Should you pay off your mortgage early?

Should you pay off your mortgage early?

My friend Amy recently wrote with an interesting dilemma. “Should I pay off my mortgage early?” she wonders.

Amy has a high-paying job and has managed to save enough that she could be completely debt-free if she wanted to. And she kind of wants to! But is this the best choice? She's aware that this is a nice problem to have — but it's still a bit of a muddle. She'd like some guidance.

Here's an abridged version of her email:

I'm wondering if you have any advice for me related to paying off a mortgage vs. keeping it for tax purposes.

Here’s the basic rundown: I have 22 years and $103,000 left on a 30-year fixed-rate mortgage at 3.95%. My monthly payment is $668 per month. I will pay about $48000 in interest this year. I pay both my taxes and insurance out of pocket annually.

The past two years, I've made close to a quarter of a million dollars each year, and this year I will likely exceed that amount. This is a wonderful place to be. With no other debt, I'm contemplating whether I should completely pay off my mortgage in one swoop come November when I get my bonus.

I have advice coming from both sides. My accountant warns me against it, as I would have no other write-offs to offset my high income. However the freedom of being DEBT FREE sounds amazing, even if it comes with a high tax bill.

I would love your advice (or the advice of your readers, if this offers an opportunity to share with them).

My stock answer to this question — which I get a lot — has always been: This is a no-lose situation. Deciding whether you should pay off your house is a case where either option is awesome.

Mathematically (and financially), the best choice is almost always to carry the mortgage. However, many people receive a huge psychological boost from not having a mortgage. In other words, this is one of those situations where the smart financial decision and the smart psychological decision aren't necessarily the same.

Although Amy is asking specifically about the tax implications, let's start by examining the Big Picture.

Should you pay off your mortgage early?

The Pros and Cons to Paying Off Your Mortgage

Just so everyone is on the same page, here's a quick look at the pros and cons to paying off your mortgage. There are advantages and disadvantages to both choices. Are certain advantages more important than others? You make the call.

Here's why you might want to pay off your mortgage early:

  • Whenever you pay off debt — including your mortgage — you earn a guaranteed return on your money. The stock market returns a long-term average of 6.8% (real returns), but average is not normal. There's a lot of risk involved investing in the stock market. If you're not comfortable with that risk, paying off your mortgage is a fine investment. More on this in a moment.
  • I like to think of home equity as a “store of value”. When you pay down your mortgage, it's like putting money in the bank (albeit money that's harder to access). That equity can be tapped when needed. In the meantime, it slowly appreciates (assuming the value of your home increases).
  • If you're currently paying private mortgage insurance — typically in cases where you have less than 20% equity in your home — then paying down your mortgage will help you eliminate that cost. This isn't applicable to Amy's situation, but it's something others might want to consider.
  • There's absolutely a sense of relief that comes from being mortgage-free. You know that if things go to hell — you lose your job, the economy tanks, et cetera — at least you have a place to live.

On the other hand, there are reasons you might want to keep a mortgage for as long as possible. Here are some reasons you might decide you'd rather not pay off your mortgage:

  • If you believe you can earn a higher rate of return investing elsewhere, then that's the most sensible choice. In our recent era of low mortgage rates and high stock market returns, for instance, the logical choice was to invest in the stock market instead. In the 1970s, though, when mortgage rates were high and the stock market was lethargic, this wouldn't have been a smart decision. (Here's a simple calculator that can help you weigh this decision.)
  • Some folks — like Amy's accountant, apparently — believe that the tax breaks from your mortgage make it worth keeping. The home mortgage interest deduction, they say, helps to lower your obligation at tax time. While this is technically true, it's a poor trade. (You'll see why in the next section.) Still, as part of the Big Picture, it's an influencing factor.
  • Although it's not often a consideration, inflation is actually your friend when it comes to a mortgage — especially a 30-year mortgage. I bought my first home for $108,000 in 1993. If I had kept that home and mortgage, I'd still be paying on it until 2023. But I'd be paying with current dollars, which are only worth about 57 cents compared to 25 years ago. Inflation is generally the enemy; with a mortgage, it's your friend.
  • Finally, it can make more sense to keep your mortgage if you value liquidity. That is, if you want and/or need cash, keeping the mortgage can be the better option. Once you give your mortgage company your money, it's a pain to get it back.

Because of my own situation, I feel like that last point deserves a closer look.

You see, I've been without a regular income for more than five years now. I'm living off my savings. It's true that I have substantial savings (for which I'm grateful), but much of it is held in retirement accounts that cannot be tapped without penalty until I turn 59-1/2. (That's less than ten years away now!)

