You also have to guard yourself against those instances in life where rational decision-making on your part creates perverse incentives for counterparties that you may encounter. For example, I don’t think most people realize a danger that arises when you try to pay off your home mortgage early. If you ever lose a job, take a pay cut, or encounter some difficulty with making your mortgage payment once a good chunk of the principal has been paid off, the bank is going to be less likely to work with you if they have clarity that they will make a profit.
This clarity doesn’t exist when most of the loan amount is still due. If you run into trouble after just twelve payments, the bank has a heavy incentive to work with you because foreclosure proceedings will require significant fees that will nearly guarantee losses for the bank. The repayment of … Read the rest of this article!