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.

 

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 move What 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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There are 208 comments to "Should you pay off your mortgage early?".

  1. Rebecca says 27 June 2006 at 08:12

    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 most recent discussion, please scroll to the bottom.

  2. J.D. says 27 June 2006 at 08:26

    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 beginning of the loan, this will be a small amount. But as time progresses, this amount will increase.

    Actually, his method is slightly more complex than this. I tried to simplify it for this entry. I think that it’s worth an entire entry on its own, though, so I’ll try to post it in the next day or two…

  3. Jen says 27 June 2006 at 09:48

    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.

  4. Justin Thibault says 27 June 2006 at 10:11

    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 more flexible in the rent that you offer.

    Just a thought.

  5. George says 27 June 2006 at 10:41

    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 of these options is that my mortgage, originally amortized over 25 years, will be paid off in approximately 15 years.

    I’ve never understood why people would want to pay a mortgage monthly when they usually receive their paycheques every two weeks. I find it much easier to budget things when the regular bills coincide with the regular paydays.

  6. Jim says 27 June 2006 at 12:16

    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 $1000.

    5) only way to undo it is to get a second mortgage.

    6) your house appriciates or depreciates whether you prepay or not. so it’s meaningless.

    7) you can do better things with $1000 than to prepay. You can put that $1000 in a 10 year bond or CD and use that $1600 to pay one payment in the 10th year.

    8) the only reason to prepay is if the interest rate enviroment is oppressive and you can’t get a deal in a bank and you are set financially and don’t really care if you win or lose a few thousand. If you won the lottery and can’t remember to make payments every month because you are always on travel.

    • Silly wilson says 09 February 2020 at 15:59

      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.

  7. Jim says 27 June 2006 at 12:26

    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 can borrow $100k for 30 years and pay only 5% interest. 5% interest is the deal of the century. Don’t slaughter this golden goose by prepaying it.

  8. dokaben says 27 June 2006 at 17:11

    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.

  9. Jim says 27 June 2006 at 17:27

    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 host’s advice was to get a second job to pay continue paying the mortgage and pay off the debt.

    You can see the fixed mortgage payment as an enemy or a friend.
    With inflation and a buffer in the bank, you can make it your friend. Ask someone who is paying off their 30th year of their mortgage. You may be shocked that their payment is not even half your current mortgage. That is what inflation and a fixed mortgage can do.

  10. Adam Jusko says 28 June 2006 at 04:23

    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 part of a plan to diversify–a chunk of money in higher-yield, higher-risk investments, a chunk of money in no-risk, lower-yield investments.

    I like to pay down the mortgage a bit for psychological reasons, but the one big downside already alluded to is that your mortgage is not liquid. Paying it off feels good, but if you haven’t created a cushion with an emergency fund, you could find yourself wishing you could get your hands on some of that money, and the only way to do so is to then get a home equity loan or line of credit, which sort of goes against the point of paying down your mortgage to begin with.

    One other note: we shortened our mortgage to twenty years from thirty years while rates were so low because it only added about $100 to the monthly payment. It seemed like a good financial decision at the time because we were making pretty good money, but then our situation changed and our mortgage payment is now somewhat stifling–we still make OK money, but we’ve locked ourselves into paying too much of it toward our mortgage each month. I wouldn’t do it again–it may be satisfying to know our mortgage is getting paid off quicker, but it’s become more of a day-to-day sacrifice than I’d like. It’s not always about the money, sometimes it has to be about your comfort level as well.

  11. majeest says 28 June 2006 at 07:09

    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]

  12. George says 28 June 2006 at 12:01

    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 $1 pays off the last $1 you’ll pay in the 360th payment.”

    Not true. If I pay $1 now, I’m paying off $1 that won’t have interest charged on it for the remainder of the loan.

    “no tax benefits.”

    I’m in Canada. Mortgage interest isn’t tax-deductible here.

    “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 $1000.”

    That $1000 you pay now won’t accrue interest for 30 years. Figure out the compound interest on $1000 over 30 years, and you’ll get a lot more than $2500.

  13. kurt says 17 March 2007 at 07:38

    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 interest write-off is a fool’s game. This is not for everyone – but for those with the good fortune of a good income and discipline for self denial, it is a formula that can work for the “working-class” earner.

  14. ABog says 10 September 2007 at 18:28

    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 mortgage, I would walk away with $10,000 in cash and zero mortage at 35 years old.

    Lots of people suggested this wasn’t the wisest course, since you can get a better return investing, etc. But the thing was, I was looking at the opportunity to upgrade my life in both lifestyle and in expenses. Now, all I pay is my property tax which is $4,100 a year or around $342 a month.

    It allowed my wife to quit her job and for us to start agressively saving on just one salary. I have an emergency fund already set up, but since I have no mortage, my bare bones essential living expenses are around $1500-$2000 a month, so I could survive a loss of income for quite a while.

    I know that the math adds up a certain way, but living 100%, no doubt about it, debt-free is a feeling that’s worth money to me.

    As much as we lost by going this route?

    My answer would be yes.

  15. Tom says 16 November 2007 at 15:44

    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.

    • Ryan Kiel says 22 March 2021 at 08:36

      I was suprised to see that this argument was left in the article since the standard deduction basically doubled in the 2017 tax revision. The argument of tax benefits was weak before the tax revision, but now it is basically a moot point.

  16. Elena says 26 January 2008 at 21:33

    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 to have to commit some cash to big ticket items that have simply worn out. I want to create the cash flow to do that without debt.

    We’ve been pre-paying in bits and pieces, but realized recently we could pay off the mortgage in less than two years without sacrificing our long term financial priorities. We are a childless couple in our early 40’s who have adequate emergency savings, save regularly, max out our retirement funds, and have some smaller investments.

  17. Shiva says 02 March 2008 at 04:06

    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 into a mix of savings, extra Roth contributions (if the S&P decline dropped by 300 points), or mortgage principal payments. There is also the issue of vacations – it’s been a while since we splurged but feels hard to do when you barely own a piece of your house and all you hear about is the plunging real estate markete. So, reading GRS has been helpful – at least this is a great dilemna to be in. So, here is my summary of what all of you have been saying. It’s like picking between belgian waffles, french toast or pancakes for Sunday brunch!

    To Prepay:
    Pyschology – You know that owning your home outright in less than 30 years would be liberating and allow you to enjoy life to the fullest

    High mortgage interest rate (7-8% or 3% higher than 1 year CD rates). Would be tough to beat with investing.

    You would obsess with your investments “beating” your mortgage interest rate too much. You check your investments more than once per week.

    Low equity especially if you pay PMI, a
    variable rate “piggyback” loan/HELOC, or have an ARM. Each prepayment gets you closer to lowering your overall monthly payment or the opportunity to refinance on better terms earlier.

    You don’t have much total yearly mortgage interest compared to your standard deduction – no tax advantages to paying interest.

    You plan to stay in your house for a long time

    Your emergency fund is of the 6 month rather than the one month variety and your retirement is being fully funded or at least at a level you feel confident about

    Not to Pre-pay
    Psychology: the idea of a large chunk of your net worth being illiquid and tied to your home gives you nightmares. You like the idea of having a back up emergency fund that doubles as your “beat my mortgage” investment.

    Low mortgage interest rate, no PMI, fixed rate mortgage, more than 20% equity with stable home prices in your area.

    You enjoy investing and do so for the long haul. You are pretty sure you can “beat” your interest rate and won’t panic if you don’t during a bad year. You are disciplined and won’t touch this money till your mortgage is paid off.

    You already have a lot of equity and will pay off your mortgage in the next few years without extra payments. You have a fixed rate mortgage. No matter what you pay in pricipal, your monthly payment will stay the same till the end of the mortgage.

    You are in a high tax bracket with an expensive home. Mortgage interest will be higher than your standard deduction for the next few years or longer.

    You’ll probably move soon so you won’t really ever “own” this home.

    Your emergency fund is not “fully funded” for your needs, you have kids/illness/lots of fear and anxiety. You aren’t quite funding our your retirement plans fully.

    So, Like most things in life, there is never a right answer. Just a more right answer for you based on how many of the “To prepay” or “Not to prepay” factors apply. For me, the main factors are that my mortgage scares me and I would LOVE to own my home before I retire (maybe it would even help me retire earlier), I have little equity and an ARM that I would like to be able to refinance, and we plan to live here for a while. So I plan to throw must of by extra money (80%) into the mortgage until I have ~10% equity. Then I plan to split evenly among mortgage, Roth, and savings/non-retirement investing.

    I feel so much better just having a plan – one that is based on the numbers as well as my values and goals!

  18. bill says 25 July 2008 at 15:14

    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 for…it’s like so many things you just “deal with it” but once its gone you really feel free.

    Like so many posters on this site how we got our home paid for was real simple. We spent less then what we earned and paid cash for those needful things at the register. We bought 3 year old medium mileage cars. We did not vacation in Hawaii, Disneyworld, or Europe. At first our friends called us frugal or misers but now we have the same “stuff” they do but it’s all ours, while they have car and house payments to deal with for years. Now this summer we are going on a nice trip while the miser callers need to stay home, their equity lines need to be paid for and the times are a bit lean.

    So my advice is to pay ALL debt now and simply cut-up the credit card. (When my wife and I first got married I pulled her credit cards out of her purse and froze them in a bowl of water in the freezer. That way, if something was that important to buy, the effort would need to go towards the defrosting of the card FIRST…funny how often that need went away on leaving the store.) Debt should NOT be a burden for life simply a vehicle to your home purchase. Those financial advisors who say otherwise, don’t get commissions on early debt retirement, so their advice is suspect!

  19. James says 12 February 2009 at 08:25

    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.

  20. bill says 12 February 2009 at 10:16

    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.

  21. Len Penzo says 24 February 2009 at 17:21

    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

  22. Michael says 02 June 2009 at 14:45

    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 the emergency fund. Our mortgage is about $1000(principal and interest).

    Should I prepay the extra $500 towards the mortgage to pay it off in 15 years or invest? Please advise.

    Thanks for all your advice

  23. Bill says 25 July 2009 at 11:18

    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 owed 180k. Instead of dumping money into an over the top yard, pool, or remodel we focused on retirement and the mortgage. In 2008, thanks to principal payments, the home was paid for.

    Of course the financial experts said I was a fool. The rate I had was quite good while the market paid far better. It was not foresight the market was going to drop (else I would have shorted all my holdings and be fully retired now) but knowing I was betting on a SURE thing. That is, the market goes up and down while you can know for certain your amortization schedule.

  24. Mike says 06 November 2009 at 12:02

    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 previous home within 2 weeks and took almost all the proceeds and paid off 100% of second loan and about another $10,000-$12,000 on first mortgage, but I used it to make about 8 monthly payments in advance for a safety net. I am self-employed over the last 8+ years and my wife works part-time for the fairly recession proof school district. We have about 6 months in cash.

    My first mortgage rate is 5.625% on a 30 fixed a payment of $1015.00 monthly (currently about $333.00 of that is going to principal). My loan balance is about $146,000.00 now on a $241,000.00 house and we are also funding the kids college educations via a state pre-paid tuition plan. I am currently putting $1500.00 monthly to the college plan (twins are in the third grade, I also have a 5th grader with 4 years already funded). I will be done funding the tuition plans at 4 years each in summer 2010. We also fund 3 Coverdells to the tune of $6,000.00 yearly and full IRAs for both of us (another $10,000.00).

    My second mortgage was a 30 year fixed at 7.935% for $58,500.00 It was paid off without penalty in the second month (saving $176,000.00 in interest).

    We have no debt other than the home thanks to the debt reduction gurus because we were swimming in about $50,000.00-$60,000.00 of card debt until 2006 which we took on for my wife to stay home with the kids for first few years, we considered the interest our “Day care cost”. We purchased two used cars since 2007 (1-2 years old each) and knocked out the note in less than 1 year in both cases.

    I am currently paying 2200 monthly to the mortgage (1 regular payment and additional to principal), so just over double the required payment and I am still 1 year ahead on required payments, so I could stop paying for a year and be fine.

    My plan is to increase mortgage payments to 3000 for one year after paying off the college plans (increasing household cashflow by about 400-500 per month vs. we pay now between the two expenses). I will then pull it back to 2300 a month (increasing household cashflow another 700 monthly) and finish the mortgage in just over 5 years from today if my calculations are correct.

    I figure I will save about an additional 20,000.00 in interest for each year I follow this plan from here forward (so roughly another $100,000.00). In less than the first 3 years of the loan I calculate that I already banked about $242,000.00 in interest and future interest ($176,00.00 in interest not paid on the second mortgage and about $66,000.00 so far on the first due to pre-payments) and I would have taken a huge hit on the money had I put it in the market instead.

    My calculations were that in the first year of the loan, every $100.00 extra principal knocked an entire payment off the end and all the interest in between (or $168.75 interest saved per $100.00 extra paid in addition to taking it off the principal owed). My calculations are that for every 3.5 payments I make the way I am paying them right now I knock another full year off the end of the loan.

    If I stopped all pre-payments right now, we would still have saved over $242,000.00 in interest and would complete the loan about 9-10 years early. I would also still have a 1 year safety net in pre-paid regular payments.

