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Let’s chat a little bit about mortgages, shall we? Made popular in the U.S. in the depression days (“depression”, not “recession”), mortgages are a fairly recent concept for Americans. Before that, YOU ACTUALLY HAD TO HAVE THE MONEY TO BUY A HOME! WOW! No, seriously. You didn’t own a home unless you could buy it in full. Crazy, right? But mortgages were introduced to help out wanna-be homeowners get into a house without having the full amount right away. Though, these were much more conservative than out modern mortgages. You were typically required to pay 50% down, sometimes more, and the terms were as long as 5 years.
Today, the typical term is the 30-year mortgage, which gets refinanced often, and repaid slowly. Mortgages are seen as the norm, and if you don’t have one, you’re weird. According to the Federal Reserve, the outstanding mortgage debt in the U.S. was about $82 Billion back in 1950. Today? Around $13+ Trillion. Sounds financially savvy, right? Now, I know there are reasons to keep your mortgage, and plenty of reason to kill your mortgage, but which ones are better in the end? Let’s look at the options:
Reasons To Keep Your Mortgage
- For the awesome tax breaks! When you buy a home, it comes loaded with a sweet package of tax breaks to keep more money away from the government and put more money into the hands of those oh-so-generous bankers. You can currently deduct the interest paid on your mortgage, your real estate taxes, points paid on the mortgage, mortgage insurance paid and even more if you have a small business.
- Low interest rate can be beaten by your investments. This is the classic argument against paying down your mortgage early. In today’s current low-interest-rate environment, you can lock in a 3.25% mortgage and put all your extra money into index funds and RIDE THE STOCK MARKET WAVE! If you can rake in more than your mortgage rate in annual returns on your investments, then you win!
- Keep a high credit score. Keeping your largest debt account in good standing is sure to keep the credit police at bay and help keep your credit score high enough to continue to borrow MILLIONS!
Reasons To Pay Off Your Mortgage Early
- Tax deductions are a bad investment. The answer to #1 from above. Tax breaks aren’t all what they’re cracked up to be.
- You are wasting money on interest. Sure, you may be able to beat your interest rate with your investments, but do remember, mortgage loans are amortized, and a lot of times they front load the interest. Investing your money will *hopefully* beat your interest rate return, but paying down your mortgage is a guaranteed return. It’s a sure bet.
- You don’t own your home. When you have a mortgage, it’s because someone else owns your home besides you. Sure, you can paint the walls, landscape the place and call it your “home”, but while you are still paying the bank every month, they know who’s really in charge. The only way to truly own your home is to pay it off, burn your mortgage and never borrow again.
- Debt sucks. Nothing feels worse than owing someone money. Well, you know, besides everything that does feel worse. Either way, debt sucks and getting out of it as fast as possible will get you to freedom sooner!
So, Which One Is Better?
Of course, the controversy on the decision to pay off the mortgage or not. The “keep your mortgage forever and ever” crowd will tell you that putting all your money into your house is a risky investment. Real estate prices are too volatile to sink all of your money into it. Plus, with your super-low interest rate, you’re losing out on money that is invested in the stock market. The “Kill your mortgage with a machete” crowd will tell you that you should pay down your mortgage with every extra penny you can find. Scrimp, save, and aggressively pay down the principal to slash years and even decades off your mortgage, and save tens of thousands in interest. So, who’s right?
Both of them.
Here’s What We Are Doing
Paying off your mortgage early is a good idea, and investing instead of paying off your mortgage is good idea. So we’re going to split it right down the middle. Here’s our current financial goals and future plan for our mortgage payoff:
- Pay off the student loans. I set a goal to have these paid off by the end of the year, but had to put it on hold because I don’t feel comfortable with the size of our Emergency Fund at the moment. Once that’s in place, we’ll pay these off with the quickness!
- Increase our investments. I’m paying in 6% to get the max employer match in my work’s 401k plan, and that’s it. I’d love to ramp that up to at least 15% of my gross pay, with the extra 9% going into our Roth IRA, which should max it out.
