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Should You Pay Off the Mortgage ASAP?

Do you currently have a mortgage? Given our economic uncertainty, do you ever  wonder if you should be making an effort to pay off the mortgage? What are the pros and cons if you do start making those extra payments? What if you don’t? RB40 recently wrote about this very topic, but as I expected, his perspective was a little bias toward taking on debt. And guess what mine is? You’ve got it, NO DEBT! Let’s take a look at my perspective.

Save on Interest

What is the current interest rate on your mortgage? If you have a 30-year mortgage, you likely have an interest rate over 4%, which means that on a $250,000 loan, you’re paying $180,000 in interest over those 30 years! If you bought your house for $300,000, after the interest, you actually paid $480,000 for it. Good luck selling that for a profit!

Now, the advocate for holding onto your debts will say, “What about inflation? And, what if you invested your money instead of put it toward the mortgage. I could earn more than 4% a year!”

Inflation

It’s true. On average, the United States experiences between 3% and 4% inflation, which means that our dollar today can only buy about $0.96 worth of stuff next year. If we pay off our house today, we’re paying off our house with a greater valued dollar than in the future, which means that we’re paying more for our house than we should, or so the argument goes. There’s just one problem with the assumptions in this argument…

This argument assumes that if inflation is on the rise, so are our wages. But, last I checked, there weren’t many people getting huge bonuses lately. In fact, you’re lucky if you haven’t experienced a reduction in pay. So what if, in the future, your wages are less and it costs more to buy milk and bread, would that make it easier to pay your house off? I don’t think so!

Investing

The other argument against paying off your house is taking the extra money and investing it instead. After all, any shmo can make a 4% return in the market right? I’m not so sure. Tell me this, if you invest your money in the stock market, is it guaranteed to yield a return? After seeing the Dow plummet from $14,000 to $6,500 in 2009, I hope your answer to that is “no”. Investing can be tricky and given the incompitency of our government these days, I’d say that the overall market could crumble at any moment.

Also, if someone decided to invest instead of put extra cash toward their mortgage, what are the odds that all of the money would actually go toward an investment (a real investment)? I’d say that 95% of the time, the money would find its way into a depreciating asset. Something like a better car, a boat, or maybe even a small cabin. Investing is not very exciting, so it often takes a backseat to the “big-boy” toys. It’s best just to put the money toward the mortgage. At least then you know you’re saving thousands of dollars in interest.

The Mortgage Tax Deduction

I have to say that I actually get upset with people when they mention the “mortgage tax deduction”. Somehow we have been so brainwashed to think that having a big debt is a good thing because we’re getting a reimbursement on the interest that we pay. Some people actually keep their mortgage just so they can keep getting this deduction. Do you know how ludicrous that is?! If I told you that for every $100 you gave me, I’d give you $20, would you keep giving me $100? Of course not! But this is the logic of many when it comes to the tax deduction. If you pay off your mortgage, you stop giving away your $100. It stays in your pocket. I’d much rather have that scenario.

Cash Flow

I think one of the strongest arguments against agressively paying down your mortgage is regarding cash flow. If you put most of your resources toward your house mortgage, you won’t have much cash left for other investments, which means that you’re not diversifying. Sounds kind of bad doesn’t it? But what happens to those that are diversifying their investments? For those that invest in real estate and have mortgages on each of their investments, they may have a positive cashflow but their debt load could easily be a million bucks! If a couple investments don’t work out, they could be in big trouble! With greater debt comes greater risks.

But, what if you could pay off your house in a very short time frame (less than 5 years)? Then you’d have an entire mortgage payment at your disposal each month. You’d quickly be able to save up a sizeable chunk of change to invest, and then with an increased cash flow and no debt, you’d be able to save up an even greater amount, and so on and so forth. All with virtually no risk! This method might not make you a billionaire, but it could easily give you a retirement fund of $10 million, and I would hope that that would be enough for you! ;)

Peace of Mind, No Risk

I’m obviously risk averse, which means that I loathe debt. Hate it with a passion. Just the very idea that I could lose my job tomorrow and have the bank foreclose on my house makes me want to pay it off today (if possible). Given the current economy, my job could really be gone at any moment. You just never know! If my house were paid off, then at least I would know that it was 100% mine and I’d have a guaranteed place to lay my head at night. There are far too many people that have lost their homes for me to think that I can play the game of the 30 year mortgage. There are just way to many things that could happen in those 30 years.

For me, I have a plan to pay my house off in the next 2 years. After that, I’ll have plenty of cash flow to invest in a rental property. Once that’s paid off (in a little less than 2 years), I can do it again…and again…and again. And with each property, my cash flow will continually increase, until it just takes off exponentially. I’m ok with this plan. How about you?

Are you trying to put extra cash toward your mortgage? Why or why not?

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92 comments to Should You Pay Off the Mortgage ASAP?