    We are in a blessed position with regard to income right now and I want to make the best decisions I can while times are good in case they are not later. I would like to be mortgage free before my first leaves for college and be able to pay cash out of pocket the finances they will need beyond tuition and fees (if any, given the Coverdell funds that will also be available). Depending on where they go and our cash position, I might just buy condos in cash for them to live in during college and then either rent them (in a college town) or sell them off after that depending on market conditions, we’ll see…..

  25. LifeAndMyFinances says 01 December 2010 at 05:01

    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.

  26. Bob N.H. says 01 December 2010 at 05:03

    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.

  27. Jacq @ Single Mom Rich Mom says 01 December 2010 at 05:20

    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.

  28. retirebyforty says 01 December 2010 at 05:32

    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. If you think inflation rate will be high in the next 10 years, leverage as much as possible. I’m not saying buy a McMansion, but to acquire rental properties.

  29. Nathan says 01 December 2010 at 05:35

    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

  30. Kristen@TheFrugalGirl says 01 December 2010 at 05:37

    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.

  31. Rob Ward says 01 December 2010 at 05:57

    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.

  32. First Gen American says 01 December 2010 at 06:03

    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 the mortgage is one of the ducks I want to put in a row before I even entertain something like that.

  33. Bill says 01 December 2010 at 06:27

    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 more in retirement income than I probably will see for many years.

    But, when I add those costs of hers and deduct them from her net income, I come out ahead where it counts, with more money in hand.

    Overall, I think it was a good move for me to pay off the mortgage and would be good for anyone entering retirement, especially someone with a low anticipated retirement income.

  34. chris says 01 December 2010 at 06:50

    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 course you have to have the mindset that you will live in and enjoy your home because, afterall, that is what it is – your HOME.

  35. HollyP says 01 December 2010 at 06:57

    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 pay for food.

    For someone like me, with no non-mortgage debt, an emergency fund and able to contribute the max to tax-sheltered retirement accounts, allocating a portion of my other savings to pre-paying the mortgage is sensible.

  36. NoTrustFund says 01 December 2010 at 07:07

    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 years ago that stock market returns would be as poor as they’ve been. I am not convinced future investment returns will be anything to write home about, if they are it will be happy surprise to me. I am looking forward to the reduced stress, lower fixed costs and career freedom that come from owning a house out-right.

    Thanks for the good post. I usually only see articles about how it does not make sense to pay early.

    • Mario says 22 August 2012 at 17:56

      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 🙂

  37. Steve says 01 December 2010 at 07:14

    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. So, essentially we are putting our next house down payment into the current mortgage, and getting a guaranteed 4.385% return (before taxes). Try and find that in a bank account these days!

  38. Sara says 01 December 2010 at 07:17

    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 I pay some extra on my mortgage (and plan to pay it off early), but I don’t think of it as a return on my investment. I think a true return on investment would be if the value of my house went up or down.

    Too many people just scoff at it as “Who would pay $1.00 to save $.25?” but honestly, it really works out for us now. Before we bought a house, we had about $9,000 in itemized deductions, so we always took the standard deduction because it was higher (we’re married filing joint). Last year, combined with the mortgage interest (and property taxes) we were able to have just over $23,000 in itemized deductions – so it saved us a LOT more on taxes. I realize that this benefit will become less valuable as the mortgage goes down, but there are situations where the tax benefit is extremely beneficial.

  39. Mom of five says 01 December 2010 at 07:35

    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 we can get another 50k in emergency savings, we’ll begin paying down the principle.

  40. mb says 01 December 2010 at 07:48

    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?

  41. Rabbithutch says 01 December 2010 at 07:49

    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.

  42. Jackie says 01 December 2010 at 08:00

    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.

  43. DianaH says 01 December 2010 at 08:13

    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”.

  44. partgypsy says 01 December 2010 at 08:14

    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.

  45. LoveBeingRetired says 01 December 2010 at 08:17

    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! 🙂

  46. kdice says 01 December 2010 at 08:29

    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 because they can’t sell for close to what they bought for. We decided to move up last spring to a newer house given the seriously low prices. We could do it because we were paid off (and hadn’t bought at the high).

    We rented our older house and could shave off a few dollars on the rent to attract interest because we weren’t worried about covering the mortgage with rent.

    I know the big investment folks would argue we could be getting better returns elsewhere, but it’s given us piece of mind and flexibility to have it paid off.

  47. Ben says 01 December 2010 at 08:34

    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 loved ones) financially exposed at a time when pulling that money back out of a mortagage might be difficult, if not impossible.

  48. JB says 01 December 2010 at 08:57

    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 off my house when I could have invested more, but the peace of mind is worth more than any money in my pocket.
    NO ONE can take my house away. In a worse case scenerio, we can lose our jobs, the power and water can go out, and at the end of the day, we have shelter that is worth $150,000 or more (depending on the market) that we can cash out on anytime we need!
    We can move to a new town, get jobs, and not worry about whether our house has sold yet… no stress, no rush! Heck, we cna rent our house out if we move and if we want to pay cvash for another house, we just sell theone we live in now. Can you imagine the leverage you have if you want to pay for a house with cash? You NEVER have to walk into a band to get a loan! I, for one, say pay off the house if you can.

  49. Contrarian says 01 December 2010 at 08:59

    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!

  50. JB says 01 December 2010 at 09:01

    @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!

  51. RJ Weiss says 01 December 2010 at 09:11

    @MB – No that isn’t true, unless your bank is evil. Hopefully, somebody didn’t write that.

  52. Mom of five says 01 December 2010 at 09:12

    But JB #25, don’t you have to pay taxes and insurance? Our escrow is now at $500 a month and I do see our taxes going up in the future. We live in the Philly area and our taxes are actually quite low, considering we live in a 4 BR/3 BA house in a nice safe neighborhood. If we really had to, we could rent out a part of our house to a couple of college students who could cover the actual mortgage part ($1100) of our monthly payment, but we’d still have the $500 or more in additional pay up or potentially lose our house expenses.

    I’m sure you’d say it would be better to get rid of the $1100 and then those college kids could cover our housing expenses and then some, and that’s certainly true, but my point is I just don’t ever see us feeling this huge relief when our mortgage is paid once and for all.

  53. elisabeth says 01 December 2010 at 09:15

    Paying off our mortgage may have been the best investment we ever made. After we paid off the mortgage (and I felt great about all the interest we didn’t have to pay by paying early — we made sure when we took out the mortgage that there was no pre-payment penalty and that all we needed to do was pay off the principle), we continued to put the allocated funds away in retirement accounts. It really wasn’t painful, since we’d already been living within that budget. But I’m not sure we would have had the discipline to put that much money into retirement if we hadn’t done it for the mortgage… At the time, I also thought, if we really needed money, we could get a line of credit from the bank on our equity in the house, so it wasn’t totally unliquid.
    One thing that happened to us was that paying off the mortgage on what some people would call a “starter home” kept us from buying a bigger, more expensive house that we don’t really need. We did keep going to open houses, as a kind of hobby, but once our house was paid off, no house we saw ever looked so perfect and wonderful that it was worth taking on a mortgage again.
    And, I don’t worry as much now about the “loss” of value in our house, since the amount we actually spent on it was much less than it would have been if we’d paid off a 30 year mortgage.

  54. Caroline says 01 December 2010 at 09:22

    So, this is more of a question or comment, but I have about $17,500 in student loans at an average of 2%. My husband and I also have a 4.75% mortgage with an large amount of principal left (we just bought). In this situation, wouldn’t it be better to pay off the mortgage more quickly than the student loan? Or, should I max out my Roth IRA?

  55. Mom of five says 01 December 2010 at 09:30

    Caroline – is your SL tax deductible? We couldn’t deduct our SL so it was better for us to attack that debt first.

  56. Caroline says 01 December 2010 at 09:40

    The SL is tax deductible and my employer pays a yearly lump sum towards payment that is partially determined by my loan to salary ratio. So, I’m thinking that at this rate, I will have that paid off in around 5-6 years.

    I should add that I’m 31, so am thinking that I should put extra money towards a Roth IRA, since it has a lot of time to compound (I’m currently putting in about $200/month, in addition to 5% in a 401k with a full employer match).

  57. Cathy says 01 December 2010 at 09:42

    After much debate, my husband and I decided to move our liquid assets (cash) into paying off the mortgage. We knew that we were giving up the ability to invest that money, but with the volubility of the market, we weren’t getting anywhere with our investments. We are self-employed, our income is never guaranteed. When we looked at the $100,000 in future interest that we wouldn’t be paying, the deal was sealed. I never felt better! I am totally secure knowing that this is my home forever.

  58. JB says 01 December 2010 at 09:51

    @Mom of five #28…
    Sure I will still have to pay insurance and taxes… that comes to about $1,600 A YEAR for me in Alabama… a little bit better than the $3,000 a MONTH we were paying to kill our loan, dontcha think? 😉 Plus, i was paying those anyway, lumped into my loan… I think in a worse case scenerio, I can come up with 1600 bucks in one year…

    It is up to you… When we paid off the mortgage, we had a milkshake. And were very VERY happy… I made a video of it (I won one of the video contests for this site) and humbly brag about it to my friends and family.

    Bottom line; the bank owns your house, I own mine. You can toss all the math at me you like, but at the end of the day, I am still happy I own my own home.

    But, again, it is up to the individual. Some may enjoy not having a house payment, some I guess, do 🙂

  59. mom of five says 01 December 2010 at 10:12

    JB – I can’t imagine having a 3k a month mortgage even though nearly everyone we know does. I see what you’re saying and I guess if my post mortgage house expenses were around a hundred a month, I might feel more joy at the prospect of getting rid of our mortgage. It’s not that we don’t mind paying the mortgage, it’s that we really feel better with the liquid savings. We could sell our home tomorrow for well more than double what we currently owe on our mortgage and buy a much smaller place with cash. And even though I HATED the credit card and student loan debt, the mortgage debt just doesn’t bother me the same way. I don’t know why.

    p.s. I don’t blame you for bragging to your friends and family – you’ve earned it!

  60. Suzanne says 01 December 2010 at 10:12

    @Caroline, there are two considerations in deciding to pay off a SL vs. a mortgage. First, how long will it take to pay each off? If you can pay the SL in a couple/few years, then go ahead and get it out of the way. The interest rates are both low anyway.

    The second is that you can always sell your house if you get into financial distress (maybe not for what you want), but you can NEVER discharge student loans. IE if you lose your job, declare bankruptcy, sell your house, or whatever, those student loans will still be there, accruing interest and penalties.

  61. Suzanne says 01 December 2010 at 10:15

    PS – I just stayed with my 71-year old aunt for the holiday, and found out she still has 10 years left on her mortgage. It sounded like hell to me; she had to go back to work last year because her money got too tight. At 71.

    I will be paying off my mortgage long before retirement.

  62. Steve Zussino says 01 December 2010 at 10:45

    Money (loans) are as cheap as they can get at the moment. If you can find a better investment opportunity that gives better return then paying down the mortgage, I would do it.

    That being said, I am paying down my mortgage.

  63. jeffeb3 says 01 December 2010 at 10:46

    I look at this question differently. Would you rather have a house that is paid off, or the cash needed to pay off the loan in investments, gaining (on average) more than the mortgage payment every month in interest? It’s definitely riskier to invest the money, but there is still piece of mind knowing you can pay it off, and choose not to. There are tax intricacies with both options, because if you have the bag of money, gaining in value, then uncle sam wants some of that income, but your mortgage interest is tax deductible.

    If the sacrifice is set, and the money you are putting towards the house to pay it off early or not is set, then the question is pretty simple. A lot of commenters are bringing in arguments that would change the amount of contributions

  64. AC says 01 December 2010 at 10:47

    I am surprise amortization schedules were not considered when this article was written. Before putting money into paying off a mortage it is wise to plug that money in some online mortage calculators to see if it is even worth it. That $100 extra a month takes off 8 years, but the more you contribute after that the less amt of time comes off.

  65. Kelley says 01 December 2010 at 10:56

    We’ve looked deeply at this issue in the last year. My husband maxes out the TSP and we were contributing 10k to Roth’s and monthly to both girl’s 529 plans. In the future we will be using the 10k we were putting in Roth’s to prepay the mortgage. Sometimes it’s not exactly about the numbers. Our house could be paid off in 3 years from today and either we’ll live rent free or (since we’re military) it would provide us with an additional $1350 to $1500 a month which would supplement our retirement nicely. Now those are numbers I like.

  66. JB says 01 December 2010 at 11:00

    @mom of five #36

    our monthly payment was $3000 only because we made it that way. Minimum was $900 but over time, even years, we steadily increased it with each time we got a raise.
    We are an exception I think. We had jobs that allowed us to work form home some days allowing our kids to stay home with us and us work… a rare thing.

  67. MrsKruse says 01 December 2010 at 11:04

    I wouldn’t consider paying off the mortgage early unless we had a HUGE emergency fund and were well set on retirement contributions.

    If I plow my extra cash into the house and then lose my job, the bank won’t care that I’ve paid an extra $20k on the house over the last few years. They want to know where this month’s mortgage payment is. We keep six months of expenses fluid & six months of expenses in hard to reach places.

