What does a mortgage have to do with wealth? Doesn't borrowing money drain my wealth with interest expenses and closing costs?

Let's distinguish between what is often referred to as “consumer debt,” and debt used to invest. Consumer debt is borrowing money to buy things that go down in value. Credit cards and car loans fall in this category. While consumer debt may sometimes be useful or even necessary, it must be carefully managed and generally should be minimized or avoided.

Debt used to invest on the other hand, is used to buy things that go up in value. Real estate has a long and steady history of going up in value. When you borrow to own real estate, you gain control of large and valuable asset that will tend to get more valuable through time. Your mortgage gives you financial leverage and the return on your investment—in this case your home—is magnified several times over. Overwhelmingly, wealth is created through appreciation in home values, not by paying down your loan balance.

Some people when presented with the many home loan choices tend to focus on interest rate risk and how fast they can arrange to pay their loan off. They often choose to commit themselves to the highest possible payment by fixing the interest rate for the life of the loan, and then working hard to pay down the principal balance. However, there is an opportunity cost to this approach.

A mortgage is the least expensive way to borrow money and your best tax shelter. Why strain to eliminate relatively cheap money and your best tax deduction? Your home will appreciate at the same rate whether you have a mortgage or not. Instead, your earned income might be better directed toward other investments that return more than your mortgage is costing you.

The desire to reduce debt is understandable. But working hard to reduce your mortgage is probably not the best path to increase your wealth. Focusing on debt is only one side of the equation. The other side is equity, which is the difference between your loan balance and the value of your home. Rather than get focusing only on how to pay your loan off, you might benefit more by looking at ways to manage your mortgage with fewer dollars per month, and let the natural trend of real estate appreciation do the heavy lifting for you over time.


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