Should I Pay Off My Mortgage Early?

One of the most controversial subjects around the family finances is the decision to payoff the mortgage early.  Some say you should keep the mortgage around as long as possible, citing low interest rates and tax deductions as opportunities you are giving up by paying it off early.  Others enjoy the freedom that comes from no mortgage payment, and the huge amounts of disposable, monthly cash that comes along with being mortgage-debt free.

Life Without a Mortgage

Can you afford your mortage? I don’t mean can you afford your mortgage payment, I mean can you afford to even have a mortgage considering all you’re giving up to finance a home?  Mortgages are sort of a necessary evil nowadays, mostly because real estate is too expensive for the average person to pay for a house with cash, but in some cases because people buy more home than they can really afford.  In many cases people could nearly pay for a home in cash, or at least put 50% down, if they would settle for a smaller place.  Of course, some in extreme real estate markets would argue even this plan is impossible with modest homes starting in the $400,000 range.  I would agree.

Still, it is hard not to enjoy the idea of not owing anyone any money.  Imagine the freedom that comes with being debt free, including the house and all credit cards.  Let’s say for example that you are in your late 40′s, and your kid(s) are wrapping up college.  Instead of carrying out that thirty-year mortgage to the full term you worked to pay it off in twenty years.  Now you own a $200,000 paid-for home, and have no other debts. And if you really liked having a house payment, you could always refinance your mortgage.

At this stage in your life, could you seriously consider an early retirement?  Would a career change, or relocation now seem plausible?  Of course!  With no payments you simply have to earn enough to cover your basic needs such as food, lights, insurance, etc.  And assuming you had adequate savings there is nothing stopping you from going after the career you’ve always wanted, but could never afford.

But Couldn’t I Earn More in the Markets?

Maybe.  At the time of this writing the markets are doing so hot, so passing on extra mortgage payments to invest in a flat (or declining) market doesn’t yield the kind of returns you might expect in a bull market.  The flip side to that is that when markets are in a decline it is a good time to stock up on beaten up companies with solid fundamentals, so setting aside some money to invest does makes sense.

I try to look at things through a short-term-pain, long-term-gain filter.  I may have to miss out on a few hot investments now, but down the road I’ll be able to make huge contributions to retirement funds and taxable savings vehicles if I have no debt payments.  I’ll also be free to make more decisions about how to spend the remainder of my life energy, rather than continuing to work in a passionless career just to make a house payment.

Comments

  1. I have paid off my mortgage. It was a very liberating day, indeed. I listened to all the baloney talk about tax writeoffs, yada, yada, yada, and did it anyway. Once the mortgage is paid, you know you will always have a roof over your head, although you still have to pay taxes, etc…it’s still way easier to come up with the tax bills (when due) than the mortgage payment (monthly, without fail). I recommend, first pay off ALL high interest credit FIRST, then the mortgage, then anything else. It makes little sense having a large “emergency fund”, earning virtually no interest (the current market is actually losing you money by saving …i.e INFLATION) when you are paying large interest payments on your outstanding credit…it’s nonsense. Of course, you should always have a small emergency fund as a fail safe backup (I like 6 months of income as my cushion, but actually have about 2 years worth of cushion). The media and the government grind us down EVERYDAY to SPEND, SPEND, SPEND, but you MUST resist diligently. ALWAYS remember, no one is going to take better care of you, THAN YOU. The media or government will not be there at your most dire moments of need. Good Luck all.

  2. I’m a new reader, within the last two weeks, but from what I gather you seem to follow Dave Ramsey like ideas for debt reduction. My wife and I are currently eliminating non-mortgage debt (baby step 2). I like Ramseys plan (Total Money Makeover is an easy read). It gave me a great overall plan for how to handle money on a life long scale. He says once you’re debt free but the house, have a 3-6 month emergency fund, and are contributing 15% of gross income to retirement vehicles, then go crazy paying down the mortgage. I like his plan and find that it is working well for my wife and I.

    Thus far we have paid off both cars and half of her student loan, all since January 30th. It has been so motivating for us to watch the debts disappear. I look forward to owning my home free and clear.

  3. I’ve spent a lot of time debating this very issue lately. Dave Ramsey does make a valid point when he does the math and says, all this interest is NOT worth the tax deductions. It doesn’t add up.
    That being said, I’m not an extreme saver. I have a mortgage, a car loan (which I got at 0% interest. I expect to keep it much longer than the car loan and I couldn’t justify losing the interest my money was making to pay for the car outright. Dave would hate it, but it’s working for me.)