    Plus, depending on where you live, you can still easily lose your home over property taxes. My tax bill each year is relatively small at $4k, but we only have .07 acres. We know plenty of people who have tax bills in the six figures. Owning your home won’t stop you from becoming homeless if you can’t afford your tax payment.

  68. Pam McCormick says 01 December 2010 at 11:22

    I am with the group who paid off the house.BEST decision for my family.We had already paid for college/wedding/cars and are contributing to retirement 401K/403b, we have covered term life ins,long term care ins,long term disability,health ins dental vision car and house ins all covered.Now my husband and I feel safe even if we got laid off we have a budget that covers all the basics and we have figured out what it would take to cover just the basics then we planned where that money would come from if jobs were lost.I have considered rental property for income in retirement.We also are really lucky to both have pension plans that will come to us.We have been in our house almost 30 yrs and intend to stay forever.Lots of variables to figure out.For us no mortgage meant $1500 each month not going out.We would be paying taxes regardless so I plan for an increase of 4% on all expenses however we all know things can rise much more.I can tell you there is a great feeling paying off a house and it is difficult to consider taking on a mortgage again.

  69. Jeremy Streich says 01 December 2010 at 11:24

    The whole “tax deduction” of the interest is bit of misnomer.

    If you have a home with a payment of $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year. Say, you’re in a 30% tax bracket, you will have to pay $3,000 in taxes on that $10,000. According to the math, we should send $10,000 in interest to the bank so we don’t have to send $3,000 in taxes to the IRS.

    Now, in order for it to make sense to this, you would have to invest the extra money you would have paid to the mortgage company in something that has higher returns. The problem most people are disciplined enough.

    If you want the same deduction, and have paid off your mortgage, just donate the same $10,000 you were paying in mortgage interest to a non-profit charitable organization.

    43% of Americans have less than $10,000 in retirement savings. Most of those believe that Social Security or other government programs will take care of them. Convincing them to pay a little more towards the mortgage each month is easier than convincing them to go get an Roth IRA.

    My personal take is, do both. Save 10-15% of income for retirement in tax sheltered investment programs (Roth IRA and 401(k)). If you have a 30 year mortgage consider refinancing to a 15 (without taking out any equity), if you can afford the payments, if you can’t trade houses down. Talk to the bank and switch to a bi-weekly mortgage payments.

  70. Kathryn Fenner says 01 December 2010 at 11:25

    We were wisely, I believe, advised to pay off our mortgage and then use what we would have paid to beef up our retirement savings, which have taken a huge beating in recent years. The amount saved for retirement, whether in a 401(k), 403(b), IRA or other deferred compensation structure is fully deductible, so it more than offsets the partial deductibility of the mortgage loan payments ( a portion was principal, and thus not deductible), plus we get the money back later, unlike interest payments. Furthermore, by making ourselves “artificially poor”–actually right-sizing our spending to sustainable levels, we will indeed need less income to replace our current salary-funded lifestyle.

  71. Jill says 01 December 2010 at 11:49

    When we refinanced from a 30 year to a 15 year mortgage when rates blipped downward in 2003, it only increased our monthly mortgage payments by $150/month.

    Given the volatility of the markets since that time, we’ve come out far ahead financially compared to where we’d be if we’d invested that $150/month in a DJIA index fund.

  72. Daria says 01 December 2010 at 11:54

    Nicole and JeffeB questioned “why not have the security of cash in the bank” and you could pay off the loan if you needed to plus you don’t need to have a spartan lifestyle now while paying off a loan early? That’s the key. The majority of Americans that do not have the goal of paying off their mortgage early, don’t put their excess cash into investments outside of a 401K and many people took equity out of their homes to spend on cars, vacations, etc…They spend their excess cash.Heck, there are a lot of people who choose not to put money into their company’s 401K. That’s why many companies have a default proviso to force people. The people who put money into Roth IRA’s after investing in a 401K are a minority, never mind putting money into a non retirement investment. Poll how many people you know who actually have 6 months of living expenses set aside for emergencies. That number is low. My aunt is 82 yrs old living with a pacemaker and still works in a school cafeteria (that is heavy lifting of food trays)4hrs per day so she can pay her $600 month rent. Her social security check goes to food, utilities, and medical bills. Doctors have turned her away because she didn’t have the cash to pay for a doctor visit. I paid off my house in the 90’s, my husband took a 50% cut in pay to change jobs b/c he hated his job, we put our kids through college debt free, we bought a house in Florida that is rental until we retire, another house in Florida paid off for my brother to live in, and are buying a house two houses away to live in while we live off the rent from the original house that we paid off in the 90’s.

  73. KarenJ says 01 December 2010 at 11:55

    I don’t think of the home I live in as an “investment.” I think of it as a place to live. Here in NJ where most people have mortgages of $200,000 or more (mine is $250,000), I wouldn’t even think of retiring with my $1,700 a month payment (including taxes). The peace of mind that comes from knowing your savings only have to cover your basic expenses is priceless. Plus it gives us the freedom to rent out our place (we’re near the beach), and travel if we like.

  74. Marsha says 01 December 2010 at 12:23

    @48
    If you’re doing so well, and your elderly aunt is having such a struggle, why are you not helping her out?

  75. Pirate Jo says 01 December 2010 at 12:35

    “The biggest thing missing from this article is that having lower monthly fixed costs gives you more career flexibility.”

    I paid off my mortgage just two weeks after my 40th birthday, and this has by far been the best benefit for me.

    Check out this article:
    http://www.theatlantic.com/magazine/archive/2009/05/why-i-fired-my-broker/7384/1/

    Note the interview on Page 3 of the article, with Seth Klarman, manager of a $14 billion fund. He advised the interviewer to pay off his mortgage early instead of leaving it in the market. This is not what Joe Six-Pack hears from his glad-handing, self-interested “financial planner”, or those selling 401K plans, but it’s what the guys at the top, the fund managers and traders – NOT the salesmen, advise.

    And it makes sense. If you don’t even own the house you live in, you have no business gambling on risky investments. And if you are putting your money in safe investments, you are certainly earning less on those than on the mortgage interest you are paying.

  76. Lin Ennis says 01 December 2010 at 12:42

    As a long-standing advocate of paying off large, non-income producing debts as quickly as possible, it is fun for me to see this discussion come around again after the furor it caused some people when it came up a bit over two years ago. I’m sorry a lousy economy had to form the backdrop.

    Another consideration besides return on investment (ROI) value is CASHFLOW.

    Compare two couples filing jointly, with $100K income and $125K mortgage. Mr. & Mrs. Tax A. Voiders took an $11,215 mortgage interest deduction, making their adjusted gross income $88,524. Tax liability was $15,524. Cashflow: $73,261.

    Cash and Flo Mavens, on the other hand, had no remaining mortgage and therefore no interest deduction. So their tax liability was higher: $18,330. Cashflow: $81,670.

    So, the people with no mortgage and higher taxes have more MONEY.

    Priorities vary, and so should approaches to both security and wealth building. Mathematical geniuses often overlook the second aspect of money, which many here have spoken in favor of: the psychological aspect. Money is not just numbers. It’s numbers plus meaning.

  77. DreamChaser57 says 01 December 2010 at 12:43

    Personal finance cannot be reduced to a formula that’s universally applicable to everyone and I try not to be motivated by fear. There are two very prominent fear- based, hysteria-inducing arguments that I see in the PF blogosphere all the time – the impending implosion of Social Security and the apocalyptic end of this county and/or the global economy. The later proposition is especially comical as if any type of financial planning can remedy such an occurrence. Digression aside, I strongly believe that paying off our future mortgage is a smart idea. In my view, aggressively paying off the mortgage is a luxury we cannot afford nor is appropriate until all consumer debt has been paid, a healthy emergency fund has been established (6-8 months of expenses), sizeable retirement contributions, and paying off every dime of my student loans. Needless to say it will be a while before we’re in that position, but in theory I really like the idea of having a paid off house.

  78. Tara C says 01 December 2010 at 12:47

    I agree with Ben in #24 – if the rest of your ducks are in a row, paying off the mortgage early is a great idea. I don’t have a mortgage and it is a huge relief not to have that debt hanging over my head, all I have to worry about is my property taxes going up, but I can handle that since my monthly expenses are so much lower without a mortgage payment.

  79. chris says 01 December 2010 at 12:59

    I am all for paying my mortgage off. DH and I did it in 5-2007. But J.B. I am solidly in mom of five court. It great, but it not this huge relief.

    First, our taxes are decidely higher than ours (about $3500) per year. Second, all houses need ongoing maintainance. Third, the equity in your house is not as liquid as you make it sound. If you want out now you need to be prepared to take less than market rate for it. We did need/want to relocate. Initally our house was empty and it cost of about $500 per month to have it empty after we paid the taxes, homeowner’s and utilities on it. Now we have a tenant. Still I would rather have it gone and move on with life. A paid for house still has plenty of responsiblities that renting just doesn’t.

  80. Andy says 01 December 2010 at 13:54

    For younger home-owners, a decision to invest in a retirement account or not shouldn’t be based on how low the returns are.

    I don’t think that’s the right way to consider the stock market. If you are contributing to a retirement account a monthly set of money (let’s say $500 a month) and you aren’t retiring for ten years or more, you should be happier that the stock prices are staying lower. Those low prices allow you to accumulate more shares.

    In simple terms, with lower stock prices, your $500 buys you more stock.

    If you’re not taking that money out to retire for ten years, what do you care if the money sees a high growth? What you should care about is how much (in shares not in monetary value) you own.

    If stocks cost $100 each share, you have bought 5 shares of stock with your $500 contribution. If stock prices went up (which everybody would be happy about because stock owners would have earned a better return on their investment) and cost $150 the next month, you’re $500 will only buy you 3.3 shares.

    Why would you be happy about that? You’re buying less product with your money.

    As for me, I invest $500 a month in my retirement account at work and an additional $50 a month into a Roth IRA. My mortgage is just under $1700 a month and I overpay to the tune of $2000 or $2200 depending on how much money I have in the bank. But I only put 10% down on my house, and I’m paying a bill for PMI. I’m overpaying my mortgage to eliminate that bill as quickly as I can. Once I have, I’ll probably increase my contributions to my Roth IRA.

  81. jackie says 01 December 2010 at 14:42

    I’m considering a short sale and I’m glad I never put any extra money into my mortgage. If I’d have put $10K into my morgage 3 years ago, when I could afford it, I’d have $30K negative equity instead of $40K negative equity. I’d still need to short sell and the result would only be $10K less in my emergency fund.

  82. Chris says 01 December 2010 at 16:23

    We just paid off our house a couple of months ago. Being debt free is a wonderful feeling. I will have a home if inflation goes sky high. I will have a home if deflation hits. Yes there are still some expenses even when you own but for financial freedom, nothing beats owning the roof over your head.

  83. Kristen says 01 December 2010 at 16:41

    I haven’t read all the comments so if I am repeating, sorry. But this line strikes me: “The first financial priorities for most people should be to pay off credit-card and other consumer debt, build up an emergency fund, and max out tax-advantaged retirement accounts”

    Considering that the 401(k) maximum in the US is $16,500 per person, and Roth IRA is around $5000… to max out tax advantaged retirement accounts first, the author is suggesting putting away $43,000 every year BEFORE working on paying extra toward a mortgage. My husband and I make pretty good money, but this is a stretch even for us.

    Does this seem realistic?

  84. Pat says 01 December 2010 at 17:47

    Pay it off. As long as you can flip burgers you can pay your taxes and you’ll always have a roof over your head.

  85. Mom of five says 01 December 2010 at 18:12

    The rule at my old place of employment was a maximum of 15% of your income up to 16.5k. I don’t know if that 15% number was set by law or just that particular plan, but folks who earned 50k a year would max out their 401k at 7500.

  86. Jeff&Lori says 01 December 2010 at 18:49

    Kristen:

    Yes, the amount some people save and invest can be quite shocking, relative to their INCOME. The key for my Wife and I is that we actively practice prudence and frugality on a daily basis (careful about spending, turning out the lights, turning down the heat, turning up the air conditioner, using coupons for food, etc., etc.). Meals: Always save leftovers which I always eat (and enjoy immensely) the next day….The list goes on and on and on. Because we diligently live off about one-half of one of our incomes, we have been blessed with quietly saving and investing the surplus for the past 12 years in 401(k), 403(b), Roth and Regular IRAs. In 2003 we managed to refinance our mortgage to a 10 year fixed (4.50%). The loan is due to mature in 2013, but my Wife and I decided to pay it off on January 1, 2011 (reason why I am on this site).

    So, to answer your question, yes, for some people that target number is realistic.

    To echo what many commenters have already stated, yes, my Wife and I did this so we could have financial independence and a choice in our lives (rather than ‘stuff’ that will collect dust and accrue interest).

    Jeff & Lori

  87. Sunny says 01 December 2010 at 18:54

    Paid off the house in April and the car today, peace of mind is priceless.

