Some people debate whether it is a good idea to pay off your mortgage early. I don’t see why it is a debate at all. Sure, we can conjure up some numbers that make it look smart to stay in debt, but staying in debt is never a good idea.
Benefits of Keeping a Mortgage
Before I go off on my anti-debt tangent, let’s look at the benefits of having a mortgage. There are a few reasons to keep a mortgage that can make the “pro-debt” camp look smart.
Investing Your Money Elsewhere
Right now, we have historically low mortgage rates. If you have a good credit score, you can find a 15 year fixed rate mortgage loan for less than 3%. If you are paying for money at 3% and you can invest for more than 3%, you are making money by having a mortgage.
Beating the spread is easily possible, but not guaranteed and without risk. Current savings account rates are less than 1%. To beat the 3% threshold, you need to invest in riskier places like peer-to-peer lending, stocks, or bonds.
If you have a high mortgage payment every month, you probably qualify for itemized deductions. The standard deduction in 2012 is $5,950 for a single adult or $11,900 for a married family filing jointly. If you pay more than a few thousand a year for your mortgage and you file single, you probably qualify for an interest deduction.
When you get your year end 1098 from your bank, you can deduct the interest paid from your income, which results in a tax deduction at your tax rate. For most single people, that is 15%-25% of you interest back in tax savings.
If you have a long term installment loan that you pay on time, you are doing a lot to build your credit score. Having a great credit score is very valuable if you are going to be applying for any new credit in the near future. If you are going to buy a new home with a mortgage, car with a loan, or apply for a new credit card, your credit score helps determine your interest rate, or if you get the loan at all.
However, as long as you have a high credit score, over about 720, you will always get the best rates. There is no reason to have a “perfect” credit score. You only need a good one, and that is only if you want new credit. If you own your home outright, you probably don’t need any new loans anyway.
Benefits of Paying Off Your Mortgage
The benefits of paying off your mortgage far outweigh the potential upsides of staying in debt. Here are a few of my favorite reasons to pay off the mortgage early.
Is there any better feeling that being debt free? Most of us don’t know that feeling. Many people never will. However, it is completely possible. Imagine not owing anything? No credit card payments, no car payments, no student loan payments, and no mortgage.
That is the order of priority for me. I have never been in credit card debt, I paid off my car, I paid off my student loans, and my mortgage is next.
Investments may provide bigger returns than your mortgage costs, but your financial health, just like a business, is most reliant on your cash flow.
Your ability to save and invest is a factor of your cash in and out the door each month. If you don’t have to pay rent or a mortgage, you can save hundreds or thousands of dollars each month for better uses, like saving for retirement or new investments.
While you can’t put a dollar value on this, not having to worry about paying a mortgage every month takes a huge load off of your shoulders. Ever since you left your parent’s house, you have had to pay for rent or a mortgage. Now you don’t. You own your home outright. That is pretty cool.
What do you think? Is it better to keep the mortgage or pay it off as fast as possible? Please share your thoughts and strategy in the comments.
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22 thoughts on “Should You Pay Off Your Mortgage Early?”
This is something that we’ve been thinking about. After we’re done with my student loans, we’re not sure if we want to start tackling the mortgage like crazy, or just start saving more aggressively. Not sure yet.
I am having a tough time deciding how to balance the savings vs. mortgage. Now that I have a good savings cushion, the mortgage is tempting. I set a specific savings goal and once I hit that, all extra will go to the mortgage.
I don’t know about paying it off as fast as possible but I sure don’t want it for more then 10-15yrs. We could use the extra money to invest in P2P, stocks, and other assets. After a while though I would feel like its just not worth it and would be a burden. I don’t want to have to think about mortgage in retirement. Mortgage and insurance are too big expenses I really don’t want to having later in life.
The sooner it is paid off, the sooner you get “free rent.” I think of it as an investment into future cash flow.
I guess when you look at it that way and you don’t end up paying 3x’s the amount of the loan.