    Instead of paying a 0% loan off early, I’ve decided to pay more towards my 5.5% mortgage. I’ve figured out how much to add a month to make my 30 year mortgage now a 15 mortgage. It’ll be paid off by the time I am 50.

    I do have a 6 month emergency fund and no other debt and significant retirement savings.

    As a single Mom with a 3 year old (adopted, no child support) I have to consider cash flow too. I really want my daughter to have dance lessons, zoo memberships and other things. I tend to spend less on myself (like most parents I guess!)

    So I vote yes, but not to the detriment of some lifestyle choices. It is amazing how much you can save with an extra half payment each month.

  4. Now you own a $200,000 paid-for home, and have no other debts. At this stage in your life, could you seriously consider an early retirement? Would a career change, or relocation now seem plausible? Of course! With no payments you simply have to earn enough to cover your basic needs such as food, lights, insurance, etc.

    I don’t care what anyone says. Not having a mortgage debt would feel wonderful!

  5. when my husband and i were first married i owned a condo outright and it was GREAT not having a mortgage. then we got pregnant and bought a house and now we have credit card debt! our circumstances have changed — i’m home with our two kids and my photo business — but we are working to get back to the non-mortgage days. it’ll be a while, but i’d love to have no mortgage again.

  6. My husband and I are renters and aren’t looking to buy a home any time soon. But, when we do, we hope to put at least 10-20 percent down on a 15-year mortgage.

    We’ll try to pay it off early, but if life happens and we can’t, we’ll at least know that the house will be paid for by retirement.

  7. I’m working to pay down the mortgage is soon as I can. Should be paid off later this year. Plan to retire this year and the money that investments might make by not paying it off would not match the mortgage payment.

    Never understood the idea of wanting to pay interest just to get a fraction back in taxes(not that I like paying taxes).

    You’re right that not having those debt payments give you freedom to persue your dreams rather that just working for a paycheck. Also agree with Christofer, no one will take better care of me than me.

  8. We are also planning on paying off mortgage. We are paying half our monthly payment every 2 weeks, resulting in an extra payment every year. Also, once we have completed paying off all our other debts, I plan on sending even more. Plan is to have mortgage paid off within the next 10 years (instead of 29.5).

  9. We have paid off our mortgage. The mortgage deduction is not even worth considering. As for investments, I would rather have a gauranteed 6% return (a typical mortgage rate) than gamble on a possible 8 or 9 per cent return. But money considerations aside, it’s a great feeling to really own your own place. The sense of freedom is fantastic.

  10. We are working towards paying down our debt & I definitely would love to pay off the mortgage too. It would be so nice to not have any bills and to have the option of an early retirement!

  11. Absolutely 100% pay it off. Just think about the cash flow. Almost 100% of your take home pay to do exactly what you want with it. Imagine the freedom. You want to quite your job and pursue a dream, go ahead you wouldn’t have many bills to cover! People tend to overlook the freedom that comes when you are in total control not someone else.

    Once we move, I hope to have the house paid off in seven years. That is just my dream.

  12. Absolutely pay it off. We’ve paid off an extra 10 years on our 30-year mortgage (making it a 15 year), and are planning to have it all paid off in about 13 years total. At that point, we’ll be about four years from our first child going to college, so we’ll have some time to save harder for that goal. I periodically think we would be better off investing, but I think owning the house outright still sets us up better for the future than hoping for a bull market.

  13. I paid off my mortgage – it feels fantastic. This debate has been going on forever on various financial blogs, but you know, I’m really believing that those opposed to it are mostly financial planners of some sort because when we pay off our mortgage it helps us and not them. They want us to invest elsewhere so they can get some fees from us. They get nothing when we pay off our mortgages. And then beyond that, when I learned that Dr. Phil paid cash for his house in Beverly Hills, and so did Suze Orman, that was good enough for me to pay mine off too. They could have invested that $ elsewhere, but didn’t. And then, look at what happened to Ed McMahon? No regrets about paying off my mortgage. Absolutely none. Wish I would have/could have done it sooner.

  14. I would definitely pay it off early given the chance. Firstly, paying interest on something like a house adds up to such a significant amount and I believe that should be avoided where possible.
    The second reason, and the bigger of the two for me, is that being bound to that monthly payment can limit your options. It’s much easier to spend 3 months in the south of France to write a book if you don’t have to also pay a mortgage back home. It allows you more freedom with your finances and will be less stressful if something happens to go wrong.

