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Pay Off Your Mortgage? This Expert Has a Better Strategy to Build Wealth
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Pay Off Your Mortgage? This Expert Has a Better Strategy to Build Wealth

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One of the best ways to attain financial independence is to pay off your debt as quickly as possible. Eliminating both the recurring payments and, especially, the interest expenses you have to pay, will result in a lower cost of living and more financial flexibility.

But that doesn't mean paying off debt is the only -- or even the best -- way to reach financial freedom. With mortgage rates so incredibly low, one financial expert has taken a different strategy that he expects will result in a far larger payoff over the long run. In the video below from the Oct. 29 edition of The Wrap on Motley Fool Live, host Jason Hall explains the strategy he's using to grow his wealth more quickly than paying extra mortgage payments.

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Transcript:

Jason Hall: I'm going to talk about a strategy that my family has taken to improve our financial freedom, and what we've decided to do. We just refinanced -- we bought our house in November (of 2019) got a 3.75% 30-year mortgage, which at that time, I thought, "That's like free money. We're never going to get better." (We) refinanced not too long ago at 3%. The way things are going, I feel like early in 2021, we might refinance at an even lower rate. The bottom line is this: That cost is so low, we have decided to take a very specific strategy to achieving financial flexibility faster.

We decided it does not make sense to prepay our mortgage and to pay down the principal faster. What we have done is, we have started taking that delta when we refinanced the lower payment, the difference of the payment, we started putting that money into a taxable brokerage account. Every single month, I buy a new dividend stock. The plan is that for the first year, every month, I will buy a different dividend stock. The idea is to force myself to start building a diversified portfolio of stocks, and then after that first year, I can buy a new stock or I can reinvest in an existing holding over time.

But the idea is that over time, I feel confident that I can identify great companies that have strong balance sheets, durable competitive advantages, and the ability to continue returning cash back to their investors and generate a dividend and a return of growth in principle that are going to far exceed that 3% that I would get by paying early on the mortgage. I just think it's a simple way to do it. I'm doing this in a taxable account because I want to make sure that I still have access to that liquidity if, for some reason, we decided to take a different approach.

Also, the goal is to not touch it for at least a decade. The idea is to let it continue to compound, to let those dividends reinvest. As the companies increase the dividend, the yield on the cash that we pay will continue to grow and will continue to grow. I'll only ever get a one-time 3% benefit by paying early on the mortgage. I think this is a strategy that more people should be using -- is to refinance at the lowest rate you can get, and then start buying great dividend stocks and let time and the power of compounding, and growth of those dividends, help you get a little bit richer, a little bit faster than paying off your mortgage would.

The Motley Fool has a disclosure policy.

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