It’s the American dream, right? — to pay off your mortgage and live debt free in your home.
You should never have your home paid off, if you want your hard earned money to actually work for you.
I’ll keep this one short, so I don’t over complicate the strategy.
First, let me introduce you do Lending Club.
Lending Club is simple: it’s a peer to peer lending platform that allows individuals to lend out money to borrowers. You can choose the risk of the borrower that you are lending to, which is reflected in the yields that you will get. Obviously, the riskier the borrower (someone with bad credit) the higher the yield; someone borrowing money with good credit will give you less yield. Just like corporate bonds.
Right now, I am getting steady 11% returns from Lending Club for the past two years, because I have chosen to lend money to riskier borrowers. The loans are broken up into $25 segments, which means my risk is spread across many borrowers and lessens the default rate.
Back to the home loan point…
Let’s say that you own a home that is worth $500,000 and you own it our right, with no mortgage. If you were to take an equity loan out on the home, you’d probably be able to get 80% out – or $400,000 at a fixed rate of 3%.
So, you’d be paying back the $400,000 at 3% annually over 30 years.
But, let’s say you took that $400,000 and put it all into a Lending Club account that yielded 11%, like the one I have.
11% (your yield form Lending Club) minus 3% (your cost to borrow the money against your home) will give you 8% annually on the $400,000 that you borrowed.
Much, much, much better than leaving that money in your home as equity.
This of course is an overly simplified example, but with rates currently so low, you’d be crazy to pay off your home when you can get better yield in other investments.
I know what you’re saying… ‘But Lending Club is risky’ … or… ‘Where the heck am I going to find something that yields more than 3%, my bank account is only giving me 0.3%.’
But here is a secret: there are LOTS of opportunities out there that give you great returns. In fact, the 11% I’m getting back from Lending Club is conservative.
We’re investing in something that is getting 25% and will probably go higher in the coming years. (That’s not a typo, yes 25%).
But, you get the point… paying off your home just to leave your equity sit quietly is a waste of capital. Some people don’t feel comfortable with debt. In fact, I hate it. But, if you use debt properly, like the example above, you can actually put it to your advantage.
I’m really enjoying your blog and have been trying to catch up on your past posts. Did you write about those other investmemt opportunities, like the 25% investment vehicle you allude to?
Unfortunately, Lending Club is not a possibility here in Canada.
Yes, I have written about many things with 25%+ opportunities, and I will be writing about much more! (Agricultural land is one of them.)
Lending Club has recently been going through some tough times on an operations level, so don’t be too concerned about missing out there. Here are three similar services that are available in Canada:
Lending Loop – http://www.lendingloop.ca