  15. In the USA, you can “write off” mortgage interest against your income to reduce the total taxable income. That’s what people talk about when they say they’re keeping the mortgage for the tax benefits. But how beneficial is it really?

    Suppose Person A and Person B both pay $10,000 for mortgage interest a year. Both are in the 25% tax bracket income-wise, which means their adjusted gross income (AGI) before taxes (that is, with all their exemptions and deductions taken out) is between $32,551 and $78,850 for an unmarried person.

    Now suppose Person A’s AGI, with the mortgage and all, is $78,000. A will owe 25% federal income tax which is $19,500. If A pays off his or her mortgage, $10,000 of deductions go away, and A’s AGI becomes $88,000. Which puts A solidly in the 28% tax bracket, meaning A now owes $24,640. That’s a difference of $5140, which means that even though A pays more taxes than before, there’s still a net gain of $4860 in A’s pocket from interest alone.

    Now suppose B pays the same $10,000 in mortgage interest. B is earning an AGI of only $32,000 which would make B a poor risk for the kind of mortgage that would require payments of over $10k a year if it were a new loan. B will be in the 15% bracket, meaning that B owes 15% * $32,000 = $4800 in taxes. If B pays off the mortgage, B’s AGI goes to $42000, meaning B is now in the 25% bracket and owes $10,500 in taxes. $10,500 – $4800 = $5700 that B is ahead.

    So both A and B have come out ahead even though they jumped up a tax bracket as a result of paying off the mortgages. Neither would benefit from paying more money in interest than they would in taxes.

  16. My thoughts on paying off the mortgage early:

    1. It’s got to be a great feeling to be completely debt free and own a home. I’d gladly sacrifice some lost opportunity for that feeling.
    2. Dave Ramsey says, the savings from the interest deduction can also be had by giving the money to church or a charitable organization. If I feel I need the interest rate deduction after the house is paid for, I’ll just give the money to church.
    3. I also agree with Dave on saving 15% for retirement and then using the rest to knock out the house (assuming all the baby steps are being met).

    Saving for retirement is critical and you should start immediately. My wife and I continued to save 15% during the two years it took to become debt free and the extra two years it took to save up a 20% downpayment. We will also continue to put in 15% as we pay off our mortgage.

  17. I’m going to take a contrary position on this article. First I agree I would love to own my house free and clear, but I don’t think it is the best choice available and I am NOT willing to sacrifice my investments to do it. I don’t want to have a house and no cash!
    It’s very hard to catch up by investing more money later. Do you have the discipline to invest what you once paid for your mortgage? Even if you do, compounding interest makes early contributions worth a LOT more.
    The difference between 6% and 8% doesn’t seem huge, but it becomes huge compounding for 30 years! Investing $100,000 with 6% returns for 30 years will total $574,349. With an 8% return it is $1,006,265. That’s a difference of $431,916! I’m sure someone will argue that 8% returns are not guaranteed. That’s true but looking at long term averages for the stock market (i.e. S&P500) the worst 30 year period returned about 8% so I would contend that is a pretty conservative estimate.
    I would also argue that because the stock market is so beaten down now that it’s a great time to invest in stocks for the long term rather than investing in your mortgage.
    Inflation- if you believe inflation is going to be high then you should wait as long as you can to pay off your house with less valuable dollars. If the inflation rate goes higher than your mortgage rate then the bank is effectively paying YOU to carry the mortgage!
    If you really want to own your home sooner check out refinancing to shorter term loan. If you can lower your rate enough it can pay for itself. I recently refinanced to a 15 yr 5% loan from a 30yr 6.75% loan, I wish I had refinanced a few years ago when rates were even lower instead I was doing extra mortgage payments, and that was a huge mistake! Now I am NOT making extra mortgage payments- instead I’ve increased my retirement contributions!

    -Rick

  18. Your posts have been so timely lately! I was up in the middle of the night to get a glass of water. As I walked up our stairs to go back to bed, my first thought was, “Gosh, I wish I owned this house and not the bank….” I think just the sense of owning your home is worth any tax deduction, or better return on the stock market. Sharon

  19. The problem with the mortgage tax deduction is that you have to pay someone else money in order to take a deduction off your gross income for tax purposes. It isn’t like depreciation, where your loss is on paper, with a mortgage payment, your loss is real.