- Start a college fund. I WILL start this very soon (probably this month), but won’t be contributing much until I increase my income. I would like to put away $200 a month in this.
- Pay down the mortgage.
Once we get to step 4 (and you’ll notice these look very similar to Dave Ramsey’s baby steps, and they are), we are going to take any and ALL extra monies and split them between pre-tax investments and mortgage principal. I want the best of both worlds. I can get my “better gains” by investing in the stock market in funds and other securities that will hopefully net me a better gain than my 3.25% mortgage. I can also start paying down the mortgage early, savings myself interest in the long run, building equity faster, and ultimately taking years off the life of my mortgage (sounds kinda evil, huh? Shortening the life span of my debt. Mwuahahahaha!).
We will be diversified in our investments. Half into the stock market and half into real estate. Sounds like a balanced portfolio to me 🙂
Let’s Throw a Wrench Into The Mix
We have MIP (mortgage insurance) on our FHA loan. This sucks. To get rid of it, we need to pay our mortgage principal down 22%. So, before I split between investing and mortgage payoff, I am going to throw ALL extra money at the mortgage until that stupid insurance is gone. Then I’ll truly start my “step 4”. I’m excited for this plan. Sure, it might be a few years, but I am optimistic that I can work hard at these goals and hopefully exceed my expectations. I haven’t set dates on these yet because my future income is uncertain, but I wanted to set a priority list so my money knows where to go when I get there.
Comments: What do you think of my evil master plan? Should I pay off my mortgage early? Or should I leave it and invest? What are YOU going to do with your mortgage? Anyone just going to skip all this crap and buy a house with cash moneyz?!
75 thoughts on “Should I Pay Off My Mortgage Early?”
Since our only debt is our house and one car, we are paying extra on our mortgage principle every month…even though we only plan to be in the house for 5 or 6 years. The housing market in our area is pretty sweet and with they cosmetic DIY improvements we’ve been doing, I’m hoping to make a little money on the house when we sell.
You going to use the equity for another down payment, or buy your next house cash? Also, get rid of that car debt! (Unless it’s 0%) 🙂
I think we’ll probably start paying our mortgage off early soon. We haven’t really made any extra payments but it’s always on my radar that we should be doing that. I’ve been focused on saving and investing but early mortgage payoff is an important part of it too.
Think of it as another investment and you’re just diversifying your portfolio 😉
When we buy our next house, we definitely want to pay it off early since that will be our only debt then. 🙂
You gunna opt for a 15-year mortgage?
Hey It’s me again the resident stalker. Yes totally agree with throwing every penny and the baby in the bath tub at the mortgage to get rid of the PMI. I also have PMI( insert embarassed face here). My evil master plan is to
1. Pay off credit card debt accumulated when the hubby wasnt working.
2.Pay off student loans. I just started paying biweekly payments of the monthly amount( hoping to through the credit cards $$ at it once those are paid off)
3. Increase income( new job in the works) this will go towards maxing 401K to the almighty 17.5%.Continue living at todays income, KWIM.
4. Pay off mortgage( need to get rid of the PMI), currently paying extra $100 a month towrads it. Once number one goal is done, I can start heavy lifting number 4.
5. Emergency saving( no where close to where I need it so focuing on that too.)
Diggin’ the goals. Do you have any timelines on them yet? Putting a goal date really helps kick the motivation up another notch. I’d totally put a date on mine if I could. Also, my only recommendation is to move #5 up a little higher, as all of your plans will come to a screeching halt if you have an emergency without an adequate emergency fund 🙂
And I LOVE the idea of directing increases in income toward your 401k. If you don’t see the extra income, it isn’t there to be spent 🙂
Once again – EXCELLENT insight/comment!
Hey, thanks Jim!
We have no plans to accelerate our mortgage payoff for now. Maybe later, but now? No, and here’s why:
We refinanced to a 15-year at 2.87%. We have more than 20% equity, and no PMI.
