As a personal finance writer I hear a lot of investment advice. To my skeptic’s eye, much of it is too risky, unnecessarily complicated or involves hidden fees. The best advice I ever received was to pay off my mortgage. I did that seven years ago and have been reaping the benefits ever since.
This advice came not from a financial advisor, but from Marc Eisenson, an engineer and electrical contractor who is now retired. In 1991, shortly after Ichanged careers — from law to journalism — he sent me a copy of his book The Banker’s Secret (Villard Books). It came with software that you could use to calculate how much money you could save in interest by paying off your mortgage more quickly than the bank requires.
The concept, which also applies to paying off credit card debt, is simple: your rate of return equals the interest rate on the loan. To test Eisenson’s premise, I ran his software on the Apple Mac Plus that I then owned — how quaint! The results were dramatic.
At the time I didn’t own a home, but Eisenson’s message made such a huge impression, that when my husband and I bought our house in 1998, I keptThe Banker’s Secret in mind in dealing with our own banker. We were both self-employed in businesses that were thriving. Yet knowing that self-employment has ups and downs, we were very frightened of debt. We made as big a down payment as we could possibly afford, and took a mortgage for about 40% of the purchase price. That mortgage included a penalty for prepayment, but it only applied for the first year.
Meanwhile, when business profits exceeded what we needed to live on, we built a laddered portfolio of two-year U.S. Treasurys. At the time they were paying more interest than we were paying on our mortgage. When that was no longer true and the bonds started maturing, we took the principal, along with the interest we had earned on those investments and put every dime of it towards our mortgage. By the time we celebrated the fifth anniversary of home ownership, the property had doubled in value and we owned it free and clear.