  88. Kelley says 01 December 2010 at 21:31

    Kristen, We’re a one income family. It’s very possible. We kind of did it in babysteps. We started the kids 529’s when they were little, we started Roth’s in 2005, it’s really about priorities. We save roughly 30% right now towards those funds, but we also save for other things too like vacations and cars. Of course we’re children of baby boomers and our parents situations had us both scared at a pretty young age. A common reaction I’m finding out among people in their 30’s. Paying off our mortgage will allow us to live like our parents did but without any of the debt. 🙂

  89. Ted says 01 December 2010 at 21:52

    I am so encouraged to hear all the voices that have paid off their mortgages and have no regrets. Use your money the way you want, not paying interest to banks or investors who bought your mortgage as part of a package.
    As for the tax benefits: they are nice but think about how much you pay each year to get the deduction. Plus, who knows when Congress will eliminate this deduction- it was one of the suggestions by the Deficit Commission.

  90. RM says 01 December 2010 at 22:22

    When doing a financial comparison between keeping a mortgage or paying it off, don’t forget the tax advantages of itemized deductions other than mortgage interest. For example, I believe that charitable donations as well as mileage/commuting costs for volunteering at a non-profit are deductible only if you itemize. It’s not only about the mortgage interest. I think property taxes may also not be deductible if you take the standard deduction.

    Of course, this has nothing to do with the sense of well being you may get from not having a mortgage.

  91. vern says 01 December 2010 at 22:27

    When we paid our house off last year, we were thinking of buying a vacation home. But it felt so great to be totally debt free that we hesitated for a bit.

    Now I’m so glad we didn’t buy another home. You can search for property rentals on craigslist and other sites. It’s possible to rent a furnished house or apartment almost anywhere in the world. From Berlin to Taipei and all points in between.

    That’s the way to go for us. In addition to not being tied to one location, you won’t be stuck owning something far away if gas prices spike up again.

    Pay off your house!

  92. lalaland says 01 December 2010 at 23:32

    I don’t feel any hurry to pay off my mortgage. I’m 26 and my escrow payment is more than my mortgage (mortgage is less than $350)so I don’t think that it will free up enough of my income to be worth making the huge sacrifices it would take on a single income to pay it off before I plan on selling it.

    Personally I would only feel it would be worth it to pay off a mortgage early if I was planning on living in it mortgage-free for at least a few years. This is my first home and it is not family friendly–one-bedroom bungalow with a detached studio apartment that a friend is using in exchange for paying for all our utilities, including cable/internet and they manage the studio…meaning no repair costs for me. The deal is they either live with it, fix it, or have it fixed. In exchange I don’t charge rent or personally collect money from them unless it’s to pay our bills.

    Because of this I know that when I’m ready to grow my family I will need to sell the house (being a landlord does not appeal to me and unless my SO is willing to take the role as property manager I don’t foresee keeping the property.)

    I did the math, and even if I cut back my retirement savings to only match my companies 401k match up, stop investing in my ROTH, stop contributing to my e-fund and only spend money on my necessary expenses–for me that is cellphone-no landline, internet, car insurance, utilities (because I won’t always be having someone staying in the studio to cover them), property taxes/home-owner insurance, groceries, and house and car maintenance (I have no student loans, car loans, or consumer debt), it would STILL take me a MINIMUM of 8-10 years to pay it off on my single income. The point is I’m still very young and the idea of giving up all extracurricular spending, missing out on retirement savings, and life opportunities that having liquid cash on hand might make more available is much less appealing to me than having a fairly small mortgage. My house is a bit of a fixer upper and I’d rather spend the extra money I would have spent on paying towards a mortgage I would never be free of before selling, combined with sweat equity to raise the value of the property so that when I do sell it I can get enough back to put a substantial down payment or possibly be able to pay cash for my next place.

    Though I will say that I do not plan on carrying a mortgage into retirement. I likely will not sell my current home until I am married and am ready to start a family, and when that time comes that is going to be when I plan on purchasing (with my husband of course) our “forever” home that will carry us into retirement mortgage free. But until then 🙂

  93. chris says 02 December 2010 at 07:28

    How much you can withhold into your 403b or 401k is up to the employer. My employeer would let me do 100% (up to the $16,500) and DH’s employer will let him do 50%.

    DH actually does the 50% right now because he was unemployed the first half of the year and not elgible for his companies plan until 9-1 so our savings this year is pretty heavily loaded to the last couple of months of the year.

  94. Kevin says 02 December 2010 at 10:17

    @MrsKruse (#44):

    If someone loses their home because they can’t pay their $100,000 property tax bill, then I think they’ll be able to survive just fine on the $900,000 left over after the municipality seizes and sells their $1 million-plus property, and distributes the remaining proceeds to the former homeowner. I’m not too worried about people in million-dollar mansions.

  95. Coley says 02 December 2010 at 10:30

    A misconception – in my opinion – keeps appearing in these discussions. One need not live in the house long enough to fully pay off the mortgage in order to enjoy any benefit of mortgage prepayment. It’s not logical to argue “I’ll be moving in X years, before I could ever have the mortgage fully paid, so there’s no reason for me to pay extra principle.”

    Rather, the extra principle that you pay, and the interest that it “earns” (more accurately, the interest that you consequently did not have to pay) will be returned to you upon the sale of your house. Specifically, you’ll have that much less to pay to the bank out of the proceeds of the sale to settle the mortgage.

    There are some valid reasons for not prepaying, depending on one’s circumstances, but plans to relocate in a relatively short number of years is not one of them.

  96. Nicole says 02 December 2010 at 10:38

    @71, except they don’t sell it for 1 million. They sell it for pennies on the dollar, just enough to pay off the bills. At least that’s what they do when the HOA seizes the place for unpaid HOA dues.

    @72 I think that becomes really clear when you use an amortization spreadsheet and compare the difference in interest that would have been paid in next month’s payment without the prepayment to interest that is actually paid next month given that you’ve done the prepayment. For us that number was $52 this month. Last month it was in the 70s. That’s pretty good compared to the $8 the same amount was getting each month in savings.

  97. Dave says 02 December 2010 at 15:05

    For those who want to pay off their mortgage early, here’s a strategy to consider. In year one, add $50 or $100 per month to your monthly mortgage payments as additional principal. In year two, add $100 or $200 per month. Each year, increase the additional principal payments. This method allows most people to add amounts that may coincide with increased earnings. Obviously, the numbers can be adjusted to suit peoples’ comfort levels.

  98. Petunia says 02 December 2010 at 18:19

    @Jackie, #58. Have you already submitted your bank statements to your lender? Have they stated they are willing to let you keep your emergency fund even as they take a 40k loss? If so, your experience is very atypical. I strongly suspect you will find your lender will demand your cash on hand in order to close the short sale. Sometimes short sales fall apart at the last minute because the lender demands more cash than the seller has. But sometimes it does all work out, so good luck to you with it.

  99. Rani says 02 December 2010 at 19:28

    Perhaps this is a bit off-topic, but on the subject of emergency funds and housing payments: what do people think of the idea of using one’s emergency fund to pay down the mortgage (or complete a down payment), with the possibility of taking out a HELOC on the equity in the home if those emergency funds are ever required? Yes, I know in that case you’d pay interest on it (probably when you least need to be paying interest on anything), but on the other hand you are saving interest by prepaying the mortgage, and the need for the emergency fund is not 100%. Perhaps the case for using it for a down payment is less clear?

  100. Petunia says 03 December 2010 at 00:35

    Rani, your lender can lower the limit or close your HELOC anytime that they wish. So if you have no EF and are instead relying on being able to draw from your HELOC, you run the risk of having no access to those funds just when you need them.

  101. Julie K. says 03 December 2010 at 03:35

    To pay off the mortgage in advance is very alluring idea. But if you are in the situation that you don’t have such high income, you have to borrow the money from someone else and that you are in debt again. The most secure way, how to pay your mortgage, is to regularly pay your monthly payments as you have agreed on the beginning…

  102. Doug says 03 December 2010 at 12:02

    I’ve not read any of the comments but I’ll say this: one real point to consider is how well will your investments *really* do? I’m a case where I thought I could “do better” and have failed miserably with my investments (even before the end of 2009). So now I wish I HAD used my relatively small sums of money to pay off my mortgage instead…. And, I now have an investment property that could, in theory, become a liability if Congress does decide to do away with mort. int. write-off for 2nd homes. (Does a “2nd home” include investment property? I’m thinking it does.)

    So paying off a mortgage for some people may be far better than trying to figure out how to “invest better.”

  103. Doug says 03 December 2010 at 12:09

    With regards to mort. int. deductions, it is my opinion that the deduction should be a “short-term” deduction, say for only 10 years. After you’ve owned the home 10 years you no longer get the deduction. That would encourage folks to save while easing the pain of not having the deduction in the first place. (In particular, now with our economy so weak and home prices teetering on the edge….)

  104. Bender says 03 December 2010 at 13:42

    Arrrrrrg. Why is it so many “financial experts” get so confused about the “tax benefits of a mortgage. What is worse they always compare the rate of return to equity market returns.

    1. For all practical purposes, the rate of return on a prepayment is essentially equivalent to the nominal stated interest rate on the loan PERIOD. Of course, if in connection with a refi you make a prepayment that gets you a better rate your returns can be substantially larger (think 1.5 to 2 times) the stated interest rate.

    2. If you adjust the rate of return to account for the lost of a tax deduction you must do the same to the alternative investment you are considering (unless you live where apples are oranges and vice versa).

    3. Comparing the rate of return on a mortgage prepayment to the “expected” rate of return in the stock market is just plain ignorant. They have nowhere near the same risk characteristics. Mmmmm gee which has a higher expected rate of return the risky asset or the risk free asset. Hint, you should look at this from an asset allocation perspective. DUCY?

    As expected Seth Klarman gets it.

  105. Petunia says 03 December 2010 at 14:32

    @ Doug #79. No, investment properties and second homes are not at all the same thing.

  106. Rosa says 04 December 2010 at 10:49

    It’s not either-or – you are still paying off the mortgage early if you’re just adding a little bit to the payment every month. I agree with everyone who says pay off debts and fund your retirement first, but especially if you’re a person who’s likely to fall back into debt or have a lot of job insecurity, doing all those things a little at a time instead of going after them in a big way but one thing at a time, can be really helpful psychologically.

    The amplification of early payments is pretty exciting – we did the math the first year of our (30 year) mortgage and every extra $100 we paid took $700 off the total. That’s a big incentive. We won’t have it paid off super fast – current schedule is looking like we’ll have the whole thing paid off in a little over half the time, 18 years or 8 years from now – but it was painless, paying more in the early years when we didn’t have a kid, and less (but still some) in the years I was a SAHM, a little more when I was working but paying daycare, a lot more now that he’s out of daycare.

    To me, it’s all about keeping fixed expenses low for more flexibility – that includes the mortgage obligation, other debts, and long-term-payment plans like cell phone service. The lower those are the more freedom we have to respond to changes – in income, in job location, in family needs.

  107. lalaland says 06 December 2010 at 09:38

    “There are some valid reasons for not prepaying, depending on one’s circumstances, but plans to relocate in a relatively short number of years is not one of them.”
    It can be a good reason if one has a fixer-upper and would do better to put extra money into sweat equity that could bring more in the resale than saving a few extra dollars a month would. It’s a similar reason to why someone flipping a house would not pay extra on the mortgage. They are adding as much equity as the neighborhood can support without having to be 100% at the mercy of the market to raise the value.
    Updating and coding the apartment cost about a thousand dollars, but my mortgage is so low, and therefore my interest payment, that I probably raised more in the value of that home in one week than I would have saved in interest paying an extra $100/month for 5 more years. And considering if I did a good job at updating (personally I think I did; it’s a craftsman bungalow, so I did a classic craftsman update that doesn’t go out of style like say pink and black bathrooms and granite counters and cherrywood) that value will only go up each year to reflect the current cost of updating. The earlier you update a home (especially during a recession that significantly affects the construction and remodel businesses) the more return you will get when you sell. Generally the longer you wait into the ownership, the less you ROI you get back. Next project is the bathroom, then I will finish up the kitchen by the end of next year.
    Anyway, in short, my point is, yes, the amount of time you plan on spending in a house can be a valid reason not to pre-pay.

  108. jglynn says 14 December 2010 at 18:21

    There are many variables often overlooked or improperly evaluated when it comes to this topic. The author provides a comprehensive view, but fails to convey an adequate sense of the subjectivity, and potential gravity of these variables.

    Liquidity, in today’s economic environment, is of paramount significance. Paying down a mortgage ahead of schedule drains liquidity, and raises risk of financial failure in the event of a loss in income. Example, you overpay at the expense of liquidity, then lose a job, and you become forced to liquidate assets – either investments, or the home, just to stay current on the mortgage. This is not something you want when asset prices are down.

    I also do not like the argument that you would need less in retirement, hence lower tax burden from taking qualified plan distributions if there wasn’t a mortgage payment. If you had a mortgage, and planned it correctly, you’d also have a tax deduction to help you off-set qualified plan distributions so that you do not pay tax on them.

    There’s no one-size-fits-all advice in this arena. But the baseline default way of viewing the mortgage as purely burdensome is faulty.

    Many who get to retirement with no mortgage also get there without adequate savings. They end up taking a reverse mortgage, or being forced to live off of smaller income than planned, or are forced to sell their home. In all cases, preserving mortgage debt in favor of liquid investments would have worked out better.

    You could get to retirement with no mortgage, no tax deduction, and start living off of savings. Or, you could get to retirement with a mortgage, a write-off, more assets (from investing vs reducing debt) and a more dynamic financial footprint so that your options are not relegated to live on a shoestring budget, or sell the home you worked so hard to pay off.