We qualified for a sweet first-time homebuyer’s tax credit called the Mortgage Credit Certificate. We will get a 20% tax CREDIT each year on the interest paid. We can also deduct our mortgage interest the regular way with itemizing, which we are able to do thanks to charitable contributions and other things bumping us way over the standard deduction. For now.
All told, we will pay $24k in interest (this is after our refinance…I think we paid around $5-6k in the year before we refi’ed).
I’m also taking that MCC credit into consideration, reducing that interest amount, but I haven’t factored in what itemizing will do since it’s harder for me to predict that far ahead.
Right now, our priorities are maxing out both IRAs (done) and being aggressive with our kids’ 529s, general savings (for our next vehicle, as example), and also a 401k if that becomes available to us later.
We may want to save up and pay it off in full at some point, but for now I can’t really convince myself why it would be worth paying off early.
Just checking my math here: You went from paying $6k in interest to $24k? Did you pull cash out when you refinanced? Just trying to figure it out.
With your low interest rate, sounds like you can maximize investing to beat the guaranteed return on the mortgage payoff, but why not throw a little at it? Think of it as diversification 🙂
Also, super jelly of that credit. Is it a state thing?
Noo…I wasn’t clear. we paid like $5500 in mortgage interest in 1 year’s time, for 2012. We refinanced in late 2012, and so from here on out we’ll pay something like $3k year, decreasing each year.
For the ENTIRE 15 years of the loan, it will be roughly $24k (and that’s not counting that year before the refinance). Hope that makes sense!
The MCC is a federal tax credit that you apply for in your state. It’s not widely publicized, and oddly not even all realtors know about it. It’s for first-time homebuyers who meet income requirements. We had to have a household income of something like less than $79k/year (ish? I forget).
That was the income level for a family of 3+ people in our county. All I know is, we made under that. We keep the credit, even though our income has gone up.
And ya know…I just popped in my spreadsheet what it would do if we threw an extra $100/month at the principal. We’d pay it off in 159 months instead of 180, and save $2,800 or so in interest. Hmm. Something to think about anyways. Thanks!
It’s just diversification. Putting a little away in a physical commodity instead of only securities. Definitely something to think about 🙂
p.s. I LOVE amortization spreadsheets 🙂
Ahh, makes more sense. Sorry, I get confused easily with my pea-sized brain 🙂
Wow, wish I knew about that. Though we were a family of two, so probably wouldn’t have qualified.
And as for your situation Jacob — I think it makes total sense to obliterate that pesky PMI as soon as you can. You’ll need to pay for an appraisal and they make it really annoying, but whaddya do.
We have an FHA, so no appraisal required, but I hear the paperwork and review process to get it removed is a PAIN!!
The interest vs. credit score is the biggest trade-off, for me at least. Your plan looks very solid – good luck!
As in you don’t want to pay off your mortgage because your credit score might go down?
I like your plan. I would actually take on a very similar plan when we buy a house. After our retirement accounts are maxed out, I would split the leftover money between after tax investments, mortgage early pay off, cash on hand, and fun money. I would still like to have cash on hand just in case an opportunity happens or something drastic occurs. It’s always good to be prepared.
Fun money is always a good investment. Better returns than any market, IMHO! Cash on hand for opportunities is also an awesome idea. I just took advantage of that recently 🙂
Good article. I think your plan looks good. I am hoping to get our debt down to a more reasonable level and then start hitting the mortgage a little harder. Even if it is just an extra $50-100/mo.
Every little bit counts. Especially when it ALL goes toward principal 🙂
I have to pay PMI as well at $300 a month :-/ I plan on aggressively paying off my mortgage enough to get rid of it and then going back to saving more. They are changing the laws and starting in June you will have to pay PMI for the life of the loan. Glad I bought right before that changed!
I heard that on the radio. Glad we ReFi’d when we did! My brother-in-law is looking at buying soon, and will probably get hit with that. Though he plans to pay his house off in 5 years.
Something else to consider for the not paying off your mortgage list. In theory as inflation comes along you get at least cost of living raises from your employer, however the mortgage amount stays the same. So every dollar paid toward the mortgage 10 years from now is worth less than a dollar paid in year 1. Of course, having any kind of debt is still a burden because as you mentioned it technically isn’t your house until you pay off the mortgage.