I have a roughly $300,000 nest egg to last me the next ten years. If the stock market falls, that number will shrink. There's a part of me that wishes I hadn't been required to pay $442,000 cash for this house last year. It'd make me feel better to have some of that equity — maybe half of it? — in the stock market and savings accounts instead.

As it is, I could be in a pickle if it turns out I need more cash.

The Home Mortgage Interest Deduction

Because Amy asked about the tax implications of paying off her mortgage, let's tackle that before we dive deeper.

Here in the United States, homeowners are allowed to deduct their mortgage interest from their income taxes provided certain conditions are met.

The basic conditions are relatively easy to understand. But as with anything tax-related, there are a lot of exceptions and complicating factors. For more info, consult this IRS guide to home mortgage interest deductions. You can also download the 17-page IRS Publication 936 in PDF form.

Let's assume that Amy makes (as she hopes) $250,000 this year. Using the income tax tables for 2018, we can see that her marginal tax rate would be 35%. (This means that the last dollar she earned is taxed at 35%.)

She'd be taxed $45,689.50 on her first $200,000 of income, then $17,500 (35%) on the next $50,000. Her total tax would be $63,189.50 and her effective tax rate would be 25.3%. (Her tax liability would be 25.3% of her income.)

Amy says she'll pay roughly $4800 in mortgage interest in 2018. If she's able to fully deduct that interest, that means she's able to reduce her taxable income from $250,000 to $245,200. This would reduce her tax liability from $63,189.50 to $61,509.50 — a total of $1680.

This is the part that confuses many people. Income tax deductions reduce the amount on which you're taxed, not the amount of tax you owe. It's a subtle but important difference. (Tax credits reduce the amount you owe. Here's what the IRS has to say about the difference between tax credits and tax deductions.)

If the home mortgage interest deduction actually reduced Amy's taxes, she'd save $4800 this year. Instead, she's only saving $1680. For each dollar she pays the bank, the government is reducing her taxes by 35 cents. Sound like a good deal? If so, let's talk! I'd be happy to give you $35 in return for $100.

Like many others, I find the “you should keep a mortgage for the tax deduction” argument unconvincing. Here's how my accountant once put it: “You shouldn't look at the tax savings as a reason to purchase a home. It's only one component, and a minor one at that.”

This is especially true since if Amy is unable to come up with enough other itemized deductions to exceed the $12,000 standard deduction. If that's the case, there isn't any tax advantage to the mortgage.

The IRS website has an interactive tax assistant. As part of that, there's an automated interview that helps you determine what you're able to deduct for mortgage interest.

The Math of Paying Down Your Mortgage

Have you noticed that we keep talking about the “guaranteed rate of return” that comes from paying off your mortgage? Yet we haven't talked about what that guaranteed rate of return is. Let's take a moment to do that.

  • If you don't itemize your tax deductions, your rate of return on prepaying your mortgage is simply your current mortgage rate. Let's say you have a mortgage with a 3.95% APR like Amy. Paying that down gives you a guaranteed 3.95% return.
  • If you do itemize tax deductions, your guaranteed return is a bit more complicated to calculate. To do so, convert your marginal tax rate to a decimal and subtract it from one. Then, multiply that number by your mortgage rate.

Let's use Amy's situation to explain that last point.

Amy's marginal tax rate is 35%. If we convert that to a decimal, we get 0.35. If we subtract that from 1, we get 0.65. If we multiply that by her mortgage rate (3.95%), we get 2.57%.

If Amy were to pay off her mortgage early, she'd earn a guaranteed 2.57% return on her money.

This is much, much less than the 6.8% real return Amy should be able to earn if she routed that money to index funds instead. The catch? As mentioned earlier, stock market returns are not guaranteed.

(I'm going to leave out compound interest vs. simple interest calculations because I've already spent too much time on this article. Suffice it to say that stock market returns compound while the returns from prepaying your mortgage do not. If you're dying to see a discussion of this, check out this article at Afford Anything.)

If you make your decision based only on math and logic, it makes sense to keep your mortgage as long as possible. But nobody makes decisions like these based purely on logic. Not even financial “experts”.

Want to know more about the math of paying down your mortgage? My buddy Todd Tresidder, the Financial Mentor, nerds out on this stuff. Follow that link to read his advice. The short version? He used to be in the “pay off your mortgage” camp. Now he thinks the opposite. (If you're a money nerd, Todd provides some of the best mortgage calculators I've found. Check them out!)

What the Experts Say

Paying off your mortgage early can be a smart financial moveWhat do the actual money experts think about this debate? They're divided. Some think you should do what you can to pay off your mortgage early. Others think that's a dumb idea.

Here's a round-up of opinions from some of the money manuals in my library.

