How to increase your investment rate of return using mortgage financing

If you’re looking to get a good return on your money, and you’re looking at bank accounts, you might want to consider paying down your mortgage balance. Before you do, here are some things you should consider…

Most bank accounts generate paltry rates of return. Those returns are not getting you any interest on your money as such other vehicles that present greater rates of return typically have lock-in periods where the money is tied up for several years. This doesn’t point to liquidity so for our purposes and what we’re illustrating we’re talking about a basic money market savings account or a checking account. These are not good places to store your money long-term honey long term. These sources are good for an emergency fund or cash on hand but here are some things to consider as it retains mortgage financing and gets a favorable ROI.

Generally, the returns in such accounts are very low 1% or lower is not uncommon. So if you have a mortgage on your home, and you’ve been trying to refinance your mortgage, or maybe even aren’t trying to refinance a mortgage, but just are looking to get a better rate of return on your money here are some things to consider:

  • You can pay down your mortgage and take the savings generated by the principal balance paydown
  • refinance and pay down the loan

Here is an example

If you were to pay your loan, down say $50k which translates to about $300 a month of payment, that’s $3600 a year gained over the rest of the term of your mortgage.

$3600 per year in gain divided into the $50k of capital necessary to attain the benefit translates to a 7.2% cash on cash return. This begs the question if you want to get a good return on your money for your $50k, that money is otherwise sitting in a bank account that’s earning 1% you could turn around and invest that money on your mortgage.

The same applies if you’re refinancing your house let’s say for whatever reason your loan to value is just not there, the house does not appraise, and you’re left with a decision to make pull the plug on your refinance or pay down your principal balance. If you’re financially able to pay down the principal balance to make the loan to value work to generate the savings and you’re going to pull that money from the bank account that otherwise has a paltry rate of return you should give some strong consideration to paying down your loan in succession/by doing the refinance because the math is there.

No general bank is going to yield a 7% return on your money. So, if you’re looking for an investment vehicle, you have a mortgage on your home, and you have money in the bank you might be better served to pay down your principal balance and get an immediate liability reduction.

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