Stick With Stocks Or Pay Off The Mortgage?

One of the most frequent questions I see popping up these days is whether or not we should continue to invest in stocks, or pay off our mortgages early? There are many factors driving the urgency behind this question. The down economy, and endless talks of deficit spending, national debt, etc, seem to have awakened people from their personal debt slumber. Folks are finally making serious dents in their personal debt, and I think that is a good thing.

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Photo by sacks08

But what about mortgages? Real estate has been a pretty touchy subject as of late. Many people now find themselves underwater – owing more on their mortgage balance than their home is worth. Those not currently in a home have taken a much more cautious approach to home buying than just a couple years ago, when anyone who could scrape up closing costs and had a half-decent FICO score were jumping into jumbo mortgages they could ill-afford.

Now that we have seen real estate is not a sure thing when it comes to appreciation, and that the market can basically go nowhere in an entire decade, we are questioning some long-held assumptions about the world of finance. Maybe it doesn’t make since to keep a mortgage. Maybe paying off a mortgage early, and living debt free, is the ultimate hedge against what the future might hold. Maybe renting isn’t such a bad deal after all.

Using Investment Money to Pay Off Mortgage

I was recently asked by a friend if they should pay off their mortgage using $120k in taxable investment accounts. I asked him the opposite of that question. “If you owned your home free and clear would you take out a mortgage to put $120k in the stock market?” Naturally, he replied, “Of course not!” Same thing.

That question gets right to the heart of the matter: risk. Our society seems to be going through a pull back thanks in large part to the pains we’ve experienced after watching each other go on a credit binge. It goes beyond being frugal. People are downright scared. And for good reason.

Unemployment is still hovering around double digits (real unemployment is much higher). I read a new article every day about the coming bust in commercial real estate. The student loan program appears to be under strain (and might get overhauled along with the healthcare system). And will there be a double dip to this recession? There is a lot of uncertainty out there.

I often advise people to make paying off their mortgage a priority, once other financial goals such as retirement investing and saving for college are in place.  However, I’m going to go a step further. I believe, over the next decade, we are going to see some unprecedented shifts in the way our economy operates – some good, some bad.

I think those who are completely debt free will be the most insulated from the negative effects of the changes, and have the most opportunity to be successful. That doesn’t mean you’re doomed if you have a mortgage (at least I hope not, considering I still have one myself), but it does mean that finding a way to pay off your mortgage should be near the top of your financial priorities.

What About the Opportunity Costs Lost By Not Investing in the Market?

Well, assuming market values appreciate in the coming decade, there is a cost to paying off your mortgage rather than investing in stocks. However, if I asked you if you’d rather owe nothing on your home or have $150,000 in savings in ten years, which would you pick?

Not having a mortgage could mean living comfortably on $1,000 a month less (or more, depending on your home loan). With $150,000 in stocks, you are doing pretty good, but certainly no where near financial independence. And you’d still have that big mortgage payment to contend with.

In a perfect world we could do both: pay off the mortgage early and invest in the stock market. Unfortunately, most of us don’t have that many dollars to play with. So, the ideal compromise may be to save for retirement, save for college for your children, and then pay off the mortgage early, rather than invest in taxable investments outside of retirement accounts.

This is the plan I will adopt, with the exception of adding to my dividend stock portfolio over time in an effort to boost passive income.

*This post was included in the Carnival of Personal Finance #249 at Amateur Asset Allocator

Comments

  1. I would put the money into paying down the mortgage.

    We have tried Buy-and-Hold (ignoring valuations when buying stocks) four times in U.S. history. It has brought on an economic crisis each time. If stocks perform in the future anything at all as they have always performed in the past, we will be seeing another price drop of about 60 percent over the next five years or so. That’s going to be a big hit for those who have already experienced significant losses.

    The other side of the story is that stocks are going to offer an amazing long-term value proposition in the early years of the post-Buy-and-Hold Era. Pay down your mortgage today and you will have more money available to invest in stocks when they are again selling at reasonable prices.

    Someone has to pay for the recklessness of recent decades. But it doesn’t have to be you.

    Rob

  2. Great article. I just read Rich Dad Robert Kiyosaki’s “Conspiracy of the Rich”, which I highly recommend as it talks about investing in stocks and about mortgages.