  • Ric Edleman (Ordinary People, Extraordinary Wealth): Never own your home outright. Instead, get a big 30-year mortgage and never pay it off — regardless of your age and income. “Every time you send an extra $100 to your mortgage company, you deny yourself the opportunity to invest that $100 somewhere else.”
  • Suze Orman (The Laws of Money): Invest in the known before the unknown. Paying off your mortgage offers a guaranteed return on investment. “You cannot live in a tax return. You cannot live in a stock certificate. You live in your home.” (Or on your private island.)
  • Elizabeth Warren (All Your Worth): Save 20% of your income. Use 10% for retirement savings, 5% to accelerate your mortgage, and 5% to save for future dreams. “Paying off your home also does something many financial planners neglect to mention: It gives you freedom. Once that mortgage is gone, just imagine all the freedom in your wallet.”
  • Dave Ramsey (The Total Money Makeover): Prepay your mortgage if you can, but only after you've saved an emergency fund, and only if you're putting at least 15% of your income toward retirement. Don't use a program designed by a broker; use your own self-discipline.
  • Joe Dominguez and Vicki Robin (Your Money or Your Life): “Pay off your mortgage as quickly as possible.” This advice is from 25 years ago, when mortgage rates were higher. While writing this article, I emailed Vicki to ask if her advice is the still the same. It is: “My choice is to not have debt and to live in a house I can afford.”
  • Charles Givens (Wealth Without Risk) offers a novel approach to prepaying a mortgage. “On the first of the month when you write your regular mortgage check, [include extra] for the ‘principal only' portion of the next month's payment.”

I've read hundreds of money books during the past fifteen years. Many authors have commented on this issue. Some experts argue in favor of keeping your mortgage; other experts argue in favor of becoming debt-free. There's no consensus.

When I first wrote about paying off your mortgage more than a decade ago, I linked to a Yahoo! Finance article by Laura Rowley. That article has vanished, which is a shame. In that piece, Rowley offered some interesting background on this debate:

Why do so many people choose to put extra money into a mortgage when other options would likely increase their wealth? “This is really remnant of Depression mentality that has persisted from generation to generation,” says [one expert]. At the time, most mortgages had one- to five-year terms, with a lump sum payment due at the end.

“Any shock to income meant you couldn't afford your payment — mortgages were much more susceptible to economic uncertainty,” [the expert says], and roughly one-quarter of Americans were unemployed during the Great Depression. “It's fine to pay down your mortgage if it gives you peace of mind, but you should recognize what that peace of mind costs.”

Rowley is suggesting that the “pay off your mortgage if you can” mentality is the product of a scarcity mindset. It's a decision born out of fear. Keeping the mortgage, on the other hand, is a sign of an abundance mindset, a belief in a positive future. (Do you agree with her?)

FB Discussion about Paying Off Mortgage

What My Colleagues Say

Yesterday, I polled some of my colleagues who write about real estate. These folks live and breathe housing and mortgages, so they know their stuff. I was curious what they thought about paying off a mortgage early.

My pal Coach Carson said:

My wife and I have debated this exact question on our personal residence. We love the idea of simplifying our lives and reducing our risk. But thus far we've decided not to.

Overall, I see paying off your mortgage early as a decision that balances peace of mind (low risk) and growth (return). The more weight you give peace of mind, the more likely you are to pay off your mortgage early.

Scott Trench, the President of real-estate site BiggerPockets and author of Set for Life, told me:

Whether you should pay down your mortgage is less of a mathematical problem and more of an emotional one.

  • If I'm in wealth accumulation mode, or trying to operate my decision-making for the largest amount of long-term wealth possible, I'm going to invest in an alternative rather than pay down my mortgage.
  • However, once out of wealth accumulation mode, paying down a mortgage seems to be hugely popular. A paid-for home can make a huge difference in the amount of cash flow needed to fund your lifestyle.

I go into a bit more detail about the math behind paying down a home in this article.

Finally, here's advice from Mindy Jensen, host of the BiggerPockets Money podcast (and Mrs. 1500 Days):

Most people overlook the incredible power of having a paid-off mortgage. I can sleep just fine while still having a mortgage, but some people get the heebie-jeebies having any sort of debt at all.

However, if you'll do something with this money that can return a higher yield than your current mortgage, it's a no-brainer to not pay it off.

We've saved enough money to pay off our mortgage at any time, yet continue to keep the mortgage because we can make more money investing in the stock market (or investing in real estate) than we pay in interest to the loan. Our rate is 3.25% and we will keep it for the entire length of the mortgage.

Among my friends who make their living from real estate, there's more of a consensus than there is among traditional money experts. The real-estate pros all say the same thing: From a mathematical perspective, it's best to keep the mortgage. But from a mental perspective, sometimes the best choice is to pay it off.