My plan once we purchase a house is to pay it off before I retire. I should hit FI pretty early, but I’m still going to have some form of work just not what I’m currently doing. I don’t think it’ll be paid off once I quit my current job but it’ll definitely be gone before I call it quits from a full-time job for good.
Good call. With the possibility of major inflation coming up, the debt owed with be worth less down the road. I want to pay it off before 40 (13 years away), but that means some major income increases need to happen in like the next 5 years.
While yes a dollar paid today will be worth less than a dollar paid in 10 years. Though consider everyone who forewent paying off their mortgage in the housing bubble, and kept the equity in their home at a minimum with this idea. Suddenly housing prices fall, and now most of them who want to get out of their homes can not sell them without coming up with a large amount of cash to sort of buy their way out of their home, so they can sell it and move somewhere else.
Of course I don’t own a home, but I am debt phobic, and unless things drastically change in my life soon, more than they are already expected too, I can honestly imagine myself doing something crazy like buying my home in cash, or at least doing something crazy like 50-90% down.
You got this backwards, dude. A dollar in the future is worth less.
I think you know how I feel about this! We are prepaying our mortgage like crazy people and I haven’t regretted a single cent! =)
You guys are on the fast track to freedom. Kinda jelly of you, not gunna lie 🙂
I think you and I are working on a similar plan or at least will be. We are saving for a down payment now for next year, but when we get into that house, we plan on working on paying it down quickly, but only after everything else if funded.
I think that’s a great plan. Mostly because it is also the same as mine 😉
I like your plan. We paid off our higher-interest car loan, maxed out our Roth IRA’s every year, and built up an emergency fund before we started paying down our mortgage. Then we got another mortgage and that felt like too much debt, so we paid off the rent house ASAP. It’s a good feeling but now I want our current mortgage dead too…
Nice work. A mortgage-free rental is like the holy grail of real estate investing! Hope to be there in 10 years 🙂
I love your plan! We opted to pay an upfront PMI payment on our new loan, so we will be PMI free. I’m a big fan of paying off mortgages early despite what the naysayers say!
PMI is so flipping annoying. Seriously. I’ll be excited when that leech is gone. And yes, paying off your mortgage early is never a bad thing.
No I think you should pay off my mortgage early how about that haha! I’m not going to say what you are doing is right or wrong, it’s up to you. I’ve blogged about it a couple of times as you know. We will pay our mortgage in full and we should be free and clear at least by June this year. We’ve invested along the way but what we do know is the interest rate is low. What we don’t know is IF we will make money in the stock market and IF the interest rates will stay low. I’d rather have the roof over my head then risk it all to the stock market. For those reasons I’d balance it, which we did. Cheers.. and if you re-consider..I’ll let you pay it off.. just say the word! Cheers Jacob.
LoL, sure, I’ll pay off your mortgage once you’re done with it 😉
And I still can’t believe you’ll be done in a few months! That has to feel AMAZING!!!!
Funny you should post about this today; paying off our house is exactly what I’d planned to do with that life insurance money we talked about yesterday.
So reading this got me thinkin’. I did a little checking and a little calculating on the USAA mortgage refi site … and found that I am about $60K underwater, and any refis with USAA would entail $60+K cash up front. *So* not gonna happen right now.
Do you think there might be other refi options for me? I’m JUST looking into this now … most of this is TOTALLY Greek to me … so sorry if these are dumb questions.
Sure. Hit me up over email on my contact page and I can give you my broker’s information. He might have something available for you. I didn’t know I could ReFi (underwater also) until I chatted with him.
I think it is nice to see someone saying it isn’t either or… you can indeed do both! Good job on finding what works best for you guys!
Thanks Lance. It’s a few years off, but I’m pretty excited to make this happen.
I think there’s always the emotional aspect of paying off a mortgage early. That often a more emotional victory than a financial one.
Your plan makes a lot of sense!