    Bottom line: be careful trying to address short term planning (seeking a return on your current cash) with long term concepts (like 30 year mortgages, historical returns on other investments, etc).

    I’d be willing to bet most who choose to aggressively overpay their loans today will be looking for cash out refinances (at higher borrowing rates and a tax disadvantage) when the landscape changes a bit.

  109. bill says 27 December 2010 at 13:22

    My wife and I paid our home off about 2.5 years ago…paying off your home is the ONLY sure fire investment…since the magical payoff, we have simply socked the 2.1k per month into a savings account…plus, I sleep VERY well at night…limiting worries is a good goal I think!

  110. jglynn says 29 December 2010 at 13:26

    @bill – that’s awesome, what a great position to be in. And I agree, peace of mind has a value. A different one to each person.

    The flip side of this is, what if you took all the money you used to pay off the loan and invested it instead?

    in other words, why pay off the loan, so that you free up cash to save when you can just start by saving in the first place, and then let time work in your favor?

  111. Kurian says 16 July 2012 at 21:54

    Actually Jim’s point is much more valid that it is given credit.

    1. If you look at most rich folks (for this discussion more than 1 mil. on net worth) , they won’t pay off mortgage even when they can outright. There is a reason for this — mortgage is the cheapest money that can be leveraged in this country. (Source: research by Tom Stanley and Denko)

    2. People paying of mortage is falsing assuming financial security precisely because most are incapable of calculating opportunity costs in the first place. The implicit costs involved are substantial in the case of prepayment which most people do not consider as they are fixed on dollar amounts.

    3. The ideal way to increase your networth is to find options to decrease taxes (Taxes are the biggest expense for most middle class families) and using mortgage is a very viable strategy. Most sought after financial advisors in this country like Lucia, Edelman etc. have done enough studies to explain this for a variety of situations. People’s situations are indeed different, but basic financial principles and fundamentals do not change. Costs and leveraging on rates are as fundamental as it can be.

    4. The benefits of keeping a big long mortgage are several, but most people consider mortgage to be only as a debt and therefore are not savvy enough to leverage its benefits.
    http://www.ricedelman.com/cs/education/article?articleId=232

    5. And finally, here is a much better strategy than paying off: Put the extra money planned for extra principal payment on a 30 yr. mortgage in a staggered CD or even in an index fund/ dividend yeilding bond. At the end of 15 years you’ll have substantially more money to payoff the entire mortgage in a single payment. This is a much better way to leverage the tax benefits, liquidity, peace of mind and to maintain a excellent chunk of cash for a rainy day fund rather than paying a few 100 bucks every month.

    Again, most financially educated folks do this, already. People conditioned on “eliminating debt” failed to grasp the basic maths. That is it!

  112. Tim says 15 October 2012 at 20:39

    I’m looking to inherit approx $100,000 from our mothers estate, I can’t figure out what to do with it, we have no children, but have 2 homes and other items. I would like to pay off our lake home $95000, my wife would like to pay off our home ,boat and her car -total approx 65,000, I just don’t know what to do and need a little advice. Our lake house is for 30 yrs, my truck payment which is paid by my buisness account – I owe maybe 14,000 on that, I need that write off . We do have some money put away for retirement approx total $250,000 +-, should we pay off What or invest all
    My age is 48/wife 52
    Hope someone could help
    Thank you

  113. Angelo says 28 November 2012 at 00:14

    * sigh * As usual, there is no one answer that is right. It’s all about opportunity costs. The lower your mortgage interest rate is, and the higher other interest rates on your potential investments, the less reason you have to pay off early. There’s no one-size-fits-all answer here.

  114. Mike says 07 February 2013 at 08:18

    Bought my house in 2006 for 117,000.00 I have a high interest rate (11%!) and I am prepaying down my mortgage. I don’t see any reason not to. There is no investment that will beat that. I have just paid off my second mortgage (10.5% I think it was)this month. These both were 30 year notes. I didn’t want to be 76 years old before making my last payment. I want it paid off before I retire. Due to a Chapter 13 bancrupcy, I have not been able to refinance…at least yet. There is no guarantee I will ever be able to. With the speed I am paying off the mortgage (relatively speaking) I may not bother with going through a refi even though it would seem “wrong” not to. In terms of interest saved, paying off a high interest loan can be the same as paying off a low interest loan over three decades. It is PROBABLY true that my income and buying power would be greater in three decades, but not sure our health etc will be! I suspect life will go on no matter what you decide to do with your financial plans. The number one issue that is a known is that you can not spend more than you make. We aren’t the federal government. Nor can you spend in such a way that an emergency can not be survived financially. Otherwise, do what you believe is best for you and your family.

  115. uri says 04 July 2013 at 04:46

    it probably depends on what your interest rate is. if you’re paying 10%, then by all means knock off huge amounts of interest by prepaying (if you can’t refinance). if it’s 3%, then pre-paying probably isn’t worth it. invest the money and get a greater than 3% return, and you can use the higher amount to pay the mortgage down later on.

    consider this, too: if you lose your ability to pay the mortgage down the road, all of the payments that you’ve already made are lost. making an early payment is throwing good money after bad, in that situation. more of your money than necessary has been subjected to the risk of being lost to foreclosure, without getting you any extra security beyond what your monthly payment gets you. all else being equal, it makes more financial sense to hold off until you can pay off the entire amount of the mortgage.

  116. nicoleandmaggie says 04 July 2013 at 05:03

    Here’s us on the mortgage question: http://nicoleandmaggie.wordpress.com/2010/07/31/the-pre-paying-the-mortgage-question/

    Diversification of risk is important.

  117. uri says 04 July 2013 at 05:26

    i think that’s the right approach, nicole and maggie. the conventional advice – buy the most expensive home you can afford as an investment, because housing prices always go up – strikes me as a little insane. buying a home makes sense for a stable, affordable living situation, not as an investment (unless you’re really rich). it’s also my understanding that home prices do not have a particularly good return (i haven’t had a chance to read robert schiller’s “irrational exuberance” yet, but i understand that the second edition has a good discussion of the housing market and why it’s not at all special).

    my plan is to buy the *cheapest* house that i can fit the family in and put the money saved in an investment account. that way i’ll have the cash in the event i lose the ability to make mortgage payments.

    (i’m a lawyer who represents homeowners in trouble with their mortgages – that’s why i keep bringing up default and foreclosure – it’s always on my mind.)

  118. Raghu Bilhana says 04 July 2013 at 05:45

    What happened to articles like these since JD left? We need more writers like JD on this site who can write articles more related to personal finance.

    • lhamo says 05 July 2013 at 03:57

      Agreed! I miss JD. GRS is a pale shadow of its former self. I hardly even bother to come by these days….

      • cj says 05 July 2013 at 08:23

        Couldn’t disagree more.

    • Mike says 08 July 2013 at 07:03

      I think one of the challenges for the site is the saturation of the personal finance topic. When JD started his site he was ahead of the curve (one of the various reasons it worked out so well for him) and had the opportunity to hit these topics the first time. I like the idea of bringing back the throwback stories because it refreshes the conversations and brings them up to speed with the current events that may have changed the situation.

  119. My Financial Independence Journey says 04 July 2013 at 06:50

    This question is far better solved by math than by the aphorisms offered by any of the above listed gurus and books. You simply compare the interest rate on your mortgage to the expected return of whatever else you could be investing in. Whichever rate is higher, wins.

    As for homes being investments, the recent housing crash should have taught us something about that. In some hot real estate markets (NYC, San Fan, etc) homes are investments as they’ll increase in value faster than inflation. In other areas, houses generally track inflation – making them stores of value rather than investments. So most people should buy the house that fits their needs rather than the biggest thing that they can afford.

    People without large families or space intensive hobbies may actually be better off not buying a home at all and renting instead. Knowing your local real estate market, being aware of your housing needs, and running some quick numbers will give you an idea of whether this is true for you or not.

    Finally, I realize that there is some subset of people from whom debt of any kind makes them unduly neurotic. Maybe for this group of people prepaying a mortgage is a good idea simply for the peace of mind that it offers.

    • Tracy (the Other One) says 04 July 2013 at 08:06

      I actually find a lot of standard advice about prepaying mortgages/paying off mortgages very frustrating. Not only do experts not agree, but the advice is often oversimplified.

      All things being equal, of course you do better investing at a higher interest rate. Simple math, as you say. However, a lot depends on where you are in your financial life, and what your goals are.

      On the one hand, mortgage is a guaranteed rate of return, and most investments are not. Yes, you can LIVE in your house, so that’s a plus. It’s also a minus, because it locks capital up in a non-liquid form. You can potentially get a home equity loan/line of credit, but that comes with interest. If your house is paid off but you have drained all your cash savings to pay it off early, you still have to eat and pay medical bills. Then you might need to sell the house to get at the equity, but you will STILL need somewhere to live.

      Then there is the stage of life. Liquid cash gives flexibility that locking the cash up in home equity doesn’t. One thing that bugs me about retirement advice is the assumption that is usually made that the person will 1) stay in their house forever, or 2) downsize as soon as their kids are gone (to a cheaper house). But that is certainly not our situation (no kids, small cheap houses, town we can’t stand). When we finally are able to relocate, anywhere we go will likely be substantially more expensive. There’s no point in sinking a bunch of cash into our two starter homes, if we potentially need a big chunk of liquid cash to relocate.

      As with so much of personal finance, simple rules of thumb are helpful, but they need tweaking based on the individual situation.

      • Jen from Boston says 05 July 2013 at 09:36

        You bring up a good point about where you are in life. I’m in my early 40’s and would like to enter retirement without a mortgage, so I plan to payoff my mortgage within 20 years or less. Mathematically it would probably be better to put the money in a retirement fund, but I want the freedom and flexibility with a mortgage free home when I retire. I could downsize from a townhouse to a flat (less likelihood of falling and broken hips), and the amount I’m paying on a mortgage could be reallocated to health care :/

        If I were in my 20s or 30s I might have a different idea of what to do.

    • TEB says 05 July 2013 at 05:43

      Should I make these comparisons before or after the market falls? 😉

    • Lindsay says 05 July 2013 at 18:19

      Another mathematical way that I look at it is not comparing interest rates, but comparing the cost per month. For example, I’m paying 4% interest rates on about an $8000 student loan, and the payment is $140 a month. I could pay it off today, but it would take me 4-5 years to save that money back up with the extra $140 a month it would get me. While this is short term thinking, I’m trying to meet a more important financial goal by next year, so it makes sense for me right now to keep the big payoff in my savings, and pay the monthly payment.

      Likewise I’m not in a hurry to have all my money completely tied up in my house, when I don’t plan to stay in it for the rest of my life anyway. Maybe it’s because I have kids now, but having a nice cushion in the bank account makes me feel way more secure than having a loan paid off. If it comes down to it, I can default on a loan, and having loans paid off would be no consolation if an emergency occurred and I couldn’t pay for healthcare, for example.

    • Anon says 19 September 2013 at 08:15

      Paying off your mortgage is a guaranteed win–you will save the money on your interest rate.

      The supposed rate in your investments is hypothetical, and you have to pay fees and taxes on it. Don’t forget to calculate that into your expectations of what your rate of return really is.

      Everyone’s situation is different, but try to look at the big picture.

      Also, when your mortgage is gone, you get to keep the mortgage payment for yourself–investing it then, when your cost of living is so drastically reduced, will feel much safer.

      Remember, investments are always gambling to a certain degree. Try to take calculated risks, but remember, the rate of returns are not guaranteed.

  120. krantcents says 04 July 2013 at 07:04

    As I near retirement, I have been prepaying my mortgage for a few years. I feel a little conflicted because I am sitting on a huge asset which I prefer to leverage. My solution is to maintain a line of credit for some of the equity.

  121. Ben says 04 July 2013 at 08:07

    For most people, paying off a mortgage makes a lot of sense, but paying down a mortgage does not.

    Instead, set aside the money you would use to pay down the mortgage, in low-risk investments. This will probably provide you with a slightly better return, but that’s not really the point. Instead, it provides you with security against job loss or some other financial crisis.

    Regardless of the balance on your mortgage, you’re still responsible for the same monthly payment. By “paying down” that balance in an account you control, you retain the option to redirect those savings to future monthly payments, if necessary.

  122. Alexandria says 04 July 2013 at 09:47

    Overall, good advice.

    But the last one was WAY out-dated. At these interest rates, if you doubled up your principal payment every month, you’d shave 20 years off of a 30-year loan. OF course, this points out the benefit to today’s young people. The days of “mortgage versus invest” are kind of gone. Today’s young people can just easily do both, with lower interest rates and lower mortgage payments.

    I also have come across a lot of ignorant comments in recent years about how mortgages work. Smaller interest rates just create an entirely different animal.

    For Example, Our first mortgage was at 8.25%, and $130 of our $1500 payment was going to principal, at the beginning. Today we have a 3.75% mortgage and on the first payment, $300 goes to principal and $600 goes to interest. Anyway, I get a lot of ignorant comments about how we shouldn’t refinance so much and how obviously only $100/month is going to principal and yadda yadda. Interestingly, the only reason it is taking me an entire 30 years to pay off the new loan is because the payment is so much smaller and so less goes to principal on the back end. 😉 My 1-year-old 3.75% mortgage puts us about exactly where we would have been (total remaining balance and monthly principal payment) as if I had never refinanced my first mortgage (which would have been 12 years old now). This is true until about year 17, when the bigger principal payments start to pile on. (& of course, I refinanced so we could shave $600 per month off of our payments, while mostly being in the same boat otherwise).

