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A Better Alternative to Paying Off Your Mortgage

If you’ve been to a (socially distanced) cocktail party or BBQ in the last 12 months, chances are good you’ve heard someone make an offhand joke about mortgage rates being so low that they should take out a second mortgage just to invest the proceeds!

In fact, I’ve personally given some thought to that exact scenario. I have a 15-year mortgage that I could pay off, but with rates as low as they are, why would I take on the opportunity cost of sinking part of my investment portfolio into a low-rate, illiquid house?

In fact, emotions aside, it might even make more sense to stretch that 15-year to a 30-year to maximize the low rates and produce extra trading capital.

Here are the pros and cons of each strategy as I see it:

Should I Pay Off My Mortgage? The Pros and Cons
Pros of paying off my mortgage:

  • The thought of being done with a mortgage would bring me great peace of mind.
  • Savings of approximately $600 a month in interest
  • No risk of losing this money in the stock market

Cons of paying off my mortgage:

  • I would “lose” the optionality/flexibility to do what I want with the cash.
  • Interest rates are at an all-time low, and this is an opportunity of a lifetime to borrow cheaply.
  • Loss of mortgage interest deduction.
  • And if I can’t beat my interest rate of 2.25% via trading, I should be shot.

OK, being shot is a slight exaggeration, but you get the point. Having made 50% or MUCH more for my subscribers for years, taking my chances of beating 2.25% seems like a no-brainer. This leads me to believe I should keep my mortgage as is, and continue to invest heavily in my trading.

That being said, there is no doubt that if I continue to invest heavily in my trading, there are risks. While the start of 2021 was incredibly strong for my trade ideas and call buying, the last couple of months have been a choppy mess as the market takes one step forward, and two steps back. This sloppy environment is not ideal for call/put buys, so there is risk.

This leads me to another way to beat my 2.25% interest rate, and that is a covered call strategy.

Using Covered Calls to Boost Your Profits
A covered call is a strategy that consists of owning an underlying stock and selling an option against the stock. Since a call option represents 100 shares of the underlying stock, you can sell one call against each 100 shares of stock you own. Because you own the stock, your short call position is “covered” by the stock.

A short option position by itself (without the stock) is very risky, and requires a substantial margin balance. A short call on a stock you own, on the other hand, is a very conservative strategy that requires no margin.

I would recommend a covered call options strategy against virtually any stock an investor holds. In my mind, it’s free money, and best of all, it’s a great way to start learning about options and options trading.

So how could I execute a covered call strategy on a stock to beat that aforementioned 2.25% interest rate? Let’s take a look at slow and steady stock Cisco Systems (CSCO), which is currently trading at 60.

If I were to buy 100 shares of CSCO at 60, I could then sell 1 of the CSCO January 65 Calls (exp. 2023) for $4.30. This $4.30 is actually $430, which goes into my account.

And if CSCO were to trade at 60 for the next year, the call that I sold would expire worthless, and I would have created a yield of 7.16%.

Taking this a step further, if CSCO were to rally to 65 or above, I would have a profit of $500 on my stock holding, plus the $430, or a yield of 13.8% in one year’s time.

Stepping back to my mortgage debate … I can see the upside and downside to paying off the mortgage today. That being said, given the returns I could create in the stock market, I am going to stay the course, pay my mortgage every month, and continue to grow my investing accounts.

What do you think? Should I pay off my mortgage, extend to a 30-year mortgage, or do what I just suggested? I would love to hear your thoughts on this subject. Leave a comment below!