Thanks Alex. And yea, I love emotional victories! So even if I can get a greater return everytime, I’m still going to pay down the mortgage while investing, because I would LOVE to get rid of that payment forever.
I think you got a good plan Jacob. Pay off all your other debts before you worry about your mortgage. I’m doing pretty much the same thing except I have a little credit card debt to deal with.
Nice, Chris! Yea, those pesky loans are still hanging around, but I am SO ready for them to be gone. Then it’s on to the fun stuff!
Our only debt is our mortgage (at 4.125%). We’re planning to buy an investment property (an inexpensive one) by my folks place up in Maine in the next year or so. Then hopefully the rent from the investment property (at least a 2 unit) will help us pay down the our mortgage and the investment property’s mortgage as quickly as possible. I know some folks would think this plan sounds dangerous (my mother), but it works for us.
Investment properties can be GREAT! Not only do you RARELY pay tax on those (because of depreciation and such), but if you can get positive cash flow going, you can have it pay for itself and some of your house as well. Definitely interested in how this turns out!
I’m definitely in the pay it off early camp! I’ve been paying mine down aggressively. I have a 5/1 ARM at 2.5%. In the 9 months since I bought my place, I’ve paid down 15% of the mortgage, so I think I’m doing pretty well so far!. My priorities for now are:
1) Max out the 401(k), including getting the full match
2) Max out my HSA, with my employer’s help (!)
3) Max out my Roth IRA, even through the back door
4) $10,000 of Series I Savings Bonds
5) Pay down the mortgage with whatever is left
All found money gets directed at these priorities as well, which includes income tax refunds (I try to keep them low), credit card rewards, savings on my checking account, budget leftovers, etc.
Whoa, that’s an aggressive pay down schedule. if you can do it in 5 years or less, I say make it happen!!! And I like your plan. For the “back door” Roth, are you talking about rolling it over?
We are certainly going to pay off the mortgage early, but also put money into retirement as well. I think that’s the way to go. Every debt we’ve paid off so far has been like pink, strawberry frosting, and I bet the mortgage will be like the whole cake. While it is exciting to look at investment account balances rising, it’s just not the same feeling, maybe more like a bran muffin? I like cake more any day!
I LOVE CAKE!!!
Can you talk a bit more about MIP? We have it too, and I’m trying to figure how much principal we need to pay off before we can lose the MIP!
MIP is on an FHA mortgage. The only way to get rid of it is to pay down the principal on your mortgage by 22%. For example, if you have a $100,000 mortgage, you need to pay it down until your balance is only $78,000, then reach out to your mortgage company to get it dropped off the payment. If you don’t pay any extra on your mortgage, this usually takes 7 years.
PMI on a non-FHA mortgage has the same requirement, but you need to get an appraisal to make sure you have 22% equity.
Wow I love your plan! It sounds so down to earth and common sense. When I get a mortgage (a long time from now) I plan on paying it off pretty aggressively. I hate owing money, even if it’s on something that has value like a residence.
Yup! I don’t like having any debt, so hopefully I can kill the mortgage in 10 – 15 years, and building up my investments at the same time. I have a plan in place, just need to income to support it 🙂
Great progress and a solid plan. I like your approach of splitting since you really want to take advantage of the time you have until retirement. Compounding is key.
Props for getting ahead of the game!
Thanks Joe! Mostly, I just have an income problem, but the plan is there. Hoping to kill our Student Loans ASAP and get on with the fun savings!
Debt is definitely something nobody wants to live with. However if you think that keeping your loan will help you keep track of your finances then by all means!
It’s more of a balanced approach to investing than a tracking thing.
There is no such thing as “front-loading” interest. I have seen that term being thrown around a lot in the Personal Finance sphere, but it simply is incorrect. All loans are amortized unless it is a balloon payment type loan etc. that includes car loans, student loans, personal loans. It appears to be front loaded interest because it is so much as the front end in dollar amounts, but if you take the interest rate/100 to get it into decimal format and then divide that number by 12 to get your monthly interest rate and multiply that by your current principal you will get your monthly interest.