  • Don’t get me started on the mortgage interest deduction. I am in the same camp as you are…too many people have no clue how it works. Same with student loan interest. I hear people tell me all the time how they aren’t paying these debts down faster because of the money they get back on their tax return. I try to explain that they only get a small portion back, that they are still losing money and they look at me like I’m the crazy one.

    I think it really comes down to knowing who you are. Some people will be better off not paying the mortgage off early and investing the difference. But I think a lot of people will find a way to spend the money they planned to invest.

    For me, I’m not paying off my mortgage any time soon because I’m renting out my house, so someone else is paying my mortgage for me.
    Jon @ MoneySmartGuides recently posted..Beating the Unsteady Economy: How Businesses Can Stabilise Their Finances

  • We are looking into buying our next house and would like to pay it off as quickly as we can. However, that does not mean that we will start sacrificing everything to do so.
    Michelle recently posted..Is a Business Degree a Waste?

  • I disagree with you but we are each entitled to our own opinions. There is no mortgage tax credit though, it is a deduction. A credit reduces a dollar of tax paid and a deduction reduces a dollar of taxable income which is a big difference.

    I don’t like the idea of locking my money in an illiquid asset but if that is the only way you can force yourself to save you have to do what works for you. Now if mortgage rates were 6 to 10 percent I could definitely see a case for paying it off but at 4 percent or less you are making an emotional rather than logical decision in most cases.

    I tend to use logic with my money and run my personal finances like a business but that doesn’t work for a lot of people. If you can’t sleep at night with debt it may make more sense for you to pay it off.
    Lance@MoneyLife&More recently posted..Finding a Frugal Venue for Wedding Ceremonies and Receptions

    • In relative terms, 4% doesn’t seem like much, but it can still inflate to $180,000 of interest! I definitely wouldn’t let my house stay unpaid for 30 years with all of the uncertainties in this world.

      • I have to say I agree with both of you. :-)

        As Lance mentioned, a house is not liquid, however you always need a place to lay your head down to sleep.
        As Derek pointed out, $180,000 is a heck of a lot of money!
        That’s why my wife and I chose to refi to a 15 year note. Forced savings (while it’s still at 4.125% since our last refinance), however we have also been increasing our savings and retirement savings as time has gone on (up to 12% of my paycheck).
        Coincidentally, we started looking to refi to a lower rate (plans on paying it off in the same timeframe though Refinance Revisited).
        Chris recently posted..How to use Finance101 amortization calculator

    • Wish I could edit my last post to mention that we were also planning on having the house paid off when I get to minimum retirement age of 62.
      That’s our other reason for hitting our financial futures in 2 directions (early “forced” paydown of mortgage and increasing our investments).
      Chris recently posted..How to use Finance101 amortization calculator

  • I won’t summarize my whole recent article for you, but suffice to say I’m in the “don’t” camp for most people. I worry that folks will be too invested in real estate, and not just any real estate – their specific primary residence with all of its location and neighborhood issues. If you dump the mortgage early, your net worth will be made up of that house, with few liquid assets.

    As for the return, I built a calculator for a dividend reinvested S&P since I didn’t know if one existed, haha. 100% of trailing 40 year periods and 98.77% of trailing 20 year periods beat 4%. Your biggest issue would be if you messed with that money in someway, and pulled the cash at a market bottom instead of riding the recovery wave (2009-Now, roughly). Look at real estate though – houses haven’t recovered from their tops, and you could still be down 40% in net worth if you were house heavy.
    PK recently posted..The Curious Case of The 30-Year Mortgage Rate

    • Great comment PK! I should have made it more clear that I don’t invest all of my money into my mortgage payoff. I still put money into my 401(k) and am building my asset base with the value of my site and my additional MBA schooling, etc. etc. But, to establish my point in this article, I think that a guaranteed 4% earnings (by paying off the mortgage) beats a possible 4% earnings (in the stock market) any day.

  • I always think it is an individual decision, but you should look at opportunity costs. In fact, I wrote an article called “The Case Against Paying Off your Mortgage!” I can put my money to work more effectively in the stock market. The market has recovered just about all the losses of 2008! Despite my statement, I am paying off my mortgage because I will retire in less than 5 years.
    krantcents recently posted..Road Map to Success – A Personal Story

    • Haha! I hear ya krantcents. There’s a lot of data that can show investing is a better idea than paying off the mortgage, but the fact of the matter is that nobody has a crystal ball! We don’t know what the future holds, so why not take the guaranteed win?

  • We’re saving very aggressively for a home. Every penny I make from my jobs goes toward home savings as well as one of Dave’s paychecks. I’m thankful we’ve continued to live simply after college so there’s no sting of seeing so much money go toward our home and retirement.

    • Great job Jessica. I’m always impressed with you when I read your articles and comments. You are going to be miles ahead of all your friends based on the great decisions you are making today. Nice work!

