 Comments »