    • Tom says 07 July 2013 at 04:59

      I just ran the numbers on my recently refinanced 3.75% mortgage, and it would turn the 30 year term into a 17 year mortgage. So not quite half. At higher interest rates, its less effective (18 years and change at 6.5%).

      It also would turn an $800 a month P&I payment into $1070 initially, and $1300 in year 17.

  123. stellamarina says 04 July 2013 at 14:23

    It worries me that so many people are retiring without having paid of their house yet. However you decide to do it….I think ownership of house and land is the important thing for security…..and Do Not take out a second mortgage on it. So many families in our area have ended up losing their house because of that. Suzie Orman gets dumped on about this but I agree with her totally re paying off a house and not taking a second mortgage on the house you live in. We started out with a 30 year mortgage…refinanced to a 20 year 5 years later and should be totally paid off in a few years with about 16 years of payments. An extra payment is the first thing that comes from our yearly tax return which is painless and we always throw in a few extra dollars into the principal every month.

  124. richard says 04 July 2013 at 14:35

    i get paid bi-monthly (26 pay periods a yr), so on the months when i get 3 cheques, i made prepayment with the extra pay cheque. I didn’t even notice a dent in my lifestyle but it cut my mortgage down by years

  125. Pat says 04 July 2013 at 20:37

    We were in the unique situation that, in our early 60’s with me retired and husband wanting to retire in a few years, we sold our house and moved 1000 miles to be near family. We rented for a year, then bought our house 9 months ago. We could have paid cash for it. Instead, we put 50% down and took a 30 year fixed @ 4.25%. We went this route because our investments are returning an average of 6% and we didn’t want to tie up 20% of our savings in a house. Husband has since “gotten retired” (fired) and we have a mortgage running into our 90’s and wee’re good with that.

  126. Ross Williams says 04 July 2013 at 21:42

    The real answer is “it depends”. The fact that these “experts” have a firm opinion is a clear indication you shouldn’t pay too much attention to any of their opinions.

    The first consideration is what interest rate you are paying. If it is less than 4% per year, you will likely make more money from investments than you will save in interest by making early payments.

    The second consideration is inflation. You are making future payments with today’s dollar. If a dollar is worth half as much at the end of your loan, then you are giving up twice as much value as you would by making that last payment on schedule.

    The third consideration is liquidity. How many other assets do you have beyond your home? Because, while your home has value, that value can be hard to extract when you need it.

    The fourth consideration is security. You can secure your home by paying off your mortgage. But doing it in pieces actually makes you less secure. If at some point in the future you can’t make your regularly scheduled payment, usually those earlier payments won’t save you from foreclosure. By contrast, saving the money you paid on your mortgage would allow you to make your regular payment. And, once you have saved enough, you can use it to pay off the mortgage. Of course, whether you come out ahead will depend on the earnings you get on the money you save.

    The fifth consideration is how much of your mortgage is really deductible. A lot of people would not itemize at all if not for their mortgage. The tax advantages only apply to the value the mortgage gives you over the standard deduction. If you don’t have a lot of other deductions to begin with you aren’t really getting the full value of the mortgage deduction.

    Paying off your mortgage early may make sense if you are nearing retirement and have a lot of other liquid assets. You have most of your assets in low return, low risk investments. You are paying a high interest rate. You have very few other tax deductions. You are already saving money in a variety of other investments.

    In short, paying off your mortgage is a low risk, low return investment. The real question is where does that fit into your investment portfolio.

    The idea that you somehow get “freedom” by paying off your mortgage, rather than saving the money so you CAN pay off your mortgage is the kind of pop-culture investment blather you ought to ignore. If you lose your job, you are going to be a lot more “free” if you have the money to make your mortgage payment than if you spent that money trying to pay it down faster.

    • Tracy (the Other One) says 05 July 2013 at 07:26

      You have the same approach that I do, it appears. Great point about the interest deduction. Even with two mortgages, we are only able to get over the standard deduction by doubling our property tax payments every other year. So we only get that advantage half the time.

  127. bemoneyaware says 04 July 2013 at 22:03

    Idea of having old popular articles is great. (I had missed it earlier 🙂
    Having views of different Personal finance experts at one place is great. But isn’t there some calculator which can help me decide what to do?

    • TEB says 05 July 2013 at 05:37

      There is a good calculator here: http://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478

      It helped me decide what to do since I can’t get a loan modification or a refi and I owe less than 45,000. Instead of paying closing costs and fees and all/most of my payments going to interest,I am able to pay on the principal and cut my time down without the bank deciding how I do it.

  128. Debi says 05 July 2013 at 06:45

    We chose to prepay our 6.5% loan because it was a private loan from a family member. Instead of 20 years we paid it off in 7. Doing the math we saved $32,000 in interest. If we had invested the extra we paid each month and earned 8% annual return on it we would have had $49,000 in savings at the end of 7 years, so we theoretically lost $17,000 by paying early but we felt it was the right thing to do at the time.

    I would never consider my home an investment. As Ross Williams says above, you have to live somewhere. I’m a firm beliver of living in a modest home with a mortgage payment that does not prevent you from saving for the future and enjoying the present.

  129. lmoot says 05 July 2013 at 07:43

    My decision to not prepay my mortgage at this time is based on a mix of emotional and financial reasons. I’m going to be 30 next year, and while that’s not quite old-fart status yet, I’m planning for some expensive changes in the next few years that I simply don’t want to put off any longer. Those changes include a career change which involves going back to school and persuing individual skill-enriching activities that will help me get a job in a competative industry.

    Also, I’d like to start my investment property portfolio no later than next year. I only make so much money, so for me to prepay my mortgage would mean to forego those other goals indefinitely. Yes, there is no guaranteed ROI with the real-estate venture, but neither is there a guaranteed ROI on prepaying your mortgage like so many PF writers and proponents of the practice suggest. As others have mentioned already, anything could happen before you can pay off the mortgage…and that money could be lost. The only guaranteed ROI you can get from paying off the mortgage early, is to write one, clean pay-off check. Other than that, you’re in the same risk boat as errbody else.

    Add to it the fact that my interest rate is 5.375% (not too high), and my mortgage is $354/ month. While it would be nice for that cost to go away, it’s hardly the life-changing amount that it could be if it was maybe $700 or more, and to me, not worth the time, effort, and sacrifice I would have to make to make that happen.

    Once I finish school, have a full-time job in my chosen career, and have at least 2 rentals under my belt, I will pay off the mortgage the second I have enough to pay it in full. For now though, 100% of my savings are spoken for, for the next few years. Luckily I’m still fairly early into my mortgage that I think I’d still get a decent ROI by the time I am ready to pay it off.

    • Debi says 05 July 2013 at 08:53

      You didn’t mention if you’re saving for your retirement or not. If not, please, please do not put it off. Take it from an “old fart” who has been able to see firsthand what the true miracle of compounding can do given enough time.

      • lmoot says 05 July 2013 at 09:27

        You’re absolutely right. I should clarify….all NON-retirement and e-fund savings are being directed towards my short-term goals. I’m not currently saving as much towards retirement as I would like to in the future, but I started early and save up to the employer match, plus I have a ROTH (that I’m not currently contributing towards ATM), and hope to use the rental properties as income and as part of my retirement portfolio, so I’m not too too worried about maxing out retirement savings yet.

        • Debi says 05 July 2013 at 09:50

          Glad to hear it. I’m a little bit of a fanatic on the subject because when I was younger I chose to prepay on my mortgage instead of putting the extra towards my retirement, then I chose to pay for college for my children. Now I’m putting a large percentage of my income towards retirement. I wish I had used a more balanced approach earlier.

        • Curtis@PayOffMyRentals says 06 July 2013 at 05:05

          This issue will never be resolved or agreed upon…EVER.

          It’s too personal, has too much to do with one’s own station in life, one’s personal comfort levels with debt, one’s personal risk aversion, the current state of the stock market, and on and on.

          We paid our last modest house off in 19 months. We’ve paid off over 100k in mortgage debt in the last three years. We are happy and satisfied with the decisions we’ve made.

          Here’s my last post on the subject:
          http://payoffmyrentals.blogspot.com/2013/07/update-july-2013.html

  130. Diane C says 07 July 2013 at 21:09

    So nice to revisit an old, but always timely article. Nicer still is to read so many smart, well thought-out comments.

  131. Nick F says 09 July 2013 at 12:32

    Why make this either/or?

    When I have available cash flow, I allocate some percentage to investing and some to prepaying. Liquidity can be both a blessing and a curse. Personally, I find building equity to be much less interesting than investing, but I do it anyway… perhaps as a hubris-avoidance tactic. I’ve heard plenty of people ruined by bad investments, but I can’t say I’ve heard of anyone ruined by paying off their mortgage early. 🙂

    • Diane C says 09 July 2013 at 14:05

      You’re right Nick, up to a point. Every financial professional can tell you that one of their most-heard laments is:

      “I wish I’d started saving for retirement sooner.”

      Stuff the retirement fund first and then feel free to toss any extra cash at the mortgage. You won’t regret it and you’ll be able to pay your taxes and upkeep on your “paid for” home forever. Provided, of course, that you don’t make bad investments. But hey, you’re a student of GRS, so that’s not going to happen.

    • Steve says 20 December 2013 at 17:24

      Agreed. I had surplus cash 6-7 years ago and instead of paying off approximately $250k in home morgage bought into an investment idea of a friend who talked me into financing 5 investment homes in a lower income Atlanta area. A $20-40k house to rent seemed like a low risk sure thing. Post crisis and some minor fraud later, the houses proved value-less. While the loss was tax deductable, the expected 10% vs 3% return actually became a loss of over $100k, even after taxes. I would much prefer right now to own my home free and clear. While I could afford the loss and ran the numbers, nothing can compete with a guaranteed return. Even a 3% return in todays market is over 1000x what prevailing cash earns.

      • Robert says 27 September 2014 at 12:59

        Your post cuts to the core of all the decision making being discused And please beleive I am clueless. What happened 6 years ago was a historic downturn, it has happened before but on that scale it has been 80 years (1929). In your post you pass along your hard earned wisdom. ( you can also beleive we are all right there with you, almost no one escaped)
        But to what extent does our experence in “the great recession” drive our future risk taking?
        Some cut their risk as the stock market plunged and sold their positions (something is better than nothing) but now have missed the recovery. Many feel that although business and employment have improved the next downturn is just around the corner. The Mortgage Fraud, LIBOR Fraud, investor fraud and even defrauding the US goverment by the major banks and the defunding of the Justice Department financial crimes unit by congress and the Statement by Spencer Bachus, Chairman of the House Financial Services Committee that “Washington and regulators are there to serve the Banks” makes it clear that at this point the game is rigged and yet our economy depends upon risk taking. Who would be so foolish as to start a new business knowing that the banks can and will manipulate interest rates and real estate prices? I guess i think that for the short term most risk is unacceptable but I also think that if we dont do something to fix this mess there may be no road to a happy retirement. Gotta do more than vote folks!

  132. Bob M says 15 August 2013 at 19:04

    I’d say if your mortgage interest rate is below 7% and you are investing retirement funds in mutual funds, you shouldn’t prepay.

  133. Anon says 19 September 2013 at 08:12

    Here is our reason to pay off our mortgage:

    We’ll have $900 extra every month when it’s gone.

    That’s a lot extra to put toward retirement.

    If you can pay it off in a few years, go for it, and then you’ll have a LOT extra to save for the future.

    Everyone’s situation is different. But paying off your house is a guaranteed return on interest. Sure, stocks have recovered for now, but that could change tomorrow, and the value of your retirement account could be slashed in half.

    It happened to me for years…lose and lose and lose in my retirement accounts. Only now is it at a normal recovered amount.

    But we are going to get rid of the mortgage and therefore have a “raise” of $900 every month and FREEDOM!

  134. Diane C says 19 September 2013 at 11:40

    “Anon” – $900 a month invested now is worth more than $900 a month after you pay off your mortgage.

    You miss out on the value of compound interest by waiting to invest for retirement.

    BTW, if you do not feel confident in the stock market, there lots of other ways to invest for a secure retirement. Income-producing real estate would be just one example.

    “FREEDOM” is only an illusion if you don’t have actual financial security. A paid-for house will always require payment of taxes, utilities and upkeep. A paid-for house won’t pay for groceries or medicine if you lose your job, for example. Unless, of course, you borrow against it, LOL.

  135. ohiodale says 24 March 2014 at 12:04

    I believe its good to try to pay a 30 year loan in 20 years. Although, I still think with inflation averaging 2.5% its good to pay ones house slowly because the loan is fixed and your money loses value every year because of inflation. In 10 years your payment is 25% less due to inflation. When I retire I may owe on my house but by then with inflation the payment will seem like nothing. I doubt the $100/month I pay for my mortgage is going to affect me that much in retirement. By the time inflation kicks in, and it will, $1000 per month today will seem like $500 per month.