  • I’m definitely in agreement with you on this one. Paying off the mortgage frees up cash for other investments, reduces monthly expenses and creates a little breathing room for some nice lifestyle choices. Congratulations on getting to the point where you’ll be paying yours off in two years, and thanks for a great, thought-provoking article!
    Eliza from Happy Simple Living recently posted..Free Book Giveaway – The Ultimate Guide to Permaculture

  • We bought our house in 1999 at a 7% rate, 30 year mortgage; in 2003 we refinanced at 4.875% for a 15 year. We paid it off in December of 2012, doing the happy dance! The challenge I’m having is what to do with the extra monies, for sure. I went to our credit union and set up a mutual fund through them with Alliance Bernstein, because its what they recommended, one non-aggressive fund, one moderate aggressive, and I’m adding to it each month. Is it the right thing to do? I have no idea! But its something other than sitting in my account, accessible for toys. Its a challenge knowing what is the best next step, other than maximize how much can go into a 401K, I’m already doing that.

    • That’s awesome Nancy! You definitely deserve to do the happy dance! Congrats! As for the extra money, just make sure to diversify. That doesn’t mean buy a bunch of different stocks (because that’s investing all in one category). Rather, you should put some into the market, perhaps some into real estate, some into precious metals, and maybe some into a new business venture that you’ve always wanted to start. Just spread that money around and you’ll be just fine. :)

  • You know, that’s really interesting – because for years we were paying extra on our mortgage payments to knock it down. Then each time we added a baby to the mix, our extra mortgage payment would take a hit. Just this last year though, our new (gift from the inlaws) financial advisor actually told us not to do that. I was stunned to hear a financial advisor actually advise AGAINST paying a mortgage off sooner. He too, threw the mortgage credit thing into the mix as far as reason to keep our mortgage…
    Deanna Koch recently posted..Koch Family Vacation, Part One

    • Yep. I bet 99% of advisors would say the same thing. You want to know why? They live in a world of estimations that they believe to be truth. I used to do the same thing. I would have taken a look at the average gains in the market over the past X years and then made the assumption that that trend will continue, which would then lead me to believe that paying off the mortgage would be a waste of money. But, none of us have a crystal ball. If the market goes down, suddenly paying off your house would have looked like a great option (after the fact).

    • I think that’s one of the worst reasons to keep a mortgage around. It’s nice to get it if you can, but I will not be upset to hit the standard deduction sooner than later, but I’m not going to throw itemizing deductions to keep more money in my pocket either.
      Chris recently posted..How to use Finance101 amortization calculator

  • I currently have two mortgages (one is a rental). I HATE them. As soon as I am done saving money for our next adoption I will be working on eliminating the mortgages as soon as possible. Great post!

    • Good for you Nick. Doesn’t it suck to pay that money out every month? I’m working to pay my mortgage off so I can have the flexibility and freedom to invest more money into the areas I want. Best of luck to you!

  • The thought of having no mortgage payment makes me so happy can’t stop smiling, so that is my strategy at this point. To assume that anyone not paying off their mortgage is investing any extra is a great assumption, but rarely happens. Like you said, most people end up with more stuff, more payments, and then if something happens with income, you can lose it all. It happened to my in-laws. I never want to go through that.
    Kim@Eyesonthedollar recently posted..Sequestration: Has the US Government Cried Wolf Too Many Times?

    • Same here Kim. I can’t wait to make that last payment on my house! Btw, your example with your in-laws is exactly what I’ve been talking about! Thank you for sharing!

  • I know I’m definitely sleeping better! My husband retired as well, so our income has changed, not having the mortgage definitely makes a significant difference… setting aside the tax money was a change, it had been escrowed.

    • Retirement isn’t as easy as most people think it is. You really have to change your mentality about spending! You did a great thing by paying off your mortgage though. If you choose to, you could downsize and have a nice stack of cash to invest for your future retirement. Can’t wait to hear from you in the future!

  • I think we have made a decision that we will need to leave the area we live in because its so expensive, in particular from a tax perspective. We have a small house on a tiny piece of property and pay over $7K a year, that’s a chunk out of a retirees monies! The question is WHERE that move will be. I have another 5 years of working, in the interim we will be investigating that piece of the puzzle for sure.

  • Karen M

    By paying extra on my mortgage I do feel like I’m investing . . . I’m investing in my future “financial freedom” and hopefully very soon will be able to eliminate that monthly payment. The extra that I pay each month does not take away from my husband and I investing in our retirement funds or general savings.