Conclusion

There are some corners of the interwebs where people are flabbergasted that you'd want to carry a mortgage. A lot of folks think that if you can pay off the debt, it's a no-brainer. They're wrong. The math argues in favor of keeping the mortgage.

As my friend Amy has discovered, however, this decision is more about mindset than it is about math. And sometimes even the math makes paying off the mortgage the best choice.

  • In the unlikely even that you're carrying an adjustable-rate mortgage, paying it off is a smart idea, especially now that rates have begun to rise.
  • If you wouldn't otherwise use the money productively — if you'd simply spend it on consumer goods, for instance — then you should absolutely prepay your mortgage. Keeping the mortgage is only a smart financial choice if you put that money to work for you!
  • If you're nearing retirement, it probably makes sense to pay off your mortgage. Generally speaking, you want to reduce risk as you get older. Eliminating the mortgage is one way to do that. Some folks argue that paying off your house is actually another form of retirement saving.
  • If your mortgage debt is a heavy psychological burden, it probable make sense to get rid of it. Becoming mortgage-free means you're also free from the time and energy spent managing the mortgage. This is a real benefit, even if you can't put a number on it.

There you have it, my friends, 3000 words on whether or not you should pay off your mortgage early. And in the end, the answer is: It depends.

The bottom line is this is a no-lose situation. Both options are good. If you're fortunate enough to have the cash to pay off your mortgage, and if doing so would make you happy, then you should pay off the house. Otherwise, keep the debt and put the cash to work elsewhere!

Footnote
We seem to be getting three common comments over and over, so let me address them.

First, this is a new article written in October 2018. There are old comments from 2006 below because we've combined the comments on four previous, similar articles into this piece.

Second, a lot of folks took issue with my (flawed) hypothetical interest example. I've gone back and replaced those numbers with actual figures from Amy's loan. I've re-calculated everything, and the figures should be correct.

Third, many people have pointed out that the new standard deduction is higher in 2018, and that Amy would need to exceed that in order to itemize. Yes, this is true. I thought it was obvious, so I didn't include this caveat in the original article. I've added a disclaimer to reduce the number of comments on this point.

Let me know if there are other errors or omissions I should fix!

More about...Home & Garden, Debt, Investing, Taxes

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Rebecca
Rebecca
14 years ago

I’m not sure I understand why the Givens suggestion is novel – I thought this was the basic idea of paying down one’s mortgage: anything you pay above the minimum goes straight towards principle, and since principle is usually a small fraction of your total payment, a small percent increase in payment shortens the total duration of the note noticibly. It’s not like the other people are suggesting that you pay extra interest or something, right? October 2018 note: This is a new article but we’ve merged comments from four previous, similar articles into this single discussion. To find the… Read more »

J.D.
J.D.
14 years ago

Ah, I should explain *how* it’s novel. I’ve heard a couple a few different methods for accelerating mortgage payments. The first, and most common, is to just make an extra mortgage payment once a year. The second, which is a variation of the first, is to take this extra mortgage payment and divide it into twelve equal installments, and to pay this every month. I’ve also heard the suggestion that you just pay 10% extra every month. Givens’ suggestion is novel because what he’s saying is that *every* month you should pay one extra installment on the principal. At the… Read more »

Jen
Jen
14 years ago

When I look at people I know who have retired, the ones who have paid off their mortgages are much better off than those who haven’t. If your mortgage falls beyond you’re reaching 65, I’d say do all you can to pay it off early. If not, do what makes you feel more secure.

Justin Thibault
Justin Thibault
14 years ago

I think the decision really depends on the situation you’re in. For instance, if you know that you’ll probably be moving to another area in a few years and the local real estate market is good – then it doesn’t make much sense to pre-pay the mortgage. However, if you’re wanting to stay in the area, move up to a larger house, and maybe keep the house you have now for rent – then it might help not to have so much borrowed money on your new rental property. Buy paying off the bulk of your mortage, you can be… Read more »

George
George
14 years ago

There’s some variation between Canada and the USA with regard to mortgage terms. Here in Canada, most lenders have a lot of flexibility regarding prepayment options. I prepay my mortgage in two ways: 1) I’m on an “accelerated biweekly” payment schedule, with payments made automatically every two weeks on my payday. This schedule means that every two weeks I pay one-half of a “standard” monthly payment. In a year, I’ll make 26 of those payments, or the equivalent of 13 monthly payments in 12 months. 2) I pay an extra $100 toward the mortgage with each payment. The combined result… Read more »

Jim
Jim
14 years ago

Absolutely not! Do not prepay that mortgage. There are so many reason not to I hope I remember them here. 1) As you prepay in good times, you can’t ask for those prepayments back in bad times or expect favorable treament. 2) The prepayment goes to the backend of the loan. Your $1 pays off the last $1 you’ll pay in the 360th payment. 3) no tax benefits. 4) you are using current money to pay for future payment in 30 years. That is crazy. Your extra $1000 could be worth $2500 in 30 years. But you get credit for… Read more »

Silly wilson
Silly wilson
8 months ago
Reply to  Jim

I retired my mortgage and I can’t tell you how much better I sleep at night. Two months’ unemployment benefits would pay off my annual property taxes on my five bedroom,3 fireplace, 3 bathroom home.