Gary, thanks for clarifying. Agreed. Sorry for throwing that term around, still working on figuring it out myself. So do you still need to keep the mortgage around for the full term to out-earn through investing? Or is it the same percentage no matter what?
There are merits to both ways of thinking. I paid off 2 houses in full, our first house, which was a 50% down payment on our much larger more comfortable house. We eventually paid that off, along with every penny of all other debt. I think that people who say don’t pay off your mortgage have never experienced the feeling of not owing a penny to anyone, and suddenly being able to save money at a monster rate. It is HUGE how different you feel about everything. I think that debt has a tendency to multiply like cancer, such that mortgage debt still gives you the feeling of being in debt, and if you clear it, it tends to give you a simpler view of your finances. I didn’t realize that debt had a stress to it until it was all gone.
That said, I can see the validity of other arguments. But I want to make the point that emotions count for a large part of personal finance, and are not to be dismissed too easily. If you ask people who have paid off their mortgage if they would like to take out a line of credit against it so that they can invest that low interest money, very few would jump at that chance. Getting everything all paid off is just a very purifying experience. My $0.02 worth.
That said, Mortgage interest is not deductible in Canada, nor is anything else related to houses tax deductible in Canada where I live, unless it is a rental property. It all boils down to how comfortable you are with debt.
Thanks for your experience and insight, Garry. Paying off the mortgage WILL feel great, I have no doubt. And yes, people do get too comfortable with debt, that’s obvious in our culture. I think my plan is mostly so i don’t miss out on the returns and tax advantages of invest, but at the same time pay down the mortgage to get the elephant off my back.
Hoping to be where you are in 15 years or less 🙂
You have a good strategy, keep it up. Remember, saving and investing is the easiest thing in the world – just don’t buy stuff. I used to buy stuff, but now I’m reformed so that I can join the gravy train too.
Reminds me of the SNL skit. “Don’t buy stuff you cannot afford”. LoL
Hi Jacob, I am definitely in the do not pay off group. I wrote an article of my own about it. I do think you should pay down to get rid of the PMI though.
One comment said that people who kept equity low were hurt when market crashed because they couldn’t sell. I don’t think this is quite true. Sure someone with more equity has freedom to sell but it is a horrible time to sell and they are most likely going to want to hold on for a better market. If they sell during that time, they are going to burn much of that equity they built up anyway.
Also, I would always recommend a 30-yr over a 15-yr. I have a 15-yr on my primary residence and I regret it. With a 30, it makes my debt payments lower and I have more flexibility. You can always pay faster and make it a 15-yr loan.
The link to my article is http://themadrealworld.com/do-not-pay-down-mortgage/
Sorry, correct link is http://themadrealworld.com/should-i-pay-off-my-mortgage/
I think you and I are on the EXACT same page. We paid off all of our debt in 2011 and have been investing 15% into retirement and throwing everything we can at the house (yes, we are Dave Ramsey alumni). The problem is it takes a LONG time compared to the smaller consumer debts, which gives you even more time to second guess yourself. For us, the bottom line is we may being losing money by putting less in the market to throw more at the house or even vice-versa – however what is happening for sure is we are slowly eliminating RISK. You’ve heard this shocking statistic before p, but 100% of the homes that were foreclosed on had a mortgage. Mortgage + life happens + time + my boss is a jerk and wants to lay everyone off = RISK
I feel like my head says take my extra pennies and invest and my heart says pay off that mortgage! Periodically I give into my heart and throw some money at the mortgage, but reason rears its annoying head and then I stop that and invest, invest, invest.
I’m a widowed mom of two boys, 14 and 11, but smart financially. I have about 11 years left on my mortgage, but I do invest. I’m now at the point with my passive investments that my rate of return over the last 3-1/2 years is more than my gross income – crazy!! (In an excellent way.) My mortgage will be paid off right around the time my younger son graduates from college (assuming he goes), so I’ll be set up well for retirement when I have an empty nest.
I come from a family of VERY poor money managers but somehow overcame that tendency – it can be done!