  3. I could pay off my house in 5 years, by which time we will be moving, or I could save for retirement. Honestly, I plan to save for retirement, however I bought a duplex in which the renters pay for the mortgage, and property taxes and I only have to pay for repairs and insurance. I am paying less into owning my own home then if I rented however I am behind on my retirement saving by 3 years and won’t be able to up my retirement savings for another 2. Because of that I plan to focus on retirement saving and let the house take the full 30 years to pay off.

  4. As you mention, paying off a mortgage and moving into the realm of debt freedom affords one the ability to live on very little income. THAT is true freedom.

    My wife and I live in the suburbs but would rather live on rural land. The plan going forward is to continue investing in aggressive debt reduction until we can sell our home for what we owe. After that we plan to rent in a rural setting far below our means, save for land of our own, then pay cash when the time is right to buy.

    This approach may sound romantic and unrealistic to some… but we have done the math. Not only is it doable, mathematically it’s the best financial decision we have ever made.

    This puts us years away from home ownership, but keeps us continually out of debt… and to us that spells TRUE financial freedom!

  5. I would pay off the mortgage. I think it flows more along the lines of frugal simplicity. I had $100 thousand invested before the most recent boondoggle, and it dropped into the 60s. My house did not lose 40% of its value, and even if it did, I can still live in it.

    If I own my house, I am forever free of the $1000 (or more) a month, and only need to keep the place up and pay my taxes. That takes a huge burden off how much I have to earn to survive, and it pretty much guarantees that the bank won’t be coming for me should the bottom fall out of the economy. Someday $1000 might only buy a loaf of bread, but at least I could starve in my own home…

  6. Can’t you do both? Wouldn’t doing both give you the most flexibility in these troubled times?
    Of course I wouldn’t recommend the stock market, there has to be a better way. That and it depends on what you consider debt free. Why not be debt free with a mortgage by having more than enough liquid assets to pay off that mortgage at any time.
    Would that let you have your cake and eat it too?

  7. Can you live on $400-$500 per month? You can if you are debt free and the mortgage is paid off.
    That’s property tax and car/house insurance, gas in the tank, basic utilities, meds, and the few groceries I need outside of the garden, fishing, clamming, and hunting. That’s my bare bones budget.

    That’s my hedge against inflation – My insulation all this time from whatever is going on in the rest of the world – it has NOT affected my standard of living at all.

    Think what I can do with all the rest of my income…invest, invest, invest. Spoil the grandkids :) lol

    Without that mortgage payment over your head, your money has a lot more freedom! I highly recommend it!

    • Marci357,

      You’re cheating, becuase you are not including what must be set aside for major house and car maintenance and repairs, and eventual car replacement.

      You are also ignoring the opportunity cost of the time you spend on your house and garden, etc. and the opportunity cost of your house.

      I think if you took these into account, you’ll find that your cost is quite a bit higher than you think…

  8. The trouble with opportunity costs is that they’re impossible to predict and quantify in advance. It’s really easy to look back and say: “if only I’d done this instead of that, I’d be $100k richer”. Unfortunately, strategies that worked in the past aren’t always useful in the present or the future, because they depend on conditions outside our control that may not be favorable.

    For example, during the long run-up that the US stock markets had after the Great Depression, people who invested instead of holding a cash position tended to do better assuming they didn’t pick the wrong stock and get wiped out. But the economic and demographic conditions that produced that long run-up aren’t in effect today. That doesn’t mean there aren’t other good opportunities out there: there’s bound to be some hot emerging market, new sector, or new technology. But some of these opportunities will be outright disasters, and the vast majority will simply be duds. We won’t be able to tell what’s “best” until well after the fact.

  9. The problem with paying extra money into a mortgage is that it is essentially stuck there unless you sell your home or take out a loan.

    I think it is better (provided you can be disciplined with the money) to conservatively invest or just save the money that you would’ve paid to the mortgage company in a separate account and then write a big check if you’d like later on to wipe it out.

    The reason is simple, let’s say you pay extra on the mortgage and have paid it 75% off. Then a major emergency occurs such as a medical crisis or prolonged job loss. If you need extra money, you can’t get to it if it is in the hands of the mortgage company unless you sell the house. Selling a house can take months (unless you take a big loss) and that could be a big problem if you need a lot of cash soon.