I posted on this just earlier this week and came to the opposite conclusion! I’m more convinced by the numbers than by feelings, I guess – though we don’t own a house now so I don’t know how it will feel to have a mortgage. I think I’d rather come out with the (probable) higher net worth than have the feeling of owning my home outright longer.
The cash flow argument is actually in favor of having a longer mortgage so I’m not sure why you put that as a pro for the shorter mortgage. You probably can’t make up for the lost time of lower investments while you pay off the mortgage faster.
Besides, even when you own your home outright there are still ongoing costs – property taxes, maintenance/upgrades, and HOA fees – so you won’t ever feel like housing is free.
All that said, your life is your life and my life is my life and I think paying down a mortgage faster is a reasonable (although I wouldn’t say necessarily best) option.
My cash flow option is more of a long-term real estate strategy that I don’t go into here. I am already saving up a down payment for a second home. If I have this one paid off, I can get roughly $1,500 per month in rent (current market price for 2 bedroom in my neighborhood) that could be used toward new real estate or other investments. Rinse and repeat.
On the other hand, I could keep the mortgage on this one and only get a $500-$1,000 per month cash flow from the condo which I use toward a future opportunity.
At the end of the day, the biggest reason I want to have it paid off is for the future monthly cash flow. I would rather invest more up front to have more freedom down the road.
I’m hoping to pay off my mortgage before my 30 years is up. That being said, I’m in now real rush!
If you set a specific goal, I bet you can hit it. If you don’t, it will take long. Plan out a strategy and automate to make it happen.
I’m considering refinancing but at the same time think it’d be smart to keep my mortgage for a long time because of inflation. I’ll have to figure out which I want to do before I take action.
If you are going to keep it a long time, refinancing is most likely a good idea. Even if you do pay it off very early, depending on the fees and interest rates, it could still make sense.
Inflation is definitely an important thought when looking at paying for something 10, 20, or even 30 years away. I hadn’t taken that into account. Thanks for the idea.
I’m paying my mortgage off as fast as possible – for all the reasons you cite above, and one more – at my original interest rate of 4.25%, 30 year mortgage, my total interest paid on my loan would be about $178,000. I’m refinancing down to 3.25% and doing a new 30 year term – the interest on that loan would be $100,000.
I’m paying extra every month, and my goal is to pay it off in 12 years – saving me over $60,000 in interest on the loan.
When I go to sell my house in the (distant) future, the chance of my house being worth $40k more than I paid for it, is much more likely than it being worth $100k or $178k more than I paid for it. I’d like to be able to sell my house and get back as much as I paid for it, if not a bit more.
That is a huge savings! $60,000 in interest is not chump change. That is some serious savings and a very big win.
Nice wrap up of both options…. I’m currently focusing on savings, but once I hit my targeted number, I plan to start putting a planned amount toward my mortgage. (or refinance to a shorter term depending on rates at the time)
I have looked at refinancing, but getting a better deal would save me at most 1%, and the fees might outweigh the savings depending on how fast I pay it off. Lots of complicated math and lifestyle forecasting go into a refi.
We need cash on hand right now, so we are just paying the amount due on our mortgages right now. But we’re are putting a little aside each month and will make a big principal payment next year to pay off the first house completely so we can start on the new mortgage…
I am debating saving my tax refund and bonus or just putting it all toward my mortgage. Looks like you have a solid plan Crystal.
I was able to pay my mortgage off about 14 years ago. It really gives you quite a peace of mind. Thanks for the article I featured it on the Frugal News Review Podcast episode 21.
Thanks for sharing the article Mike. Did you have a 30 year fixed and pay it off early? Any strategy that we can use?
I moved into the house in 1987. I had a 30 year fixed loan. In 1990 I decided I wanted to pay off the house. First, I paid off several credit cards. I used the extra money that I didn’t have to pay on the credit cards toward the principal of my loan. I ran numerous amortization schedules to see how quickly I could pay off the mortgage. This gave me a tangible goal and a reasonable time period that I could reach it. I put most of my extra cash and any pay raises or bonus’s I received toward the mortgage. I was blessed to have a good paying job and good health during this time period. In 1999 the mortgage was paid.
12 years is pretty good! Congrats Mike!
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