    I paid 50% down on my house, then paid it off 3 years later. That allowed me to retire at age 49. Now, all I have is real estate taxes, which are a deduction, and homeowners insurance to protect my investment.

    As Squeaky pointed out, even a jump in tax brackets from having fewer deductions still puts you ahead. I did the almost unthinkable; I paid off my mortgage and then let my income dip way low, so my taxes dropped accordingly.

    I am creating new revenue streams, but have basically taken two years off to enjoy life. My “more life, less work” program is going very well indeed.

    After all, what are we here for; to work, or to live and enjoy?

    The problem with staying in the rat race to accumulate gobs of wealth is the rats keep winning the race, and we end up giving Washington a good portion of the wealth we create.

    Clair

  20. @Squeaky – Tax brackets don’t quite work that way. You would only pay 28% on the amount that was over the 25% limit.

    @Rick – I don’t think many people are arguing retirement over paying of the mortgage. Fund your retirement accounts, generally 15% of you income is a good number and then put the rest on the house.

  21. I paid cash for this final house. $40,000 as-is, and it was bad, but structurally sound…(but the location was great – across the street from my grandkids) And cash $60,000 for the repairs/addition and remodel to make it ready for my retirement when that time comes. It was 560 st ft, it’s now 1010 sq ft. For $100,000 and a lot of personal labor, sweat, getting sawdusty and paint dripped, and living in a construction zone for 16 months, I have a $200,000 house all paid for. It is GREAT to know it is all mine and I sleep well at night knowing I am debt free and well set for my retirement.

    This allows me to work 24-32 hrs a week or less, instead of the 40 I used to work, and at a very low stress job. This gives me time with grandkids which I want more than money :) And time for my great veggie/fruit garden. Yes, having the house paid for let’s me live the life I want and the way I want it :) And it let’s me do it before retirement – I’m only 54. Sometime from 55-62 I will retire – when I chose – because having the house paid for gives me that choice :) Right now I’m too attached to company paid health insurance to quit, altho I could if I really wanted to.

    The last house I paid off in 10 years a 30 yr loan, and the dairy farm I paid off in 14 years a 30 yr loan. I am a firm believer in paying off early – But that’s my personal feeling – I don’t sleep well owing money on anything.

    In my low 20% tax bracket, the mortgage interest deduction would do me little good. Do I save money now instead of making a mortgage payment? You betcha – every other paycheck goes right into the investment account without ever hitting my regular checkbook.

  22. My parents paid off their home by the time they were 40-43. It’s the only own they have ever owned and they have added on a remodeled many times over. They also funded their retirement plans in full. Mom took an early retirement package at 49 and Dad worked until 59 (he wanted to – he could have retired much earlier). My mother constantly tells me they have more money now than they ever did before.
    They have several toys and travel alot. It looks pretty desirable.
    I am torn. I see the advantages to both sides of the coin. I have paid 1.5x my mortgage payment for many years. I am currently getting back to work and trying to decide do I save and invest or continue to pay down my mortgage? In a perfect world I would do both. I have a very low 30 year fixed and would actually benefit more from investing than paying off my mortgage early.
    So I think it is a personal choice and one that must be made on your tolerance for risk etc. However, I do encourage anyone that can pay 1 extra payment a year to do so; it can be broken down by paying a little or a lump sum – it does help you pay off early.

  23. I don’t care what anyone says. Not having a mortgage debt would feel wonderful!

    People who argue for not paying off the mortgage often cite numbers relating to the tax deduction. People who argue for paying off the mortgage often cite the feeling obtained from being debt-free. My view is that experiencing good feelings about saving translates into seeing good numbers over time.

    The reason why most people do not save effectively is that most people find more enjoyment in spending than in saving. It doesn’t have to be that way! Effective savers are people who find it fun to save. One of the most fun things in the world to save for is a mortgage-free life.

    People do what they enjoy doing. If we encourage people to pay off the mortgage, we will see more people saving. It’s a mistake to ignore the good feeling about saving that comes from paying off the mortgage when we assess pros and cons of this money decision. Those good feelings affect the bottom line in the long run.

    Rob

  24. Here’s a great compromise for an average homeowner: Send in one extra morgage payment per year, mark if for “Capital reduction,” and shave 7 years off an average 30-year loan.

  25. Great article!

    I’ve started down the path of paying off my mortgage early about 10 years ago. Sometime, in either May or December I’ll have my house paid off.