    I’d rather have the liquidity and access to the money if I need it. I agree that people shouldn’t time the market and invest this money aggressively, but dumping it into cement isn’t good either.

  10. Michael – Once the house is totally paid off, if you open up a Home Equity Line of Credit, then up to 80% of the home accessed value is instantly available to you – without selling the house. The crux is tho – open up the HELOC well before you need it – then it’s just a phone call or a click on the computer away from your access :)

    I like having the house in a “liquid” form now – just in case I ever need it. I have the advantage of no mortgage, and instant liquidity in the home’s equity.

  11. My mortgage is paid off. I did a little of both at the same time. I viewed the mortgage as a 5.375% fixed return on my investment to match the rate I was paying to the bank…… and then invested the other portion for an 8-12% return in stocks and bonds.

    The danger of paying off the house is that you can leave yourself with no cash cushion and no margin for error when the unexpected happens. I’d like to see people have somewhere around a six month cash reserve built up before they start paying off their house.

    Times are pretty tough for twenty-somethings right now– companies lay people off at the drop of hat, long-term employment seems to be a thing of the past, downward mobility is just as common as upward mobility, the national debt and deficits are a disgrace that will suck away wealth, and the political environment in DC has never been worse. A big cash cushion is a good thing.

  12. I’m in a similar situation.

    My goal is to pay off my mortgage by the time I’m 30 or about 5 years from now. However, I still plan to max out Roth IRA and put 5% (max for me because it’s family business) into the 401K.

    Our #1 goal, it to be mortgage free by the time we reach 30 so we can afford to live off of one income.

  13. I wouldn’t have taken money out of my stock account to pay off my mortgage… But neither would I take money out of my home equity to invest!

    Trust me, I’ve though about both paths, but concluded to do neither, and heres why:

    1.) Having diversification in your finances is very wise! It’s the not having all your eggs in one basket logic!

    2.) My home is more than a financial asset, it’s part of my family’s identity and part of their life stability!

    3.) Investment will alway have a gambling aspect, but it’s that risk that help people become wealthy, so it has it own value in life stability…

    I’ve also played around with the idea of taking equity out of my house to buy other real estate… And so far, I haven’t done it (yet) :)

  14. Fantastic comments from all! The exchange between Michael and Marci357 was particularly good, because I have similar concerns as Michael.

    If interest rates creep up, I’d like to just save my extra mortgage payments in cash-based accounts (CDs, money-markets, etc.) and pay off the mortgage in one fell swoop when the time was right. Between now and then, if a major emergency hit, I’d have plenty of cash to cover it. The spread between my mortgage (5.125%) and high-interest savings used to be pretty low, meaning I wasn’t losing much with this strategy.

    However, interest rates on deposits these days stink, so even our low mortgage rate of 5.125% is significantly higher than the rate I can get on guaranteed deposits. Perhaps a split plan is the most effective given the current market conditions.

  15. I see that making this decision now or going forward I would do it differently than when I bought a house in 1981.We paid it off early due to converting a 30yr to 15 yr mortgage.We have now been paid off almost 5yrs NEVER have regretted it because even with 1 minimium wage job we can cover taxes, basic expenses etc.However seeing what the others have brought up – concerns in this day and age revolve around having enough liquid assets to keep you safe I would make different choices maybe.I can tell you I can not think of a better feeling than being mortgage free except being totally debt free which we are headed for by 12/31/2010 the last will be car debt.But we did not have education debt or health care debt as some unfortunate people are burdened with.I totally agree with planning for emergencies, then retirement and any other concerns unique to each person.Staying healthy costs less in the long run.I used to say that education and a home were good debt now I feel no debt is the only option for a safe free life.Just my opinion at the half way point!

  16. Great discussion here!

    I agree with Frugal Dad that the exchange between Michael and Marci357 is particularly good. The discussion shows both ends of the stick. In this case, I share Michael’s opinion.

    When your home is paid off, there are only 2 ways to access the cash: sell or refinance. Sure, you can refinance, but then you are at the mercy of the bank to prove to them that you really don’t need the money. Banks will only lend you money on your ability to pay them back. If you are disabled or unemployed, you can’t access the equity.
    It’s still risky if you accelerate payments to pay off your home. Even if you have paid 15 years ahead, the next month’s payment is always due. This is why I view paying off your home as probably the riskiest financial strategy.