Jim
Jim
14 years ago

sorry for another post but I forgot something. the value of money due to inflation means $100 in 30 years is worth less than $100 this year. a hamburger will cost $10. A Honda will cost $50k. But your mortgage will still be $1234. Your pay will increase but the mortgage stays the same. also, the point of the interest % is that you buy time with the interest. time = money. there are very little things in this work that lets you get away with a 30 year payment at only 5%-6%. Ask your brother. Or sister. If you… Read more »

dokaben
dokaben
14 years ago

We pay extra towards principal each month but are starting to cut back. The biggest issue for us is that no matter how much you pay off, the bank still expects its check each month, even if you’re unemployed or sick.

We’d rather have the extra money available for home additions, emergencies, or just dropping out. Like when I run away from the computer industry to start a business, or take a pay cut and become a teacher…

Or not. Still, it’s nice to have the buffer just in case the urge arises.

Jim
Jim
14 years ago

Dokaben, my point exactly. I heard this story on the radio one day. An Airline machanic had this mortgage that he coverted to a 15 year loan so he can save money. His monthly went up of course. And on top of that he padded it up with an extra $100 or so a month. Until 9/11. Airline industry goes to hell. He almost lost his job. But managed to save it by taking a pay cut. Now he can’t meet the mortgage as well as daily his expense. He reveal he also has a credit card debt. The radio… Read more »

Justin
Justin
14 years ago

I think the answer on paying down your mortgage has to be different for everyone. What’s your mortgage rate? Do you have a retirement account set up and are you contributing to it? What can you make on other investments if the money doesn’t go toward your mortgage? My mortgage rate is about 5.75%, so I look at any extra payment as a guaranteed 5.75% return. So I look at that as part of my portfolio of investments. If my retirement is funded and I have extra money to invest, some piece of it may go to my mortgage as… Read more »

majeest
majeest
14 years ago

Jim:

I can’t argue with your point #1, but #2 seems like an odd thing to consider “bad.” Taking money off the back-end seems like a good idea to me. By taking a dollar off the 360th month of the mortgage up front, I’m saving 30 years’ worth of interest on that dollar. Depending on how the mortgage interest is calculated, that could be very significant.

[Assuming a 6% APR compounded continuously for thirty years, we get:
I = P * e^(r*t)I = $1 * e^(0.06*30)I = $6.05]

George
George
14 years ago

Jim writes: “Absolutely not! Do not prepay that mortgage.” It’s simply not possible to make a blanket statement that applies to everybody. For example, some of your comments don’t apply outside of the USA. Comments below: “As you prepay in good times, you can’t ask for those prepayments back in bad times or expect favorable treament.” Actually, I can. My mortgage has enough flexibility to allow me to skip future payments (equal to the amount that I’ve prepaid). Mortgages can vary greatly in their flexibility regarding prepayments and skipped payments. “The prepayment goes to the backend of the loan. Your… Read more »

kurt
kurt
13 years ago

Work hard when you are young – relax as you age, when your body and mind can’t take as much stress. That is…if you think you will live long enough. Dump as much cash on the principal as you can as early in the loan term as possible. For example, I worked overtime to more than double mortgage payments and paid the loan off in 11 years. Now, I have cash to save or invest with no headaches. Imagine the investing you could do with no mortgage. This is one way to get of the “hamster wheel”. I think the… Read more »

ABog
ABog
13 years ago

I was actually faced with this situation in a way that it appears most people aren’t. Two years ago, at the absolute apex of the housing bubble, my house which I bought for $125,000 was being valued at $525,000, over quadruple what I paid for it! I wasn’t happy in the city I was lving in, so I crunched the numbers and figured out that I could sell my house and buy a house in another city for around $400,000 that would be much, much nicer than the one I was living in. After broker’s fees and paying off the… Read more »

Tom
Tom
12 years ago

Jim you are dead wrong about the tax benefits being one of the reasons why you should keep your mortgage. Tell you what, you give me $10,000 of your money that I will pay towards the interest on my mortgage and I will give you, in cash, the tax benefit I receive from the IRS at the end of the year. I will gladly take the $7k I am guaranteed to earn off of you and run.