  • I agree with your approach. I hate debt with a passion also. I have been working on getting out of debt the last three years. I think the same you do that in that I might lose my job, finances, etc. I can also see the other viewpoint. If inflation does go up 4% every year then if you are a smart investor you can easily get back each year.
    Kevin Watts @ Graduatingfromdebt recently posted..Pioneer Loans – A Private Student Loan Option for Military

    • Yep. You sound like a pretty level headed guy too Kevin. So, I assume that you’re not throwing all of your money toward the debts. You’re probably investing a little on the side also? Just make sure to get rid of those big interest debts first (which I’m sure you’ve already done from the sounds of it). Keep it up!

  • I actually did throw all money towards my student loans. I am $700 dollars away from paying it in full! The reason why I had a fear of debt was that I saw family members get buried with heavy debt and it took a huge toll on them. I’m actually going to start investing next month so all that extra cash will be put in good use.
    Kevin Watts @ Graduatingfromdebt recently posted..Pioneer Loans – A Private Student Loan Option for Military

  • Paying off your mortgage early is a good thing.
    However, if your goal is to buy more rentals, then it’s better to leverage and buy them now. Crank the number, you should be able to make more money if you leverage.
    Home price is still pretty low and who knows what will happen in 2 years.
    You might be missing the opportunity of a lifetime. or not…
    retirebyforty recently posted..February 2013 Goals and Finance Update

    • Ha. It’s the “or not” that freaks me out a little. House values were at their all-time low in 2011-2012. Now they’re starting to bounce back. With our unpredictable government right now though, I’m thinking we might have another meltdown on our hands. If that’s the case, then I wouldn’t want to be the guy that has 3 or 4 properties leveraged with the bank…

  • I am with PK and PB40 on this one (and Krant published something along similar lines as well). Pay your mortgage off eventually (even early) is great; focusing on paying it off to the exclusion of other opportunities – no. After all, this is the cheapest borrowing we’ll even get. Apart from that were all your money to go on the house you live in and ‘traditional’ pension there is no opportunity for moving to the stage of ‘money works for me’ income.

    Having said that, whether or not you pay off your mortgage is also age specific – if you are in your mid 60s its probably wise not to have one. Till then!
    maria@moneyprinciple recently posted..What do you do about saving these days?

    • I’m kind of with you Maria. I always have a cash reserve for emergencies or for other opportunities, but I do encourage almost everyone to get rid of their mortgage early. After all, once it’s paid off, that’s an extra grand in discretionary income each month for them to invest!

  • Yoursap

    Paying off your mortgage is freedom. It felt great to pay it off. I got a lot of advice against paying it off.

    The argument about using the money to invest is flawed because it doesn’t take risk or income taxes into account. The comparable investment would be a CD a 20% higher interest rate… Just to break even.

    Cash flow is a good temporary argument. You need a good emergency fund before putting much cash into paying off a mortgage. Once a good emergency fund is established, the argument goes away.

    • Good points Yoursap. For those that argue the cash flow point, I would rather put my focus toward earning additional revenues (like this website for instance). Then, I can not only pay down my mortgage faster, but I’ll have a very large cash flow once it’s paid off. Thanks again for the comment!

  • Not all debt is bad debt. Mortgages are one of the least expensive debt and particularly now with the rates historically low. With that said, some people are uncomfortable (yes, this is emotional) and prefer to pay off mortgage ahead of time. I completely understand the emotional aspect of removing a monthly obligation.

    I was in this camp and thought everyone should do this. Many years ago, I did pay off my mortgage. At the time, it was a tremendous relief for me.

    However, I have changed my point of view. It is not the best solution for anyone who has cash flow or potential cash flow challenges. Most people do not have an emergency fund. This is more important and should be well established before paying off a mortgage.

    • Hi Diane. You know, you’re right! If someone doesn’t have an emergency fund in place, they should not be paying down their mortgage aggressively. Because, if the cash flow stops and they run out of money, it would be very difficult to get the equity out of their house vs. taking it from their savings account. I think my next article will be about the steps that need to be taken before your mortgage payoff is number 1 on your list. Stay tuned! :)

  • I bought a house cash for the good feeling of owning my roof, but don’t plan on overpaying my rental’s mortgage, the rate is low and covered by the tenants, I’d rather keep the cash for improvements and investing elsewhere.
    pauline recently posted..Buy my method, not my lifestyle

    • I suppose it is a little different when you have a renter paying your mortgage for you, but it IS still your debt. If it were me, I’d put my money AND the renter’s money toward the loan. It would get paid off in no-time and then think about the cash flow you’d have. You could buy another rental with cash in just a couple of years. Then repeat the same process again and again! Then you’d have a golden retirement.

  • I love this post! It takes on the actual realities in life and not rosy assumptions. While everyone’s situation is different we plan on paying our house off early. It will help me sleep much better at night knowing my house is fully paid off.
    Brick By Brick Investing | Marvin recently posted..How Much Is Too Much?

  • John C

    We never really own our home. Our municipality (taxes & laws) and insurance company own our home.

  • [...] Should You Pay Off Your Mortgage ASAP? by Life & My Finances [...]

