The Best Way to Pay Off a Mortgage

Many people believe that paying off a mortgage as fast as you can is the best way to avoid losing money to the cost of interest.  But with the new 2017 Tax Cuts and Jobs Act, the deduction for the interest that your home mortgage provides is not really an issue anymore because the standard deduction was raised significantly enough that unless you have other deductions to claim besides your home mortgage interest, the standard deduction will most likely save you more money in taxes than itemizing will.

So is making extra payments still the best way to pay off a mortgage?

If all you are considering is the tax deduction on mortgage interest and the lack of a mortgage payment, then the answer to that question might be a yes for you.  But if you grasp the value of liquidity in addition to the time value of money and are not merely focusing on the possible tax savings, then your answer has to be an absolute no!

Taking your time to pay off your house and paying the interest as you go, will free up cash flow which you can invest with the hopes that you will not only offset the cost of the interest paid on your mortgage but actually turn a profit in the process.  And while investing to make profit is possible, it’s not very probable due to the volatility associated with investing.  Markets drops and corrections do occur fairly frequently, and when they do, they typically reduce returns by 40% or more.  This is why investing with the increased cash flow on a longer mortgage makes it a risky attempt.

At the same time, paying off your house really adds no protection for you from a market drop either.  When you own your home and the market drops by 40% or more, you will realize a 40% or more drop in your equity. While if you were merely making mortgage payments that 40% drop would not be an immediate loss to you.

So, you either lose 40% or more of your home equity or you lose 40% or more of your investment portfolio.  Fortunately there is a better way to purchase a house and keep more money.

Liquidity and the Time Value of Money

When you grasp the value of having liquidity in addition to the time value of money, the following method will  make sense as the best way to pay off a mortgage.

It has been said that, “The best way to build equity is with someone else’s money.”[i] And the reason for this is that using someone else’s money provides liquidity without deterring profits you can earn with your own money. This has to do with the time value of money.

  • The time value of money means that money you have today is worth more than the same amount of money you will have in the future, due to its prospective earning ability
  • Liquidity means having accessible cash or cash equivalents readily at hand so opportunity(s) can be funded and make more money for you

Paying off your house early can create a liquidity issue.  Keeping your mortgage as long as you can could create a time value of money problem.

By using time value of money and liquidity simultaneously you can build equity and liquidity without the expense of losing either.  This kind of wealth becomes sustainable wealth which is not subject to market drops.

The Value of a Participating Whole Life Insurance Policy

Unlike an investment or even “investment grade life insurance” such as Universal Life, Index Universal Life or Variable Universal Life, Participating Whole Life Insurance provides guarantees that protect your death benefit, as well as your cash value from being reduced by market conditions or the ever-increasing cost of insurance found in all Universal Life Insurance policies.  By purchasing a Participating Whole Life Insurance policy with the extra money you would have used paying off your mortgage faster, you can actually keep both your home and build liquidity as you’re paying off your mortgage.

Here’s how you can do it:
  1. Use other people’s money by taking out a 30 year mortgage
  2. Make the minimal payments to the mortgage company for those 30 years
  3. Take the extra money you would have used paying off your mortgage early and purchase Participating Whole Life Insurance
  4. In month one, you will have enough face value in the Participating Whole Life Insurance policy to pay off your mortgage off if you should die
  5. By year 15, you will have enough liquidity in the Participating Whole Life Insurance policy to pay off your mortgage if you withdrew it from the policy
  6. By year 30, you will have more money in the Participating Whole Life Insurance policy than the initial cost of your home mortgage, without having paid any premiums since year 15
  7. The cash value in your Participating Whole Life policy, by year 30, will be more than double what you would have saved if you’d have paid your mortgage off in 15 years instead of 30 years

Due to the binding contractual guarantees found in Participating Whole Life Insurance contracts, this method of using the time value of money and liquidity together, instead of one or the other, overcomes the obstacles of market fluctuations and the cost of interest that are associated with typical mortgage payment plans.

Approximately 40% of this type of high cash value insurance is owned by people who are putting $20,000 or more toward policy premiums annually. This is because they understand the value of liquidity and the tax-free transfer of wealth which these policies provide.  Whether you start with more or less than $20,000/yr Participating Whole Life Insurance is a valuable financial tool that will provide you with the same kind of benefits the wealthy experience.

Wherever you’re at financially, the time value of money can start working for you today. And with Participating Whole Life Insurance, the sooner you begin, the better things will become for you.

Paying off your mortgage as fast as you can reduces your liquidity and puts the money you have today into the hands of someone else, allowing them to profit from the time value of money instead of you.  In essence, paying off your mortgage faster is stealing money from yourself.

Obviously, the same concept used in paying off your mortgage to keep more money, applies to anything you purchase using credit.  But it also pertains to things you purchase with cash.

Downsides of paying with cash:

  • You lose the time value of money on what you paid to someone else
  • You lose your liquidity

Here’s a fun fact about the time value of money:

Keeping your money earning 3%, even if you have to pay someone 4% to use their money, will put you out ahead of the game.

Here’s why:
  • Earning 3% on $10,000 for 5 years is $11,593.00
  • Paying 4% on $10,000 for 5 years is only $11,231.00

So even though you may pay interest to others, you can still ensure that you’re earning more interest on the money you keep. This puts you ahead of where you would be if you paid cash and lost the compounding growth. This is because of the time value of money.

With any money transaction, therefore, make sure that you keep, more of the money you make by focusing on this aspect of your money management.

Benefits of Paying off Your Mortgage early

  1. You shorten the time you have mortgage payments
  2. You have extra money to invest sooner

Downside of Paying off Your Mortgage early

  1. You reduce the compounding effects of the time value of money. You assume more risk if the market value of your home drops
  2. You reduce your liquidity both during the payoff period and once the mortgage is paid off

Benefits of Using a Participating Whole Life Policy to Keep More Money

  1. You have a guarantee from day one that your mortgage will be paid off if you die
  2. You have money compounding in your favor which is liquid and available for other opportunities throughout your lifetime
  3. You have the time value of money working for you, with guarantees to earn more than what you pay in interest for your mortgage
  4. You end up with two assets that are completely paid off, instead of just one
  5. You create a tax-free way to transfer wealth

Downside of Using Participating Whole Life to Keep More Money

  1. You must educate yourself to think differently
  2. You have to think long term
  3. You will have to buck typical financial advice
So what is the best way to pay off a mortgage?

In the long run, paying off your mortgage faster doesn’t save you money, even if you no longer itemize your taxes. That is because the increased standard deduction in 2017 already provides you with a higher deduction than what your mortgage interest deduction would have been.  So unless you are itemizing your tax returns to benefit from other tax deductions besides your mortgage interest deduction or you are in a very high tax bracket, paying off your house early, instead of using someone else’s money (the mortgage company’s) for the entire 30 years, is really no longer a tax consideration.

That leaves you to decide if you want to pay off your mortgage early and risk investing the difference, where you could lose to market volatility or if you want to purchase a guaranteed asset (Participating Whole Life Insurance Policy) that will generate guaranteed profits for you for the rest of your life, provide a way for you to transfer your wealth tax-free, and give you the liquidity that will allow you to purchase other assets along the way.


Dr. Tomas McFieDr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. I help people beat the system with a financial formula that minimizes taxes, reduces fees and cuts losses so they can keep more of the money they make, grow their wealth and never run out of money.


[i] https://www.nasdaq.com/articles/make-fortune-warren-buffett-way-using-other-peoples-money-2011-03-03