    Opportunity costs here are huge. The “equity” in your home earns a 0% rate of return. Your home appreciates in value, but it does not earn you a rate of return.

    Banks have fooled us in trying to pay off our homes. When you study why, it’s because they love cashflow. People pay extra thousands each year when on average, they end up moving in 5 years. Then the banks get all their money back.

    If you wish to own your home, do it in 1 payment. Put any extra payment money in a safe, liquid, interest earning account. Then, stroke one check. However, I say, keep that money working for you and take advantage of the tax benefit of keeping a mortgage. Plus, you end up paying with inflated dollars.

    Ahh…one of the few times inflation works to your benefit…

  17. I have been struggling with this paradigm for two years now and decided on the mortgage even though I don’t have one yet. I want it all planned out before I sign and I may not move into the home I buy.

    There are many flavors of mortgages out there and to choose the right one could support my efforts for a pre-payment strategy. Automatically choosing Fixed Rate Mortgage is like walking into a Baskin Robbbins and asking for Vanilla without even looking at the myriad of other flavors.

    For those who are not committed to the biggest commitment of their lives yet, I would suggest you examine IO-ARMs and IO-Fixed rate mortgages. They allow you to pay only the interest on a loan leaving the principle untouched within the first 10 years. It’s to help those who do not have consistent incomes, at least that is the way it is traditionally used.

    It *seems* to me that an IO mortgage could be used in way to benefit the pre-payment strategy. In an “IO” mortgage you make principle payments when you can and the loan reamortizes or “re-casts” somewhat often as I explained. That could mean I could drop a principle payment ahead of schedule and see my monthly payments drop on the next re-cast (which could be monthly or yearly). I don’t have to wait 15 to 30 years to see the benefits of my payments drop. There are details that need to be worked out like interest rate and prepayment penalties before I can prove to myself that this will work for me, but I am very much into planning every detail ahead of signing a mortgage. It’s worth exploring because it maximizes flexibility and once I hit 40% equity I take out a HELOC to give me emergency liquidity if need be.

    For now I think I will choose to continue to rent from a friend of mine who is charging me so low it’s almost lunacy to bail on the rental for the headaches of a home for myself. My expenses are so low overall (but my quality of life is relatively high) that I’m putting away over $1200 per week. I will likely buy a condo/single family/duplex as an investment property while I continue to rent for the next few years at least. I’m even painting/upgrading the apartment I live in now so it’s more than livable but still is incredibly cheap. People think I’m crazy for investing in an apartment that is not mine but it’s MY HOME where I hang my hat and the money saved in the low rent in one year is paying for the improvements. I get the quality of place with a much higher rent for my current low rent I pay now and I don’t have to pay moving fees to get that upgrade. I hate moving.

    By the way, I would be careful about buying a Rich Dad Robert Kiyosaki book, audio, game, etc. The Author will get you into the mind set by being highly motivating but his financial advice is usually flawed or incomplete. To each his own though.

  18. We don’t have to live in a perfect world to do both.

    My husband and I are solidly middle class and are simultaneously paying off our mortgage in 11 years total and investing (our 401k & Roth IRA are in target date mutual funds and our Scottrade account is invested in individual high dividend stocks).

    No, I would not cash out our stocks to pay off our mortgage. Yes, I want to be debt free, but not at the expense of our opportunity funds. Diversity is good…especially in money. I say try to do both.

    We’re shaving 4 years off our mortgage by paying $160 more every month on our 15 year loan. We invest $200 a month into Scottrade. We’re not talking about huge money here, but we would not have been able to more than bounce back from the stock crash if we had sold everything and put it into the house (we’re up 10-15% overall in everything…that’s better than shaving another year off a 5.375% mortgage).

  19. I wold not cash out my stocks, no way. I may take some of the invesmtent money and pay off a nice chunk of the mortgage, but I would want to know a lot more specifics before I did so. Paying off a mortgage can also be looked at as an investment because the money you will save not paying off that additional interest is a profit. If you shave off five of mortgage payments due to a decent lump sump payment, you would be saving yourself thousands of dollars. The question is, could you have made MORE than the amount of money you saved by paying off the mortgage sooner, by investing in the stock market?

  20. I have to agree that mortgage is the best way to go. Stocks could depreciate as easily as appreciate, so in a time of need you might STILL not have enough available to cover the money you need. Meanwhile, you’ve lost any potential gains from cashing out. So really what’s the point?