  136. Xearo says 01 July 2015 at 10:55

    What investment is there that can result in a gain more than the money lost in mortgage interest?
    Is there a way I could use the extra money in an investment instead of extra mortgage payment over the course of 30 years and come ahead of interest paid?

  137. Geralyn Purter says 12 August 2016 at 09:38

    Awesome Post. Great looking website as well..

  138. cogsboy says 05 December 2016 at 11:22

    I’m offering my 2 cents on this issue. My wife and I have recently paid off our house 11.5 years after we purchased our home. We’re both firm believers of paying off debts as soon as possible. Over time as our careers moved forward and our incomes significantly increased, we realized that our incomes were too high to enjoy the benefit of itemized deductions from the interest payments to our house. The extra income we were saving was literally burning a hole in our pockets and we were not very confident with the financial markets to risk putting our money into.

    In 2011, we decided to pursue a 5-year plan to pay off our house. Our mortgage was on a 1-year ARM with 2.25% above the LIBOR rate. Fortunately, interest rates were very low but refinancing would have resulting in a higher interest rate than just paying the 2.25% above LIBOR. Therefore, we took the chance and bet that the LIBOR rate would stay pretty low for a few years while we paid off the principal, and it did. Between 2011 and 2016, our interest rate ranged from 2.875% to 3.25%, which allowed us to pay between $2200 and $3000 per month in additional principal.

    Yes, we could have put our money in the market which did pretty well during that time; however, it was mainly about financial security. We both wanted some sense of stability after seeing many of our friends go through some hardship during the financial crisis. We got dinged as well with the real estate market crashing and our belief is that it’s better to have your own island during financial, political, and social volatility, than to treat your home as an asset of which positive light is shed upon only during the “good times”.

    During this process, we didn’t lose sight of other financial goals, such as retirement, savings, and living within our means. Our cars were paid off, we had a healthy savings amount in the event of an emergency, and our retirement accounts were doing OK considering the financial situation after the great recession. We’re both 46 years old and it feels like a huge weight off our shoulders to pay off the mortgage. Nonetheless, we’ll probably buy another home in the next few years and possibly rent out our current home with a greater positive cash flow without the reliance of others to pay off its mortgage.

    In the end, there’s no greater feeling than paying off debt, albeit even if it’s for a few years before some other expensive purchase, such as a home, renovations, cars, etc. is considered.

  139. Joe says 30 October 2018 at 07:29

    It sounds like Amy could pay off her mortgage without much trouble. I say go for it. Her income is incredible so it doesn’t matter which way she chooses. If she wants to pay it off, go ahead.
    Also, the SALT cap would kick in if she has state tax. At that level of income, she is already over the cap in Oregon and CA. She can’t write off the property tax anyway. If she lives in WA, then maybe she can still it off.

  140. Eileen says 30 October 2018 at 07:40

    Isn’t the standard deduction going up in the new Tax plan? Does Amy even have any other things to add to that which would allow her to itemize at all?

    • jason says 30 October 2018 at 13:30

      I wondered the same thing. I live in NJ, and prior to capping SALT deductions, I was confident I would itemize till death. Now, despite high property taxes and state income taxes of 6%, my mortgage is tipping to higher principle then interest and I am not sure we will itemize much longer

    • John says 01 November 2018 at 06:56

      EXACTLY. The new tax code completely changes the math related to paying off a mortgage early.

      In 2018 the individual standard deduction increases to $12k and the married filing jointly standard deduction increases to $24k. So if you don’t have more than those amounts to deduct, you get no benefit from itemizing and deducting mortgage interest. Most FI’ers have a smallish mortgage and are not paying much more than $24k in combined mortgage interest, property taxes, state income tax, and charitable gifts.

      So you probably shouldn’t worry about the tax implications if you have a small mortgage. Just decide if you want the small gauranteed return from paying off the mortgage or the larger return with more risk by investing elsewhere.

      And my view on how to look at the tax change without getting political: You get the same mortgage interest deduction you used to get, you just don’t need the mortgage anymore. Everyone gets the deduction whether you have a mortgage or not.

      Oh, and I am not a tax expert. Research this and run the numbers yourself.

  141. Chris says 30 October 2018 at 07:50

    Great article! I think you covered the pros and cons very well. I agree with your friend, Scott, that life situation makes a difference. We are 5-6 years from retirement, so want to get our mortgage paid off ASAP to improve our cash flow. Our family believes that the home equity is for the surviving spouse to help pay for his/her care later in life. Our child and spouse, both in their early 30s, have a very low interest rate 30 year mortgage and are investing for retirement. This makes sense for their life stage.

  142. John Hemmendinger, CPA says 30 October 2018 at 07:59

    Pay off the mortgage! With the new, higher standard deduction, many taxpayers do not get a deduction for mortgage interest.

    The freedom of not having a mortgage is amazing and financial engineering is not for personal finances. Sometimes practical is better than analytical! From a Dave Ramsey fan.

  143. Big-D says 30 October 2018 at 08:10

    I paid mine off. Mortgage was $1077 for a 15 year @ 4.25%. I calculated that it would save me about $1500 in taxes a year but I also spent $6000 in fees. I would rather have the $4500 differential (plus the principal I had in my payments) and put it into investing (Roth, and regular brokerage accounts). I put about $30k a year in investment accounts (after 401k and HSA are taken out my paycheck). Part of that reason is because I am saving $13k a year by not paying a mortgage.

  144. RobB says 30 October 2018 at 08:58

    I paid off my mortgage this last June. I had a 15 year at 3.5% for $112k in 2012. The last few years the interest was less than the standard deduction so I wasn’t saving any money on taxes. My plan the whole time was to pay it off early. However in the past year or so I flipped on that assumption that paying off early was the best. Still, the peace of mine since paying it off is huge. I plan on investing the monthly payment instead. I don’t know how long I’ll be in this house, but I have an option of renting it or selling it with no rush. I can save on the realtor fees that way. If I do move into a new house, I’ll probably have a mortgage.

  145. S.G. says 30 October 2018 at 09:10

    I think the responses are skewed due to the long bull market we’ve been seeing. I see a lot of FI bloggers talk about how comfortable they are with risk and have everything in stocks. And I’m sure they mean it, but most haven’t experienced the pessimism and uncertainty of a bear market (myself included).

    The math for total return is in favor of the stock market. There are very convincing reasons why one should be invested in stocks. HOWEVER that is not a balanced portfolio, and I think it is misleading to compare a “bond” style return to an average “stock” return because the stock will always win on average and it doesn’t take into account the advantages of a bond return.

    I’m definitely in a split the difference camp: I overpay on my mortgage about as much as I put into my brokerage account every month. However I put a much larger share of that brokerage money into stocks than bonds. Should bond returns pass my mortgage rate I will put my entire mortgage over-payment into bonds instead, because they are both a guaranteed rate investment. But different products are like tools for different jobs. I think having a paid off house is one tool for financial stability and comparing that to stocks is not straightforward, and calling it an “emotional” decision does it a disservice. Really it is a move toward stability and being set up defensively should some kind of major stock crash or other market upheaval occur.

    I would like to note: This can get confusing because you need to separate your mortgage as a liability from the value of your property. If your house were theoretically worth nothing you would still owe the mortgage, and obviously with no mortgage you would still own your home.

    • Wasatcher says 30 October 2018 at 12:07

      +1

      Unless you’re pushing your asset allocation towards 100/0 (stocks/bonds), you really should be comparing the after-tax return of your mortgage payoff with the after-tax return of high-quality bonds, not stocks. For example, if I have a $1m portfolio, with an asset allocation of 75/25, I should be looking at the return of the $250K allocated to bonds in determining whether it makes sense financially to pay off my mortgage. (Yes, I know there are many other factors to consider.) Under such circumstances, paying off the mortgage is not just for “emotional” reasons.

  146. S.G. says 30 October 2018 at 10:11

    If you aren’t a number nerd, then skip this:

    I have a small bone to pick with the classification of compound interest versus simple interest. Pre-paying on a mortgage is not just a simple interest calculation. Because you save money not just on the payment, but on the interest you would have paid over time.

    To illustrate:

    Year 1 – I overpay $1000 on my 5% mortgage.
    Year 2 – I save $50 in interest.
    Year 3 – I save $52.50. The $50 in interest, PLUS the 5% I would have paid on the $50 in interest I saved in year one.

    A simple interest calculation would reduce the payment, but overpaying on your mortgage doesn’t do that, therefore the interest compounds just like in an investment scenario.

    • Peter says 30 October 2018 at 11:01

      S.G.: Your point (I think) is that pre-paying your mortgage gives you compounded savings over time. But putting that extra money in investments _also_ gives you compounded growth over time.

      That said, when my 2nd 5-year ARM came to an end last year I paid off the whole thing as a lump sum. My ARM interest rate was 1.875% and I was looking at a 30 year of about 4.25%.

      Unfortunately, you never really own your home. Here in silicon valley my property taxes are more than $1k per month — about as much as paying the mortgage on a $225,000 house.

      • S.G. says 30 October 2018 at 12:32

        Sure. If you pay off everything at once the figure changes, but then again all the money you would have been putting toward the debt now goes into investments. It’s an exponential decay leading into an exponential growth curve.

  147. S.G. says 30 October 2018 at 10:15

    Another number nerd nit pick:

    The inflation argument doesn’t hold water, because any debt you have is debt you have TODAY. I might owe $100,000 on a loan I took out 10 years ago, but that is always in today’s dollars. The interest rate you are paying is always on the money you owe today. You don’t pay it off in yesterday’s dollars. You are always making payments in today’s dollars and the principle carries through time. That only works if you’re projecting forward or back, not to what you owe today.

    Really the inflationary argument is about buying a house at all, because the value will increase with inflation while the balance owed will not. Plus, wages tend to increase with inflation so in 20 years that 25% of your wages is more like 10% of your wages while rent has tracked with inflation.

  148. FoxTesla says 30 October 2018 at 11:00

    I have a couple of points not touched upon in this article that I would ask…

    Cash Flow – It’s hinted that a large portion of the annual income is tied to a lump sum bonus. What does cash flow look like the rest of the year? Constant non-debt expenses where the freed-up mortgage cash would help? I’m thinking of possible expenses like daycare, travel costs, health insurance, membership dues, large family groceries/dining, high-end business clothing, purchasing product/inventory, etc.

    Length of Mortgage – Where is she currently at in her pay-off? Year 5/15/25 of 30? Is there concern about maintaining the ability to pay that amount for the remainder of the term (this speaks somewhat to the cash flow)?

    Future Debt – Are there plans to move in the future, and keep this property as a real estate investment? Maintaining this mortgage for business deductions and saving the money towards owning your personal property (or vice versa, having personal mortgage paid off to purchase another property for business) could be advantageous.

    • S.G. says 30 October 2018 at 14:02

      Yes. Those are very good points.

      Volatility of employment is also a question. If the economy took a hit would she lose both her income AND take a hit on the stocks? A lot of people don’t consider the fact that employment difficulties often accompany huge drops in their portfolio. If her work is volatile then having the position of a paid off house could be more important than in a very stable job. Versus if you have a very stable job you may be open to more risk in your portfolio.

  149. Matthew L says 30 October 2018 at 12:26

    What is your source of income? How reliable is it? How much is it?
    A high salary individual in a secure field (think physician) vs a lower than average unreliable income (seasonal laborer) makes a world of difference regardless of how the market performs or emotions.
    You need to live within your means. For Amy, paying off the mortgage instead of investing in a market for greater potential returns is something she may be able to stomach or live with negative results more so than if her income was below median and/or inconsistent. I agree with the basic plan of investing in your retirement funds, live within your means, have an emergency fund, and then you can do whatever you’d like with your excess income.

  150. Amy says 30 October 2018 at 16:30

    Amy here. Thought I would post some answers to a few questions to help with any advice offered.

    I’ve been at my job for 15 years, 5 in my current position. My base salary is just shy of 3-figures, so no issues should my bonus reduce dramatically from a cash flow perspective. I’m 44, been divorced for 13 years and have no kids. I live in a small, cozy home (2 BRs, ~900 sq. ft) in Northern KY, right outside of Cincinnati, a community that is very affordable. I have no plans to move, and doubled-down on that decision was some recent home renovations. I live a pretty small life. I own my car (1.5 years old that I paid for in cash), put less than 10K miles on my car per year, and live ~4 miles from work. I have what I consider a large amount in cash, and
    a good chunk in retirement that I continue to feed. My biggest splurges are travel, good food (I love to cook) and nights out with friends about once a week. I will admit to a small addiction to shoes. Should I pay off my mortgage, the only monthly expenses I will have are utilities (electric, gas and internet), food, gasoline and entertainment. Work pays for my phone and subsidizes my insurance. I have a dog named Puddin’ who is healthy and doesn’t cost a lot to care for. When I travel for work, I have a large, close-knit family nearby who watches him, saving me a ton of money on dog-sitting expenses.

    My job is very flexible, and I work from home ~75% of the time. When I do go into the office, it’s casual (jeans) so I don’t spend as much on my work wardrobe/dry cleaning as I used to. I see clients a few times a month and have a strong base of quality clothes that I update about once per year.