  • Tim

    We refied to a 20 yr loan last year at 3.875% Then we enrolled in a bi-weekly auto payment plan that knocks it down to 17 years and saves us a TON of interest. We also try to pay a little extra whenever we can , like say tax refund money, so if we make just one extra payment a year, in twelve years we will have 1 more year paid down.
    So while it would be wonderful to be mortgage free, we aren’t killing ourselves getting there. “Good things come to those who wait”

    • Hi Tim. It’s awesome that you’re focused on paying down your mortgage in less than 20 years! By steering clear of the conventional 30 year loan, you’re already more responsible than most, and then you’re paying extra on top of it? Great job!

  • Great breakdown of pros and cons; thanks for this. Great post!

  • I’m in the same boat as you. I would rather have it paid off quickly.

    The toughest part for me is that I just refinanced to a super low rate. I am currently at 2.875% on a 15 year fixed. I can sometimes beat 2.875% in a week on the stock market, let alone a year.

    For right now, I am saving up aggressively for a second down payment while paying the minimum on my mortgage. Once I have that saved up plus an emergency fund, I will hammer away at the balance (currently $99k) until it is gone. That will give me huge cash flow on a rental.
    Eric recently posted..March 2013 Net Worth and Earnings Update

    • Sounds like a pretty solid plan Eric. I think that’s actually a good message for people today. It’s a great thing to pay down your mortgage, but that doesn’t mean that you completely ignore your savings account. We should all have a solid emergency fund as well as multiple incomes, just in case this economy takes a dive (as many predict it will).

  • My heart says yes, but my head says no. My wife and I are in the midst of aggressively paying off her med school loan, so it is a no-brainer for where our money should be going right now. If that wasn’t the case, however, I would be torn between paying down mortgage and investing in real estate, since who knows how long prices and rates will stay where they are at.

    If things are in a similar place in about 2 years, then I will have that tough decision. Although, better to be in a place to make that decision than not.
    Greg recently posted..Volunteering – Don’t Forget to Give Back

    • It is definitely a tough decision Greg. For me, I’ll most likely build up a large savings while I’m paying down my house aggressively. When it comes time that I can pay off the whole shebang with a lump-sum payment, I’ll have to re-evaluate house values to see what’s logical. Most likely though, if house values are still low, I can see myself paying off my current house and saving up another lump sum super fast (since I now don’t have to pay a mortgage) and either purchasing a fixer-upper with cash, or take on a smaller loan again for my investment and pay it down ASAP. Then, I’ll move onto the next real estate investment! :)

  • Didn’t get through all the comments but 2 things stuck out to me:
    1) 30 year fixed here, closed in January for 3.35%…no points.

    2) You said $300K + $180K in interest = good luck selling for $480K. In 30 Years even at 2% (which I think is historic average) you are looking at a $532K value.

    Notwithstanding, I go back and forth on the subject and it has less to do with investment numbers and more to do with the cash flow aspect you mention. My house and taxes tax up the majority of my monthly nut…the earlier I have them eliminated the more I can invest.
    Evan recently posted..Recalculating My Monthly Nut

    • Good points Evan. I’ve recently turned into a “no debt person”, which includes everything including the home mortgage. There are definitely times when the numbers work in the favor of paying as little as possible and carrying out the full term of the loan, but when thought about rationally, I think many people would make the decision that I have. Everyone knows that at any given time a huge bill could just happen – it could be a freak accident or illness, but we could suddenly owe $100k+. If we can’t pay for both that and the monthly mortgage, then the bank takes back their house, no matter how much we’ve paid on the principle. They still own the note. I’d much rather have complete ownership of my house.

  • You sound like my brother in law. He’s got a similar plan (pay off house in 5 years, get a rental, pay off in 5 years, and so on…). Some thought:

    1. Change “Mrtgage Tax Credit” to say “Mortgage Tax Deduction”.

    2. I’m with you that most won’t put extra income toward investments, but will blow it.

    3. Cash flow is important, and I would emphasize a very large EF before throwing all extra income toward the house.

    4. I would also set a limit. Such as; “if you can’t pay off your house in less than 5 years, then split your extra money; half towards the mortgage, half into investments, especially pre-tax” Because if you aggressively pay off your mortgage, but it takes 9 years, you should really diversify your investments, and half real estate, half “other” would get your to our goal of mortage payoff, but also not leave you with 90% of your money in an illiquid asset.

    5. I now have to write about this, because I’m seeing it everywhere, but don’t fully agree with anyone yet. :)
    Jacob @ iHeartBudgets recently posted..7 Steps To Becoming Your Best Friend

    • Thanks for the comment Jacob! First of all, you’re absolutely right. To say “credit” is misleading. I have updated the post. Great tip on the half and half idea too (if you can’t pay off the mortgage rather quickly). Let me know when you write your article. I would love to hear where you stand on this topic! :)

  • Wow! this subject sure garnered a lot of comments!
    Here’s a way to have your cake and eat it too.
    Go to http://www.teampayitoff.com and watch the free financial webinar-you will be amazed how quickly you will be able to pay off your mortgage and debts.