Elena
Elena
12 years ago

I’ve been reading the invest vs prepay debate for several years and concluded that prepaying is best for our situation as we intend to put more money into our older home in the next 5 years. The list of potential items we’ll have to fix or replace looms large in my mind. We purchased our modest home 8 years ago. We refinanced twice when the rates were low from 30 years to 15 years to 10 year terms for approximately the same amount of money. I know in 5-10 years or if we have to move that we are going… Read more »

Shiva
Shiva
12 years ago

Great discussion of a really difficult issue. I’ve been struggling with this for the past few years. We purchased a house with 5% down, adjustable 7/1 mortgage without PMI due to my job/stable income. With 2 kids, no credit card debt, student debt consolidated at ~2%, a 403(b) and Roth getting some but not full funding and a 5-6 month emergency fund in place, I want our extra money to go to the “right” place but it’s hard to figure out. Right now it is kind of random – depending on my emotional state each month – the money goes… Read more »

bill
bill
12 years ago

We just paid off our house and my wife and I feel like we are in utopia. I heard all the arguments about putting the money towards retirement, the tax savings, etc. But at the end of the day we simply invested 20% of our income into retirement and put the rest towards the house. It really hit home what kind of freedom we will experience when there was NO payment at month end. We literally had an extra $1800 to spend on anything we want. You don’t realize the burden you repress each month until the house is paid… Read more »

James
James
11 years ago

This strategy does indeed provide a return equal to the difference between the mortgage cost and market returns. However, the average return will have the variance (risk) of the stock market returns. If you’re looking for a 2% or 3% return with the risk of the stock market, this is the way to go. But, you can earn 3% from money market funds with only 3% standard deviation.

bill
bill
11 years ago

Follow-up to earlier posting on July 25th, 2008: My income dropped 40% this year but we are fine because our home is paid for. Had we followed the advice of “experts” our cash flow would be tight or negative during some months. Our emergency savings remain untouched and we have managed to invest this month into the market.

Again, pay-off your house, you can’t assume your income will remain stable and the so-called experts have their own agenda.

Len Penzo
Len Penzo
11 years ago

After you contribute to your 401(k) to the point of any company match, you can’t really lose by using any extra money to prepay your mortgage — especially in a secular bear market that may be around for years. For a detailed analysis on this please check out:

http://lenpenzo.com/blog/id477-paying-off-your-mortgage-is-a-no-brainer.html

Michael
Michael
11 years ago

Hi, I am thinking about prepaying my mortgage. I have already maxed my 401K with my company. I have a 30 year fixed loan at 4.87%. My loan balance at the moment is about 195K. I have put down 20% down payment when I purchased the house this year. House valued at 245K. I have a nice emergency cushion for at least 6 months. I have no debt at all. I am lucky to still have a job as well as my wife. If one of us is laid off, we can still make the payments and save without using… Read more »

Bill
Bill
11 years ago

Michael, I’ve posted on this board and my recommendation remains the same. If at all possible pay down your mortgage. In your case, I don’t see much point in lowering the amortization period due to the great rate you have. I would simply toss an extra principal payment whenever you can. Overall, I would dump even more then $500 into the loan right now if you can. Since early high principal payments, which taper off into the future, are far better than a flat amount on an ongoing basis. In my family’s case, we bought our home in 2003 and… Read more »

Mike
Mike
10 years ago

Here is my situation: We bought our home 100% financed in March 2007 with two mortgages (hadn’t sold former home yet so really 3 mortgages, but had to jump or miss it as we had the other 3 chances at a 4 bedroom within the zone we were shopping – usually sold in 10 days or less in January 2007). The mortgage on our previous home was paid about 6 months in advance so I didn’t actually have to come up with 3 monthly payments to do it, just the first and second on the new house. We sold the… Read more »

LifeAndMyFinances
LifeAndMyFinances
9 years ago

I understand that paying off that mortgage early may not be a high-yielding investment (might “earn” as low as 3% or so after figuring in the tax bracket), but I think the early payoff is more for the individual’s comfort in knowing that the bank can’t come in and steal their house.

Also, I think that eliminating that mortgage payment can be huge! Imagine freeing up an extra $800 (could be more or less for you) per month! Put that toward your investments, and you can become wealthy in a hurry.

Bob N.H.
Bob N.H.
9 years ago

We paid off our mortgage 3 years ago at the age of 39. I’ve never had any regrets. This recession has been much easier to take without a mortgage.

