I will tell you what I did last year. My house was paid off. I obtained a mortgage for 80% of the value so that I would have the best interest rate (3.75) at the time.

The funds went directly in to a real estate investment trust earning 8% dividends.

Shortly after, I purchased residential rental property with cash on cash returns of over 10% and with five year ROI of over 90%.

I can afford the payment on the house in part from the investment income. Where else can you start a business borrowing money at such a low rate?

Everyone has their own goals and feelings about paying off the mortgage. Frankly for many it’s a waste of opportunity. Make that money grow for you. It does not go away; if you need it, you can sell a property or refinance it. Keep rolling the money forward until it pays all of the bills.

NOTE: I have been asked about REITS. Here are just two, there are many others. This is not advice to buy, just an example: Two Harbors, yield 12.7%, Annaly Capital, yield 12% and a high yielding EFT, Shares Mortgage Real Estate EFT, 9.4% yield. FYI, I prefer residential rental real estate, but it’s good to diversify.

ADDITIONAL NOTE: For those of you who have commented on the risks, I absolutely agree, there are risks. The comments seem to focus on REITS, actually, I park funds in REITs until I fund residential rental property that can earn more than it takes to repay what I borrowed. I do however have a part of my portfolio invested in REITs and I watch them. It is possible for a REIT to change it’s distribution and I have moved to others on occasion when this happens. I apologize to those of you who are concerned about risk and the fact that I neglected to mention it clearly. My answer was not intended to go into the whole world of risk-reward or portfolio management.

I explained what I did, it works for me. It will not work for everyone and in fact it will probably only work for a few but for those few, they will improve their investment portfolios. Also, a number of people who have paid off their homes ultimately dip into the equity through second mortgages later when they need something new so not everyone has the discipline to refrain from using the money. Rather than the money dripping out over time, my plan to make solid real estate investments followed up with some quasi cash investments e.g. REITs again for me and a few out there it is a good move.

Read my blog article on the same topic updated in November 2024.