    • Hi Wayne. Typically, I would label this comment as spam, but I’m trusting that you’re adding value with your video in regards to this topic. Don’t let me down!

  • Jess

    I am as big of a believer in saving and being safe with my money and I’ve been contemplating paying off my mortgage, BUT look at it from another angle: a 4% interest rate becomes about 3% (give or take) after the tax write off. Compare that to CD rates that will eventually be 5%+ again. I’d rather save my extra house payments and have that cash liquid and start turning a profit on that money when interest rates on FDIC insured CDs are earning 3.5% or more.

    • Makes sense Jess, but if you are sitting on a bunch of money in the future, do you think that you’d pay the house off then? I just like the security in saying that the bank doesn’t own me anymore.

  • Jess

    P.S. AND you’ll still always have access to that money in case something happens and you NEED to pay off the house.

  • Jess

    I wouldn’t pay off the mortgage until I had to, as long as I was earning more interest off that money than I am paying for the mortgage loan. Just think how fun it would be to be earning money off of the bank’s money! It’s like another source of income and the more sources of income someone has the easier it is to save money and become wealthy. If I needed to pay it off in order to retire I would. But if you save enough money and earn enough interest you can use the interest to make your house payments. Then you eliminate the stress and still have a load of cash.

  • I’m not paying off my mortgage for the following reason. My 30 year mortgage is 4%. I get 6% raises per year from my job. I can invest in rental properties to obtain >20% year return. I don’t need the cashflow. Now, my situation is very unique and I admit that once I achieve my goal of 80k passive income in rental properties (5 more properties) I will definitely look at paying off my home, but right now the opportunity cost is way too high and it’s only cost me 2400 per month (nothing compared to monthly net income). I think it’s all about the big picture and the goals of the person.
    Dominique Brown recently posted..Hold Onto Your Money: Can You File Your Own Taxes?

  • Andy

    My wife and I are both 29 years old and are teachers in Maine. I purchased a $100,000 condo in 2008 prior to marriage at the age of 23. At that time I had a 30 year at 5.55% I had the goal of paying it off in 10 years. Then I got married, and had two incomes coming in. We decided to be aggressive and pay it off in 3 years prior to having a child. We SUCCEEDED and paid it off in 34 months. I can tell you it felt fantastic!

    We saved vigorously for nearly two years and put a 20% payment on house we bought for $260,000 (a short sale) house appraised at $317,000. We bought in June of last year and had a 15 year with 3.125%. We refied with a no closing cost option at 15 years 2.75%. We loved the feeling of being debt free so much that we want to pay this one off as fast as possible also. We have targeted 5 years and 3 months.

    After living 2 years with no mortgage and no rent, I can see the light, and feel confident that if we can be 34 with no Mortgage, and our son will then be 6 years old. That we will be able to set ourselves up wonderfully for retirement and provide our son with lots of opportunities.

    I use the condo as a rental, I get $850 a month in rent, and my expenses are only $375 per month (taxes, insurance, condo fees). A nice $475 profit.

    I highly recommend the guaranteed return!

  • Andy

    If I hadn’t paid the condo off in full. Instead of clearing 475 each month, I would be taking a small loss!!!

    • Wow. Nicely done Andy. That’s exactly the way I want to do it as well. Once you pay off the house you’re living in now, you’re going to have quite the cash flow! :)

  • mili toro

    we bougth i house 5 years ago and we are paying 4 or 5 extra montly paymenr to the principal each month we are planing to pay off in 3 more years.now im 34 years old and my husband 39 you think is not a goog idea to pay off the house soon.

  • Jess

    Continue to save those extra house payments and instead of putting them toward your house, put that money in a CD in 3-5 years and earn more interest on it than you are paying in your low interest mortgage (don’t forget the tax write off too). $250,000 in a 5% CD will earn you $12,500 a year (CD rates are expected to jump up in 2-5 years). That’s almost enough money to pay most mortgages every year, so it will be almost the same as living mortgage free, but you’ll have $250,000 of liquid cash! You’ll then be making money off of the banks money!
    Andy- your current mortgage at 2.75%, is basically less than 2% when you factor in the tax write off. That’s basically free! Put that money in a CD as mentioned above and you’ll be earning more than twice as much interest as you are paying!
    (Do what you want, but by paying off that mortgage, you’ll actually be losing money in about 3 years)

  • Andy

    Jess… how do you figure 2.75 turns into basically under 2% with the tax write off? After deductions we are in the 15% bracket… That would still leave it with 2.33%

    Where the heck do you find a CD that pays 5%? We aren’t in 2005 anymore sweetie! We are in 2013… Find me a CD that pays over 2.33 % and Id be thrilled, i guarantee that you can’t! Also if you are factoring in taxes, remember you have to pay taxes on the money earned in CDs. So you’ve got to do even better then that. Not going to happen!