Jacq @ Single Mom Rich Mom
Jacq @ Single Mom Rich Mom
9 years ago

I chose to invest more rather than paying off the mortgage. In hindsight, it’s worked out well since I’ve made a lot more than the 3% I was / am paying on the mortgage. What I don’t like about having money tied up in the house is exactly that – it’s tied up and not easily accessible. There’s something to be said for a feeling of security in having lots of cash in the bank too.

retirebyforty
retirebyforty
9 years ago

As I learn more about finance, I believe paying off mortgage early is not exactly the right move for me. As long as I am not paying mortgage insurance, a mortgage can be a good thing. Our first house is now a rental and the rental payment covers the mortgage. This rental income is going to be huge in my retirement, rent will only go up. If I can turn another rental or two, I’ll be most of the way to retiring. Mortgage is a great way to leverage if you can make it work. You should also consider inflation.… Read more »

Nathan
Nathan
9 years ago

I’ll just point out that paying off your mortgage early is a guaranteed nominal return … inflation makes it a worse decision and deflation makes it a better decision

Kristen@TheFrugalGirl
9 years ago

That peace of mind is my motivation! Plus, I’d love to be free from the monthly payment, because that would free up so much extra money.

We’ve got a couple of other ducks to get in a row before we hit the mortgage hard, though.

Rob Ward
Rob Ward
9 years ago

I concur with Kristen (#5) that peace of mind is my motivation. I just hate knowing that I have so much debt and paying all of that interest. That being said, I’ve still got plenty of other debt to pay off first (car and school loans). The mortgage is the last debt on my list to be paid off early.

First Gen American
First Gen American
9 years ago

I’m a big believer in paying off the mortgage early. I paid off our house last year. The biggest thing missing from this article is that having lower monthly fixed costs gives you more career flexibility. If you’re stressed out at work, or hate your job, you can actually downshift be able to take a pay cut while maintaining the same standard of living. There is value in being able to work a flexible job or something that doesn’t require long hours or lots of travel. I love the idea of taking on a second career mid-life, but paying off… Read more »

Bill
Bill
9 years ago

I am in the homestretch toward retirement, which starts a month from today. And a year ago this week, I made the final payment on my mortgage. Also being free of credit card debt for about 19 years now and buying my last two cars for cash, the elimination of the mortgage meant the end of all debt for me, a very freeing moment, knowing I would face a low-income retirement. I have a good friend, already retired, who is still paying on a mortgage. And a car. And several credit cards. She justifies this by noting she gets much… Read more »

chris
chris
9 years ago

This is so important! Paying off your mortgage early is a “sure deal.” Your home is yours and it allows you much more flexibility in your lifestyle. I paid off the mortgage this summer, just as my husband was laid off from work. We have had no issues with paying our bills and saving our money. That would have been impossible had we had to pay a mortgage payment as well. I don’t care where you are in your life – still young with small children or close to retirement – you can’t go wrong with paying off your home….of… Read more »

HollyP
HollyP
9 years ago

This weekend I read a story about a young woman who immigrated to the US from Russia, and her reasons for doing so. She wrote at length about the extreme financial instability as the Soviet empire crashed. It made me wonder what I could do to protect my family and myself in the event the same thing happened here. (Not unlikely in my lifetime, IMO.) I believe that having housing, paid in full, was one step in that direction. As the previous commenter stated, it gives you some career flexibility. Your expenses are lower, worst case you only have to… Read more »

NoTrustFund
NoTrustFund
9 years ago

I am no where near retirement, but I too hope to pay of my mortgage early. We are currently in a house we will be in for five years or less, so I do not think it makes sense to pay of this mortgage early. But we are currently saving to be able to put as large of a down payment as possible on our next house, and once there will be paying off the mortgage as soon as possible. I understand that if you can find attractive investments, that should be your priority. But who would have guess 10… Read more »

Mario
Mario
8 years ago
Reply to  NoTrustFund

Mortgage interest is front loaded. Meaning you pay the most interest at the beginning of your mortgage life. So paying extra payments or lump sums will benefit you. Plus if you are planning to sell first then buy your new home you will receive all that money back at closing that can then be applied to your new mortgage. Unless you are planning on buying your new home first then trying to sell does it not make sense to pay down the mortgage. Hope this helps 🙂

Steve
Steve
9 years ago

I bought a 2 bedroom townhouse with little down payment. I do not regret this, since the rent vs own is roughly equivalent. My family is now growing, and we need to start planning for a larger house. Additionally, we want to have expenses low enough, that if something happens (loss of job, illness, etc), we could make due on income (although it would be tight). So, we are paying down our current mortgage at a high rate, so that we can use the proceeds of the sale to buy our next house, and have a a similar mortgage payment.… Read more »