    It will depend on if I decide to put some money back in stocks I sold before they crashed or not. I got luck once, maybe I’ll get luck again ;^)

    It’s amazing the number of people that feel this way. I can’t wait for that feeling of being free from the primary chains of my indebtedness :)

    Thanks for the great quality of your blog! You’re one of my top 5 blogs.

  26. If I could pay off my mortgage I would do it in a second. Our monthly payments are ridiculous and I hate paying interest on anything. We try to put some extra money towards it every month but it is hard to do!

  27. I absolutely am working towards paying off my mortgage early. When we married three years ago, my wife and I had a -$3.44 cent balance each month after paying debts. We have been frugal and aggressive in paying down our debts and now are down to one school loan and the mortgage.

    At our current rate we will (Lord willing) pay off our mortgage in 7 years. I will be 44 with our (at least) two children and no debt. The discipline and doing without now will all be worth it to have that Sword of Damocles done away with!

  28. I am with everyone who says that paying off the mortgage early would be a good idea.

    We’re following the Dave Ramsey plan of first getting an emergency fund of $1000 (done), paying off debts (done), a 3-6 month emergency fund (done), and then paying 15% to retirement and then paying off the mortgage early.

    When we get back from our big vacation next month we’re buckling down and starting investing 15% and paying extra towards our mortgage. We want to be debt free – even without a mortgage!

  29. I agree with Suze Orman, if you’re over 45, you should go ahead and prepay the mortgage. You want to be heading toward retirement with the house paid off and you still have 20 years or so to invest in other things. Our original 30-year fixed rate mortgage was supposed to be paid off in 2023. Between prepaying and refinancing to a 15 year fixed rate mortgage, we will hopefully have it paid off within the next five years. It will be a great feeling!

  30. Let me tell you what a difference having the paid off mortgage and no debts means to me today…. (This really happened today…)

    (I’m over 50 and work 4 8hr days, my choice)…. Today, the boss asked me to please reconsider going back to 5 days a week, 8 hrs. (I’ve changed from 5 days to 4 days 10 months ago) I told him that I do not need to work 5 days a week, that my $1000/month take home is more than enough for me to enjoy life with. I was able to tell him that I really do NOT want to work 5 days – period! When he saw I really meant it, we discussed other options, and came up with a better plan involving the one day a week I work at a 2nd facility for the same company. By having someone already at that 2nd facility learn the job, I could then be at my regular job 4 days a week (which is what he wants) instead of the 3 I am presently there already.

    See what a difference not needing the extra money can make!!! (and having a nice boss who is very family oriented)

    I’ve got grandkids and a garden needing my attention a lot more than my job does :) No debt gives me the choice to live my days the way I want to – with my family!

  31. @TheHappyRock

    You’re right, I over-simplified. Yet even when I calculated 28% tax on person A’s whole income, it was still more profitable to pay off the mortgage. If the 28% were only due on the portion over the 25% limit, the tax hit would be even less and a person paying off the mortgage early would save even more.

  32. With the stock market crashes of recent weeks, my husband and I made the decision to borrow money from my 401 to pay off our home loan of 37K. some have said leave it in there for retirement…but I hated to see a loss of 2K to 10K every few days. With all the mortgage companies having trouble (we were with Countrywide)…we felt like the security to having the roof over our house paid for was better than wondering who might get our mortgage if Countrywide was bought out or went bankrupt.

    Since my 401K isn’t making money and the market doesn’t seem like it will be going anywhere soon; saving interest on the mortgage and paying the 401 back the interest on the loan for 5 years seems smart in these uncertain times!

  33. Do I get the same tax break, if I give 10K a year to a charity, VS. giving 10K a year in interest to a mortgage company?

  34. @Lucy: Yes, a deductible charitable contribution reduces your taxable income as does interest paid on a mortgage for your primary residence. But don’t just take my word for it. You should consult a tax professional to evaluate your specific circumstances. Thanks for submitting your question.

  35. I posted this math at another site but I did not receive any response. I did my math and this is what I came up with. With the unstable stock market and the “mortgage crises” I am all for paying your house off early. I do not think the history of the stock market is any indication of what the future holds. 1961-1981 S&P 500 is different than 1981-2001. I will invest in my 401k and let my employer pay the fees and help pad my potential losses by matching 50% of what I put in.

    Keep in mind that when you pay off your mortgage early you are saving interest and money that you save is not taxed compared to stocks where your gains are taxed. You also need to consider inflation on all of your investments.