  • Jess

    I’m not looking to argue. Just trying to help you out. I was just throwing out rough estimates based on averages. I had no idea what actual tax bracket you are in.

    In my post, I specifically said that CD rates will go up in the FUTURE. CD rates fluctuate over the years. The government is lending banks money at close to 0% right now, so that means the banks aren’t going to offer CD rates much higher than that. As soon as the government stops, interest rates will rise and they will probably rise pretty quickly. Right now, it’s estimated that this will happen half way through 2015 – when unemployment hits 6.5% which could potentially take a little longer.

    As soon as CD rates go over 2.75% (it’s only a matter of time), you will be able to earn more interest than you are paying.

    You can obviously do what you want. But I’m currently saving as fast as I can to have enough money to be able to pay off my house. But I’m keeping it in the bank, because it’s inevitable that CD rates will be higher than current mortgage rates. Then, it’s my plan to use the interest each year to pay my mortgage. Who knows how high interest rates could be some day. In 1984, a 5-year CD earned over 12%. I’m not banking on that happening, but I’m pretty confident they will be over 2.75%.

    Good luck Andy. Because of how well you are able to save, you will be well off with whichever option you choose.

  • Jess

    P.S. Andy – I’m a man, not your sweetie.

  • [...] Should You Pay Off the Mortgage ASAP? (Mortgage): So many people come up with reasons why they shouldn’t pay off their mortgage early, but is it really the smartest option? What if you aggressively paid off your mortgage? What are the benefits? As it turns out, there are a TON of them! [...]

  • Keith

    Jess – you’re living in cloud cuckoo land!

  • Jess

    Keith – there’s a smart comment! I said nothing but facts and you respond to me with a dumb comment like that? Anyone that thinks CD rates won’t go above 2.75% within 5 years is an idiot. Same can be said for anyone that doesn’t realize earning 3%+ interest is better than losing 2.75%…..I’m also very surprised Derek approved a message that only attacks someone else, doesn’t include any facts or useful information, and doesn’t add any value to the conversation.

    • First of all, yes, I’m actually surprised I approved this comment too! I must have been half-sleeping. I loved your comeback though, so now I’m keeping both comments here! Thanks for being a faithful reader Jess. I always appreciate your comments. :)

  • Keith

    Jess: “Anyone that thinks CD rates won’t go above 2.75% within 5 years is an idiot.”

    5 yre is a heck of a long time.

  • Keith

    PS: Where are you getting the CD rates of 2.75% from?

    5 yr CDs are barely scratching the 1% mark these days!

    Chill out Jess. No one was attacking you.

  • Jess

    Geez, I didn’t know I had to spell everything out. My original comment was in response to someone who currently has a mortgage rate of 2.75%. Therefore, if he can invest his money in a CD, or anything else, and earn more than 2.75% then he is better off not paying off his house. Interest rates are currently around 1%, BUT should be above 2.75% within 5 years. Most people can’t save enough to pay off their house in less than 5 years. My point was and is, you might as well save enough to pay off your house and then make your decision on whether you should pay it off or put it in a CD (vs. throwing all your money at your mortgage until you pay it off – once you start doing that, there’s no getting that money back for the same interest rate). Yes, of course, you will be paying a little extra in interest during that time period, but odds are it will be worth it when you have that large amount of cash ready to invest…..again, yes, 5 years is a long time, but it will take much longer for the average person to save enough to pay off their house. Every person has their personal case and every answer is different. There are good reasons to pay off a house, but it’s ALMOST never a good idea when you have the potential to earn more interest than you are spending. Who ever said I wasn’t chill?

  • Luci

    Hi Jess, First off all, pay no attention to naysayers like Keith! ugh!

    Thank you very much for a great and well thought out post (above).

    I figure you must have been reading my mind – I like no doubt many others – have had this dilemma going on in my mind; especially in this day and age of almost zero interest – whether to pay extra principal to my mortgage OR save up to pay off the whole lot in a lump sum (unfortunately I have two – a small and a large one on the same house!) For now, I think the ‘best’ way to tackle this would be to save up hard to pay down the smaller of the two first. I realize this may not work for everybody and as you rightly say, each individual’s situation is different. I, too, am optimistic that the CD rates meantime will go up during this time. My intention is once I’ve paid off the smaller mortgage or at least made a substantial dent (lol)that will free me up to concentrate on the larger mortgage. All going well, I can start investing some of the savings into CDs rather than paying extra on the principal. As you mention in your post,by doing so you’re not throwing it all at the mortgage and therefore giving yourself some degree of liquidity. Even if it does mean paying a bit more on the mortgage interest. It’s somewhat reassuring for me to read that others’ like your good self are on the same wavelength/way of thinking. Thanks Jess for your great input!