Sara
Sara
9 years ago

Maybe I’m getting this wrong – but I just can’t get my mind around the idea of a “guaranteed return” by prepaying the mortgage. I just don’t see it as a return, it’s just money that’s not spent. Yes, I may save myself from paying out thousands of dollars in interest charges, but how exactly is that a return on my money? If I buy my house in cash with no mortgage, does that mean I am making a guaranteed return of 6% for the next 30 years? Believe me, I’m all for saving money by not paying interest, and… Read more »

Mom of five
Mom of five
9 years ago

It’s a tough question, because, as #9 Nicole pointed out, having the cash in the bank gives me an even more secure feeling. We probably do the dumbest thing financially which is to pay the actual monthly payment early. I’m afraid if we just keep it in the emergency fund, we’ll spend the mortgage money on something else. By the end of December, we’ll be a full year’s payments ahead. But we’re coming into a really expensive few years with our kids so it gives me peace of mind to know that we’re a year ahead on our mortgage. If… Read more »

mb
mb
9 years ago

I read an article a few weeks ago (can’t find it now) that said unless the bank recasts the loan (which hardly ever happens) you still pay interest on the entire loan amount even if you are making extra payments. This makes your effective interest rate go up.

Is this true?

Rabbithutch
Rabbithutch
9 years ago

One trick I have done is to keep making the same payments to my mortgage after I refinanced. I was already used to paying that money, so I don’t miss it, and it makes a significant dent in the mortgage.

The added benefit is that if something unforeseen financial happens, you can always just make the regular payments.

Jackie
Jackie
9 years ago

We’re paying off our mortgage early for the sense of freedom it will bring. (Plus, we don’t itemize anyway.) I don’t like owing money — it makes me feel locked down and stuck. When our mortgage is paid we’ll be able to live well on even poverty-level income if we want to or need to, and that idea is very appealing to me.

DianaH
DianaH
9 years ago

My husband I paid off our mortgage about two years ago and we have never regretted it. We did not have to worry about the house payment when I became joyfully unemployed last year. As a past comment on this site once said, I don’t wake up in the morning and say “Gee, I wish I had a mortgage”.

partgypsy
partgypsy
9 years ago

We are planning on refinancing from a 30 year (18 years left) to a 15 year loan. While payments will be higher our mortgage will be paid off when our oldest will have just graduated college and our youngest is in college (if they decide to go). I like the idea that at that point the house is paid and we could help them more with college payments. It would be great to have the mortgage done before the kids hit college, but can’t swing that.

LoveBeingRetired
LoveBeingRetired
9 years ago

Having a mortgage is also an important consideration if you are planning to move after retirement. You will have to budget for the monthly mortgage amount as well as the significantly increased property taxes associated with a home with a cost basis significantly higher than what you are paying on your home for the past 20+ years. But there sure are some beautiful places to retire to! 🙂

kdice
kdice
9 years ago

We paid off our mortgage on our first house a year ago; we’re in our mid-30’s. As others mentioned this was a huge benefit when things were looking very rocky at my job a few months later. We knew we would be OK if I lost my job because we had our house and didn’t have a big monthly bill for it. Things turned up on the job front for me and now look good for the near future. However, living in Phoenix, our home values are down 60% from their highs. Practically everyone in our neighborhood is “stuck” there… Read more »

Ben
Ben
9 years ago

In my opinion, you need to ask yourself some important questions first: do you have a substantial (at least 3-6 months salary) emergency fund; have you paid off all of your high interest debts (credit cards, student loans, etc.)? are you adequetely protected against short and long-term disability?; do you have sufficient insurance (auto, property, umbrella)?; have you/are you saving for your childrens’ education? If you cannot answer yes to all of these questions, then prepaying your mortage is probably not a wise decision. It may offer “peace of mind,” but neglecting the aforementioned factors could leave you (or your… Read more »

JB
JB
9 years ago

Yes, Yes, YES! Actually, it is up to the individual. My wife and I are ADDICTED to being debt free. We paid off a 120K mortgage in 8 years. And we are under 35, and have two kids. We carry no credit card debt, own two cars (A 2003 and 2004) which we own, and no student loans… early in our marriage we just gently attacked one load at a time… eventually it just got addicitve. Yes, I have mutual funds I invest in in my Roth IRA that earn over 12%, and on PAPER it was stupid to pay… Read more »

Contrarian
Contrarian
9 years ago

There is no imaginative financial strategy, creative monetary plan, or clever tax advantage that can compete with the simple peace of mind and joy that comes from owning yourself.

The debtor is slave to the lender. If given the choice … I choose my freedom!

JB
JB
9 years ago

@Contrarian
Bing-freaking-o.
In this economy, who wants to be slave to anyone? Go to bed every night knowing YOU OWN YOUR HOUSE! THE BANK DOESN’T!

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