    This is assuming paying off a $150,000 up front (apposed to 30 yr load @ 6 %) or investing $150,000 in the S&P 500 and assuming a 10% gain.

    Buying $150,000 home with a 6% mortgage:
    Interest savings: $173,757.28 (Reference: Amortization Table)
    1st years interest: 8,208.31 (no tax savings. My standard deduction for married 2007 is $12,000)
    Value of home in 30 years considering average national average of 6.5% increase in value: $442500
    Total value in 30 years: $442,500 $173,757.28 = $616,257.28

    S&P 500 investment of $150,000 assuming 10% gain in 30 years.
    2% broker fees – $3000
    $147,000 @ 10% interest in 30 years: $441,000
    15% capital gain tax – $66,150
    Interest total gain: $374,850
    Plus initial investment: $147,000
    Total: $521,850

  36. Matt j,
    Your calculations are very inacurate. The result of 10% interest (compounded once a year) on $147,000 over 30 years is $2,565,062.13 (includes original $147K). Even cutting the interest in half to 5% (still compounded yearly) totals $635,325.53.

    As for paying off a mortgage, every situation is unique. Not having to make that payment is a good feeling. However, a mortgage is the cheapest way (today) for most people to leverage a large sum of $. If you are young and have an income (are able to work), it is likely that you could do much better with your $ than paying off your house. If things don’t go your way, you still have time to recover. If you are on a fixed income or not able to work, it may be better to pay off your mortgage (after paying off everything else.)

  37. Matt J, the difference is that theoretical gains from your stock investment represent “compounding” interest where the mortgage interest you pay is not.

    You can loosely think of it like this:

    The 6% mortgage means you pay 6% of the original loan balance each year, as interest.

    The 10% annual gain in the S&P 500 means you make an extra 10% of the total each year and add it back into the account. Each year, the balance is 10% larger than the year before, so your “10% gain” gets larger every year.

    You need to calculate the S&P 500 investment returns using compounding to see the real result.

    $147k * (1.10)^30 = $2.565M

  38. Thanks for the correction Jack. I guess the calculations arn’t as “Black & White” as I thought they could be.

    Brian, you are incorrect in saying that the 6% mortgage means you pay 6% of the original loan each year. You pay 6% of the remaining balance each month. At least that’s true for a conventional loan.

    I may also need to factor in compound interest for the value of the home. I’m not sure, but if that is the case then the home would be worth closer to $1 million in 30 years. We also need to factor in the 172,757.28 interest you would save. Any wise investor would invest this X amount of dollars they saved each month and invest it in something, whether it be the stock market or even a low interest savings account. Either one would have value and increase your investment. This would be difficult for me to calculate since it’s not a lump sum, its a different amount each month and you would need to reference the amortization table. This is similar to the way compound interest works. The money you are saving is the “compounded interest” if you invest it somewhere else that pays interest.

    To be a little more realistic with the S&P 500 investment you can compare it to 1979 and 2009 (30 years). In 1979 the S&P 500 was roughly worth 100, in 2009 the S&P 500 is roughly worth 900. Your $150,000 invested in 1979 would be worth $1,350,000 minus 15% capital gain tax (202,500)= $1,147,500.

    Any constructive criticism is welcome. I don’t have the answers, i’m trying to figure this all out like the rest of you.

    -Matt j (not Matt)

  39. My Wife and I are ready to pull the trigger on our morgage 108 Thousand Dollars.We have listened to all the hupla about needing the interest write off. With 10 months of emergency fund in our account after paying off our mortgage and only recieving just over 2% in a money market it makes sense to us. I want to comment on what seems to be the main issue of getting your tax write-off at the end of the year. Here is what I have learned and I am not sure how many people would be in our same shoes. We worry that we will have to pay in anyway and why should we pay the interest that we lost from paying off our mortgage When we can donate that money to a fund (church) or Womens shelter or where ever and give it to some one or something charity that we deeply care for. The finger is on the trigger!

  40. Sensed but not explicitly expressed in some of these comments is the concept of utility theory.
    The “keep your mortgage and invest the difference” crowd correctly assesses the expected value of the stock market as higher, but they miss the concept that not all dollars are the same.

    Suppose you pull into a one horse town in the dead of night really needing a hot shower and a warm bed and the only motel in town charges $60 a night. This is great, since $60 is exactly what you have – problem solved.