    I don’t know if I’d go exclusively mortgage in lieu of stocks (if you feel comfortable with them, which I don’t) but I’d make it my primary focus, for sure.

    Even if your house isn’t worth what you put into it, you still have a place to live. Kind of like stocks, you only lose money on a house when you sell. Unlike stocks, you have shelter. That tips the balance, in my opinion.

  21. @Bernard – there are more than 2 ways to obtain some of the equity out of your home…. not just selling or refinancing…. A Home Equity Line of Credit (HELOC) can be opened ahead of time – BEFORE you need it…. you don’t have to take anything out when you open it – just have the paperwork done and the money available IF AND ONLY IF you need it – a phone all away or three or four clicks away if I chose to do it online… If you need $1000 then only take $1000 – It’s not an all or nothing thing. Right now my HELOC would be at 4.99% should I chose to use it. I am getting 6% or more on most of my investments. Should I need cash, the HELOC loan would be the way to go for me… PLUS the HELOC loan interest is deductible as it is a home loan.

    The house is totally paid off… I do not have to pay rent nor mortgage…. think how much that saves per month that can be put to better uses.(In my case, retirement savings)

    Plus, if I were to lose my job, it’s no big deal – I can survive on very little, less than the investment interest and dividends I have coming in. It’s nice not to have to worry about making that house payment if I were out of work. No matter HOW BAD the economy were to get, I’d still have a paid for roof over my head. I sleep well knowing that.

    That being said, remember to diversify also. I would not have paid cash for my house if I had needed to use ALL the liquid assets I had… I have other assets – so to me, paying cash for the house, and cash for the repairs/remodel, were the only way that made financial sense, in MY situation.

    It’s an individual matter and it has to fit each person’s financial situation. For me, one phone call to move money and the HELOC money is in place, at less interest than I’d loose if I used my other investments, and at deductible interest also. In my case, no mortgage and a HELOC just is a win win situation.

  22. You all must live in some amazingly low tax areas. Our mortgage has been gone for five years. Our taxes and insurance are around $450 per month. Bare bones for us is about $1500 (which is SS once we get there).We are planning for much more than that- but it is a good bottom point. They cannot forclose on a house they don’t own- and bankruptcy cannot take your home.

    Matt- you have a good plan. We did it and never looked back. We have enough land that if something happens- our grown children could easily build houses on it.
    Michael- You can always take out a mortgage if things got bad.
    We never stopped our investing outside of the mortgage. We simply double paid mortgage (and all bonuses went to mortgage) and continually paid investments. With the house paid off we now save all of that money. We always had a fair amount in the bank for crisis (like flying out of our overseas work when the war came our way).
    BTW – last year was the first time we, together, made six figures…so you don’t have to be rich to fulfill your goals- just careful.

  23. We’re a single income family making ‘double-up payments’ on our mortgage (extra $200/mos at this point)with three months living expenses in the bank. We used our HELOC to buy an investment property – kind of scary. As we pay down our mortgage, more $ becomes available on our HELOC; not that I want to touch it. So, in our own way, we’re trying to do both: pay off the mortgage early but also invest in other areas. I REALLY want our home paid off, though. To me that is huge peace of mind and will allow us to lower living expenses at least in time for my husband’s retirement.

  24. Jan, congratulations on having your mortgage paid off I think that is great. Unfortunately, what you said to Michael is completely wrong. You can only take out a mortgage with your bank’s permission. This goes the same for a HELOC. Unfortunately in this day and age I am seeing more and more people get there lines of credit taken away or at least trimmed back (HELOCs included). That’s the dilemma. If things go bad, no matter how much extra you pay or how much you prepay the bank might look at you and just say ‘no’. You lose your job, no income, no mortgage, no refi, no nothing. What house will a bank foreclose on faster one that has a $25,000 mortgage or one with a $250,000 mortgage? No matter what the house is worth I can tell you they will make more of off a $25,000 mortgage and that will be the easy business decision.

  25. @Evolution – I would only recommend the HELOC (as I have) if one has the assets to pay off the HELOC at the drop of a hat. For me it makes more sense to take money out of the HELOC at 4.99% than to mess up my investments that are making more than 4.99.