    My flirtation with paying my house off comes from a desire in the next few years to try something new. Not sure what that means yet (stay in the industry in which I currently work? consult? work at a plant nursery?). I’m working to solve for those questions. In the meantime, I think it makes sense to make my life as small and simple as possible so I have the space to take a bigger risk. By nature, I am not a huge risk taker, despite a ‘big risk/big reward’ sort of job with a ton of stress.

    Let me know of any additional questions; I’m loving everyone’s opinions so far!

    • S.G. says 30 October 2018 at 20:46

      I dunno, with a dog named Puddin’…that changes my whole perspective of your situation. 😉

      • Amy says 31 October 2018 at 09:33

        I realize that this is damning piece of evidence, especially when coupled with the comment about shoes. But a little house = a little dog. And, at 11 years old, he’s just kind of a Puddin’! Does it help that he’s a hell of a camper and has traveled all over the US with me? 🙂

  151. Jacob Jones says 30 October 2018 at 18:08

    I always like to “hope for the best and plan for the worst”. With that mindset I do plan to pay my mortgage off early, but I will be investing simultaneously.

    I feel that without a mortgage my risk is lower in case of a crisis.

  152. zzzzzz says 30 October 2018 at 20:21

    Another factor unmentioned by Amy and the article is saving for kids’ college education.

    If you have kids and are saving for their college educations, then you may want to consider paying off the mortgage as an alternative to saving for college.

    I know people who’ve decided to direct income toward paying off their mortgage early rather than to college savings, so they can be mortgage-free when their kids are in college, and direct the cash flow that was going to their mortgage to their kids’ college expenses. IOW, they would finance college out of cash flow rather than savings.

    This sort of decision can also affect eligibility for financial aid.

    • zzzzzz says 30 October 2018 at 20:43

      Oops, I didn’t see Amy’s response before I posted this. Since she has not kids, it obviously doesn’t apply to her.

    • Lisa says 31 October 2018 at 10:17

      This has been my thinking, but I’m not sure the math is in favor. Investing the add’l mortgage payments should yield more college savings. So many different ways to think about this that it makes my head spin.

  153. Liz says 30 October 2018 at 20:42

    I paid off my mortgage and do not regret it. It is HUGE peace of mind! In case of job loss or sickness I would not live in fear of ending up homeless. And it gives me flexibility to choose how much I want to work and to choose not to stay in a stressful job I hate just for the money.

  154. dh says 30 October 2018 at 21:06

    I don’t know all about numbers like my buddy S.G., but I learned from Dave Ramsey many years ago to live debt-free. It’s worked out super well.

    I just bought a new house, and it was not unlike buying a loaf of bread, which I loved. So simple.

  155. Rachel says 30 October 2018 at 22:01

    I paid off my house 7 years ago (at age 46) and have never regretted it. I would put a home equity line of credit in place, though, in case something happens and you need access to the pile of cash you would otherwise have had.

  156. Mr HM (Phil) says 30 October 2018 at 23:47

    I’ve always been super envious of Americans for being able to have their mortgage interest tax deductible. No such thing in Australia.

    That’s it, I’m moving to USA – Oh, wait ….

  157. olga says 31 October 2018 at 03:31

    So well described all pro’s and con’s and so obvious (to me) there are more “pro’s”. Which is exactly what we did 4 years ago. The argument of tax deduction – standard deduction wins. The argument of money in the index fund – you have to believe it’s a steady up AND actually invest (some of us are too uncertain about that). Paying off the house certainly makes you free emotionally and the money ‘coming” keep on rolling like crazy – now that they are really “free” (emergency fund and retirement are well take care of) – one can entertain the investing bit. And no fear of loosing income and not being able to pay biggest payment of the month. Go for it!

  158. Frank says 31 October 2018 at 07:14

    There is another factor to consider, which is how you protect your home in the event that you are sued. Oddly enough, a large mortgage protects your home from being considered a potential asset worth going after in a lawsuit.

    This is one of the primary reasons that has come up in my discussions with financial advisers regarding whether or not to pre-pay a mortgage. They all always agree that if you are good at managing your money, carrying a large mortgage and not pre-paying it is an excellent way to make your home law-suit proof.

    • Terri says 02 November 2018 at 12:14

      How so? They can get a lien on the property.

    • Karen says 03 November 2018 at 19:01

      Frank, I have two comments.

      One, state law may well protect Amy’s home from creditors. Each state has different rules, but most have some form of “homestead exemption” that forbids creditors from attaching the home in which the debtor lives.

      Second, a cheaper way to protect herself from lawsuits than paying mortgage interest is for Amy to buy what’s called “umbrella” liability insurance. It’s easy to get $1 million worth, and $2 million is also quite doable (that’s how much we have).

  159. Ron C. says 31 October 2018 at 08:13

    We FIRE’d last month and paid off our mortgage this month. While I know you might end up with more money putting it into stocks, here’s a reverse engineering mental exercise to try:

    With no debt on the house, would you take out a loan (with similar terms) against it and invest it if you could? Probably not.

    Big ERN also did a great mathematical analysis of this that factored in Sequence of Return Risk that I’d never considered. In the end, there’s lots of ways to look at it. But I don’t think paying off debt is ever a “wrong” choice.

  160. mary w says 31 October 2018 at 11:17

    First, I think you’re overestimating how much interest she’ll pay in the next year. Using very round numbers: 100K mortgage at 4% will cost not more than 4K a year in interest, not 6K.

    More importantly, unless Amy has lots more deductions under the new/current tax rates she’s better off with the standard deduction. (12K for singles, 24K for MFJ). With the higher standard deduction and SALT limitation many of us will be skipping itemization for the first time.

    I was never a proponent for paying off mortgages early. However, when my balance got below 100K is seemed more like a nuisance to pay so I worked at paying it off.

  161. Selena says 31 October 2018 at 14:53

    I paid off my mortgage before I turned 30. No regrets. I love knowing I can work at Mickey D’s and still support myself. Currently, I can truly retire (never work again) before 40 and be okay. There’s freedom in being able to walk away if my employers tick me off.

    • S.G. says 31 October 2018 at 14:59

      Total aside: I read a book where lthe protagonist had a paid off house and was amazing with money, but darn it couldn’t afford chicken even once per week. I immediately thought that the author had never lived mortgage free because, as you say, with a paid off house you can live surprisingly well on very low wages.

  162. JanBo says 31 October 2018 at 19:54

    We rented for sixteen years. We took out a mortgage for our first house. We paid it off the minute no one was still under our money for college (about six years). That was 22 years and 4 houses ago. We still buy our houses with a mortgage, giving us time to sell the other one and get the price we want. Once settled, we pay it off.
    We “envelope” our taxes and insurance out of monthly cash flow and pay yearly. We have an umbrella insurance in case we are sued- something for every FIRE to think about.
    The advantage that we have found is the freedom that it brings to our cash flow. We can save for big expenses without hitting up our nest egg. The real estate is also a great balance to our portfolio.
    Saying that, I don’t know what I would do in Amy’s place. If she sinks $100,000 into the house- she may be tempted to not move if something cool comes up. If she has a mortgage, she can rent it out and use the business deduction.
    Interesting dilemma.

    • Selena says 01 November 2018 at 18:06

      If you want to rent out your home and make the interest an expense, you can always take equity out of your home and transfer to your new primary residence if you want.

  163. Jennifer says 02 November 2018 at 12:50

    One issue I didn’t see discussed was whether you plan to be in the house for very long. We are currently in a house that we would consider selling and moving away from in the next few years. We prefer to have the flexibility of having savings outside the house so that we don’t have to make a purchase contingent on selling the current house.

  164. yyz says 02 November 2018 at 15:47

    I would NOT pay it off. You can’t undo it, should she need the cash for some reason. With interest rates rising, she may be eventually be able to earn a profit on the borrowed money.

    Also, Amy did not mention how far along she is in the 30 year mortgage. If she’s already close to paying it off, the amount going to interest each month is quite low.

    FYI: I retired 2 years ago at age 53, and kept my low interest mortgage exactly for these reasons (3.75%, 6.5 years left on 15 year mortgage). I’d rather have the cash on hand. The little bit of interest each month seems like cheap money. BTW, you can currently earn 2.25% at Citizens Access, so the actual cost of keeping the loan isn’t really that high.

    Maybe it’s just me, but I don’t consider having zero debt vs having a small, low interest mortgage to be a big deal and wouldn’t make any difference to how I feel about money….there are still payments in the form of tax and insurance. Paying the cheap mortgage is just another payment that I barely notice.

  165. Karen says 03 November 2018 at 18:50

    Everyone seems to forget about the standard deduction!!!

    The standard deduction for a single person is apparently $12,000 in 2018. So for Amy to see ANY tax benefit from her mortgage interest expense, she would have to have total deductions greater than $12,000.

  166. M.Besler says 03 November 2018 at 19:06

    Must be nice to be an American and use items like your mortgage to reduce your income tax debt load!
    Sadly, here in Canada, unless your a small business owner(runs business from home), we don’t get any of these “LUXURIES!”
    I am a small business owner running my own business out of my basement office. I get to write off a small portion of my property taxes and mortgage interest, but only the percentage amount based n how much square footage my shop uses based on total home ft2! I get to scratch back about 1-2% of my taxes paid to our federal government. If I could writeoff my mortgage, mortgage interest, visa interest, loan interests, etc. etc. like an American, I would probably already paid off my home and then some! Advice: don’t move to Canada if your allergic to paying taxes, cause with our Liberal gov., that’spretty much all we do now!

  167. Ned says 03 November 2018 at 20:55

    If you are looking at sending kids to expensive colleges, you should pay off your mortgage. Every dollar you save for them outside of a 529 plan will be taken, 100% by the expensive college, up to, say $65k or $70k. So, if you save $70k, it goes to the college in the first year. But, if you take that $70k and put it in your house, the college will give you financial aid, and that grant aid can be a return on investment which destroys the stock market.

  168. Kevin says 03 November 2018 at 23:25

    First, I agree with what money guru Clark Howard said on his show, which was: The general rule of thumb, financially, is that if your mortgage rate is below 5 percent, keep the mortgage.

    Second, If you are an investor and want to grow your net worth considerably over time, and can handle modest risk, then use the bank’s money (keeping the mortgage) to invest all you can. Paying of the mortgage delays considerably getting into much investing for most. Equity in your home is sleepy, dormant money that is making you nothing.

    Third, the vast majority of people don’t stay in their homes for 30 years. The average is 11 years, so trying to pay extra off in your home is a road to nowhere for many because they sell the home and get the money back then, so it became a mere store of value. Meanwhile, that money could have been MAKING them money with sound investing.

  169. Christym says 10 November 2018 at 12:52

    Pay it off. We paid off our mortgage last year. We are now debt free. There is no amount of wheeling and dealing that beats the feeling of owing anyone money. It brings peace. It will be hard for someone to take my home away from me, but mortgage payers are just a few missed payments away from disaster. Imagine paying on a mortgage for 20 years, then you become Ill, or lose your job, and all those years of payments mean nothing and you are homeless. Did we learn nothing from the great recession?

    The feeling though, it feels GREAT!

  170. RayinPenn says 25 November 2018 at 03:48

    We paid off our mortgage over 20 years ago and never looked back. Living debt free has been an absolute joy. Like Dave Ramsey’s fabulously successful debt snowball when you pay off the smallest debt rather then the one with the highest interest rate – it isnt about the math its about human nature.

    In 2008 when the market was crashing and jobs were evaporating and foreclosures were everywhere – we always knew we had a place to live. No mortgage means a significantly lower monthly spend rate. If i had lost my job i knew i could last a very long time. Had that money been in an investment that lost 30% of its values- We wouldnt have enjoyed the piece of mind during an otherwise very scary time.

    We watched our spendy friends and neighbors lose their homes. Too much house, cars toys, vacations, bling. The memory of that is a owerful incentive for us – No debt of any kind.

  171. JC says 01 February 2019 at 15:08

    On my second month mortgage this month, I paid $1000 toward the principal. I feel a little nervous. Did I do the right thing? How much should I pay more extra every month to shorten my mortgage 30 yrs to 20 yrs? Here is my situation.

    I recently bought a small townhouse in an expensive area, $355,000. I paid 20% down payment, borrowed $283,000 for 30 yrs fixed at 4.75%. The monthly mortgage is $1860 with $160 quarterly HOA. I am a school teacher, 46 yrs old, single mother with two kids in elementary school. My retirement age is 59 and I will get $3,183 monthly for my pension before taxes. The pension amount increases slightly every year. I also have been putting $400 monthly in 403B. I don’t have much yet. Now I do have about $200,000 in cash. I do not spend much other than the necessities, I just feel that as my kids grow older, more of my spending goes to take care of their needs, activities, etc.

    I feel that I am in a good position but still feel little nervous paying more toward to the principal. I put more so diligently and when I am to sell the house, the value decreases so much, is there any way I don’t even get what I paid off? My realtor did tell me the house I bought was around $150,000 ten years ago, right now would be the top price and I shouldn’t buy it for investment purpose which I am staying in this expensive area solely for my kids’ schooling and hoping to move out when they graduate. How much do I need for kids’ learning, activities, camps, colleges? I think that is my uncertainty I am nervous about.

    What would be my best move? Any advice will be greatly appreciated.

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