    NOW suppose that as you get out of your car you are approached by someone you know to be an honest man with a proposition for you. This man likes to gamble, and he has a 6-sided die in his pocket. He bets you $20 that, if you roll the die, you will get a 1 or 2. This is an excellent bet for you: you have a (4/6) chance {you roll 3, 4, 5, or 6} of winning $20, and only a (2/6) chance (roll 1 or 2} of losing $20. This bet has a positive expected value of $6.67, and in a casino you would gladly play this game over and over again. BUT, you only have the $60 you need for your room in your pocket. If you lose, you’re spending the night in your car.

    The simple fact is that for a lot of people, falling X dollars short of having enough
    is MORE BAD than
    having X dollars more than enough is GOOD.

    This is how all well-designed insurance policies are sold – the expected value of the loss is ALWAYS less than the premiums – it has to be to pay claims, administrative expenses, commissions, and make a profit for the company. This is also why a football team with a 5 point lead with 3 minutes left in the game will play a loose “prevent” defense – giving up a 3 point field goal is ok if they still have more points (enough) at the end of the game, and better than playing a more optimal defense with a higher chance of yielding a touchdown.

    As someone once wrote, if you can’t swim, the fact that the average depth of a lake is 3 feet won’t help you when you’re in the part that’s 9 feet deep.

    Stock market, economy, housing price, and employment-wise, we’re in the 9 foot deep part of things now. I read daily about those poor folks struggling with the sudden drop-off, and I bet there are some quiet people with paid off mortgages floating calm and easy.

  41. Would you rather have the mortgage deduction deal or be able to sleep well at night knowing that your house is paid for and you don’t have to worry about where you will be living/sleeping?

    NOTHING beats that feeling of knowing no matter what happens, that house is mine, debt-free, til I die… for minimal property taxes.

  42. Pedro, what do you do on day #2?
    Marci, “minimal property taxes” is a dangerous assumption. I have personally known many people that once they are on a fixed income or find themselves suddenly without an income and own their house (no mortgage) are either forced to sell or have lost it all together due to ever increasing taxes. Over less than 20 years my property taxes have increased from $6K to over $20K. Unfortunately, I also know people who have recently lost their pension and most of their 401K. The moral of the story is there are no guarantees. I still assert that it’s best to leverage and take risk early in life and reduce risk later in life. Just seems like a missed opportunity to pay off a mortgage early when you are young.

  43. Jack – Minimal property taxes means just that. Minimal. My property taxes are $556/year now. It is a tiny old home for my retirement – not a McMansion. At 1010 sq ft on a 55×105 lot. This is a small rural NW Oregon farming area, and my house is shaken every morning by the log trucks going to the mill at the end of my road. (my alarm clock – works well!) My taxes are going to go up the 3% per year allowed, tops. There will be no major increase in the value of my tiny old (but comfortable) home, and therefore, I am faily sure that the property taxes will probably never hit $2000 year in my lifetime (I’m 54)….It’s a fairly safe bet.

    It’s part of my retirement planning – buy a house that will not increase much in value therefore the property taxes will not increase, and live in it mortgage free til I die. Right now my bare bones budget including my property taxes and insurances is under $400/month… I can live and eat on that. It will be “Enough.” My 401K, Ira’s, Pension, and personal savings are mostly in CD’s and government bonds – very conservative but very safe unless the whole government falls apart, and if that happens I’ll still be better off than most. … Also as a result of my conservative investing, on paper my assets have held their worth and I am not screaming Mercy! like so many others are in about lost values.

    I agree there are no guarantees, but I have done what I can to minimize expenses, live on very little, and play the odds with inflation and property taxes. One just has to figure out a personal plan of attack for retirement, and go for it. No one can read the future :)

  44. Marci:

    I think you have it right – just right for you, and that’s the most important thing. Your situation sounds wonderful. I like your deliberate attitude about planning and taking care of yourself.

    Wouldn’t it be nice if most people were more self-reliant and had a plan for life?

    Good fortune to you,

    Clair

  45. Jack,
    Ya knucklehead!

    I was trying to illustrate the difference between maximizing expected value (leverage to the hilt and arbritrage the difference between mortgage interest rate return) and maximizing expected utility.

    People who understand about half as much about finance as they think they do will get stuck on the arbitrage. If it works out, they’re sophisticated financial geniuses, but if it doesn’t, they could end up ruined with little chance of recovery.