  • Luci

    Oops I forgot to add: some might also argue that by putting cash into CDs you’re also tying up your cash but at least you’d only be tying it up for a maximum of 5 yrs and if you really needed it, you could get it more or less immediately (at a penalty of course!) Once you pay extra cash to mortgage principal, its gone and there’s no way of getting it back in case of emergencies. I do also advocate strongly that one saves up an EF of at least 6 months’ salary before tackling the mortgage.

    Phew! So much money, so little time…:S

  • Jess

    Thanks Luci! I agree – I would definitely pay off your second mortgage as quickly as possible.

    Again, I agree – everyone should definitely have an emergency fund that is obtainable at any time, so a CD doesn’t work well for that. Right now, CD rates are so low it’s not worth having any money in them. You might as well put your money in a money market or a high interest savings account because the rates are pretty comparable and your money isn’t locked up for any period of time. BUT, in the future, any extra cash can be spread out across multiple CD’s. Ideally, you would have one coming due every 6 months, or maybe every year depending on your circumstance. I feel more comfortable having a 1 year CD. Then, starting another 1 year CD 6 months later and keeping that rotation going. I have a hard time locking my money up for 5 years, but if the interest rates are good enough and I had enough money in other locations, I would consider a 5-year CD.

  • […] Well, there are many reasons: most of which are summed up in my article from last March: “Should You Pay Off Your Mortgage ASAP?“, but the main reasons are that (1) it is still a guaranteed gain since I will not have to […]

  • Chris

    I like the idea of no debt and sure no mortgage is great…and $180k of interest is a lot of money…but not over 30 years! Let’s keep going with your example above, a $250,000 note over 30 years @ 4%. Your monthly P&I is ~$1,200/month. I think adding an extra mortgage payment annually makes sense, cuts into term and saves some cash. In this example, a yearly additional $1,200 payment shaves off 4yrs. and $30,000 of interest.

    But let’s think about your statement of paying it off as quickly as possible. For the purpose of this example let’s assume people stick to the general rule of thumb that you can afford to pay no more than 25% of your monthly gross net income on your home. Then this borrower earns $4,800/month of gross income. Let’s assume of the $3,600 that remains after P&I payments for the home note, $1,000 is consistently leftover to go to whatever they desire (after bills, entertainment, food, transportation, taxes/ins…etc). Also let’s assume this borrower is savvy and has an emergency fund of 6 months’ worth of expenses, so they don’t need to fund that account anymore.

    If we look at annualized returns (adjusted for inflation) for the S&P 500 from 1900 through 2013, you’ll see an average of 8.43%. From 1970 through 2013 about 7.5%. Instead of parking extra funds into the home note to pay it down ASAP, it would benefit the borrower to buy S&P500 shares. What is not mentioned in your argument, and is the fundamental benefit for longterm investing strategies, is compounding interest and the time value of money.

    If the borrower invested his $1,000/month into S&P500 for 30 years vs. paydown the home note and then invest the $1,000 on top of the $1,200 being paid for P&I, over 30yrs. they’d realize a difference in net worth of $232,329.78. Assume (keeping all things static for simplicity) once the borrower paid down the note (takes 12yrs. with an additional $1,000/month, saving $115,000 of interest) they would begin investing in the S&P500 with the $1,200 plus the $1,000/month, totaling $2,200 for the remaining 18yrs.

    Even after saving $115,000 of interest because the lost time (12yrs) paying down the house, the borrower loses the exponential benefits of compounding interest on the back end of the investment period. Note that the difference did not include any benefit for tax deductible interest.

    In simple terms, all things equal with historically average investment returns,a borrower would be in a better financial situation if they invested their additional funds in shares of the S&P500 vs. paying down a mortgage at 4%. *** (7.5% is very low but it’s the lowest annual average for a 30yr. period I could find for S&P 500, go to http://www.moneychimp.com/features/market_cagr.htm to check it out, you might find a 30yr. period that’s lower but most were well above 7.5%)

    Just for grins, the breakeven mortgage interest rate is just under 10%, paying down an additional $1,000/month.

    • Yes, you might earn more in the market, but the risk is much greater than the “earnings” you would get by paying off the mortgage (which are guaranteed). If you made this decision to invest your money in the market back in 2007, you might have wished that you put your money into your home mortgage! It’s all just a risk/reward proposition. Thank you for the comment Chris! It definitely makes sense, but you have to admit that there is risk involved. After all, the market does not always go up.

  • […] We Doing Personal Finance Wrong at Beating Broke Why We Pursued Rental Income at Young Adult Money Should You Pay Off The Mortgage ASAP at Life and My Finances How Much is Your Honesty Worth at Penny Thots Five Tips to Follow for […]

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