  46. My house will be paid off on 17Feb! For those who told me to invenst and not pay it off I suggest you check out those investments now. There was a time in America people paid for what they had; they didn’t borrow for everything on credit cards or… On 6Mar will be debt free totally(finish off the credit card after the house, so-finished). Hey should I buy some of that stock stuff now that the price is better and I can afford it?

  47. Don:

    Congratulations! That’s fantastic. As long as you’ll have a nice cash cushion in the bank after you have everything paid off, that will have you sitting just right.

    You’re going to love the idea of not writing a mortagage payment each month. And, you’ll find that the taxes and insurance are plenty to pay for all by themselves.

    Don’t be surprised if there is not a great rush of excitement when the day comes. It never happened for me because it was done very deliverately – just like you. Something like this where you plan for it can take a while to sink in, but it sure is a nice feeling.

    Onward toward the next investment challenge!

    Good fortune to you,

    Clair

  48. My wife and I purchased some ag property (just under 12 acres) in Sacramento, CA, a few years ago (in addition to the home we currently reside in). The Sacramento Area Flood Control Agency (SAFCA) has told us, and others with property near the river, that they will be doing levee work and will need to purchase some or all of our property. Long story short, I am wondering how we should use that money.

    I have thought about paying off our home mortgage… here is our scenario: our mortgage is about $375,000, and we have about $80K in the bank… we are expecting about $300K (net) from the land purchase. We will be able to pay off our home if we wanted to, but I’m not sure that’s the best decision financially (though I bet it would feel great!).

    We’re 35 and both have decent jobs (about $90K per year each… though I’m considering quitting my job from too much stress), and our kids are still quite young (6, 5, and 3). I’d be concerned about the tax liability if we had no write-offs. I wonder if we would be better off investing in something, but I’m not a stocks kind of guy and risk of losing money would worry me. We’re quite fairly conservative. Anyway, I’ll continue reading comments on this site and make a decision when the time comes… thanks to all.

  49. Paul:

    If you like where you’re at, then I’d consider pouring the proceeds of the land sale (minus the tax on income) into the home you’re in, and then watch your equity build rapidly each month with much more of your payment going towards ownership instead of interest to another party.

    Then that will put you within striking distance of being mortgage free. Perhaps you’ll want to stick it out at your stressful job for another couple of years while you steadily put more towards the house and get it paid for in two years. Then, you’ll have a sense of comfort to go looking for something that is less stressful without being concerned that it pays less as well.

    Your children should be plenty of a deduction from a tax standpoint, and you’ll still have the real estate tax as well.

    Hang onto the money you have in the bank. Don’t tap into that cushion. That should be your emergency fund.

    Clair

  50. We paid off our mortgage last month. It was SO great not having to mail in that payment on April first. None of our other bills are due on the first of the month, so I can be leisurely about paying bills now.

    We were already investing in retirement and had no other debt, so we’re just going to hoard the cash for awhile till we have a full year of living expenses saved. In this economy, we feel we should be prepared for anything (or try to be).

    We had always said we’d reward ourselves with something really big (like a BIG vacation or a spiffy new car) when the mortgage was finally gone. But just having it gone was enough. It’s not like we didn’t do any living while we made payments, we’ve just never been extravagant. Life is made up of so much more than what we can spend money on.

  51. Is there any criteria or terms that should be negotiated with the lender to payoff the mortgage? (ie. escrow funds, cash back, etc).

    What type of questions do you ask them to get the best return on your mortgage payoff??

  52. Pay off the mortgage. The tax deduction is bunk and it is like spending a dollar to save a quarter. Once the mortgage is paid off, saving for retirement is easy. Max retirement and pay off the mortgage at the same time if you can. Never buy a house just for the mortgage deduction.

  53. Go as long as you can on your mortgage. 30-year fixed rate is king. The time value of money tells us that a dollar today is worth much more than a dollar 20 years from now. You are better off starting saving and investing early instead of prepaying your mortgage. I’m doing a series on home ownership and mortgages which address this topic in detail.
    http://wp.me/pZTwu-4Q

  54. Don’t be a smuck! Pay off your mortgate and don’t listen to all those talking head A-holes telling you to invest in the stock market or other fools games that are rigged against the common investor.

    Remember, they don’t build 1,000 billion dollar hotels in Vegas if people are “winnters” do they and they don’t give multi-million dollar bonus’s to stock brokers and bankers with investors “winning” now do they?

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