    But…if the HELOC needed to be paid off immediately, I would cash in some investments and pay off the HELOC. The secret in ALL this investment stuff is to work one side against the other, use the bank’s money (not my own altho I could cuz I have it), and do what works best for you and makes the MOST financial sense, everything included. Never get in over your head :)

    I would NEVER risk my house via a HELOC if I did not have liquid funds to cover the HELOC if things got bad. Therein lies the system that works for me…. it obviously will not work for everyone. The house has to be mortgage free, the credit has to be good enough to obtain a HELOC, and the investments have to be there to cover the HELOC should the economy go south. :)

  26. @marci:

    I love what you are doing. It sounds like you have things set up properly. I’m a huge fan of the concept of using other people’s money, in your case the banks. Where else can you get access to hundreds of thousands of dollars with low, tax favored interest?

    My concern is for most people they believe what jan said “You can always take out a mortgage if things got bad.” Which is just completely not true.

  27. I am doing both as well, paying down the mortgage and investing. When I make an extra principal payment I am saving the interest associated with that payment.

    For example:
    $100K Mortgage @ 5.5% APR
    Mortgage payment: $568
    Interest portion: $400
    Principle portion: $168, in the 8th year

    When I pay an extra $168 towards the principle, I just saved (made) $400, because I cut a whole payment off the amortization schedule. Try to get that kind of return in the market. Obviously as the mortgage is paid down, the money saved goes down as well. So it pays more to make extra payments early in the life of the loan. Here is a link to a great amortization schedule for excel that I use to see how much interest I have saved.

    http://www.vertex42.com/ExcelTemplates/loan-amortization-schedule.html

    Here is an example of the difference between paying every extra every month as opposed to saving up to pay off in one payment:

    Mortgage: $100K
    Term 360 Months
    Interest: 5.5% APR
    Payment: $568

    If I saved $100 per month and waited to pay it down with one check, then it would take me 300 months to have enough money to pay off the remaining principal. I would save about $4,300 in interest.

    If I paid that extra $100 every month towards the principal then the mortgage would be paid off in 253 months and I would save $35,000 in interest. Also I would have the mortgage paid off 4 years earlier than the above method. Also I don’t have to pay any taxes on the interest I saved, as I would on the interest made when stashing the money away to make the single payment.

  28. When one has a paid off house they need less income to live. I invested in mutual funds and sold when there were gains in order to apply them to the mortgage. Buy a house you can live in that isn’t too expensive. We were house payment free at 40 and retired at 50. Now I can choose to invest in mutual funds with the extra funds I am not putting into a mortgage.

  29. My wife and I recently decided that we’re going to knock out our mortgage over the next 3.2 years. We’re stopping all Roth contributions to do this, but sticking with 401(k) b/c of the match. I’m keeping track of not only the missed IRA contrubtions, but also the missed growth and dividends we would have received. The next project after the mortgage payoff will be to make our retirement savings as close to ‘as it would have been’ as possible.

    I agree with Michael’s point (in #8), though we do have a home eqity line (zero balance) available, too. We decided not to actually pay on the mortgage directly. We’ll put the money in a credit union account (at 2.02%) then pay the mortgage off when we have the cash. This way, if some huge emergency comes up we’re not equity rich and cash poor.

    We decided on this method b/c our mortgage is a low fixed rate, but the home equity line is a higher rate. An emergency could be covered by either, but reducing savings rather than taking out the home equity line will mean extending payment on the low rate rather than adding payments on a potentially higher rate.

    After tax adjusting both the interest income and mortgage interest expense, holding the money until the end will cost us only enough interest to push the payoff off one month.

    I’ll be keeping my eye on online savings rates, too. We’re getting 2.02% in the credit union, so it won’t take much of an increase in rates to almost completely offset the 4.375% rate we have on or mortgage.

  30. I am aggressively paying off the mortgage for multiple reasons. The first is the peace of mind that comes with the elimination of debt and the related financial obligations. The second is an alternative form of “investing” which is in my mind means simply taking steps to ensure that I have adequate cash or cash flow for future needs. We have four children, the oldest of whom is a freshman in high school. We’ve been saving for college, but with the cost of higher education ridiculously high and climbing, we remain concerned about our ability to pay it.

    Our goal has been to pay off the mortgage by the time our oldest is a freshman in college. Then we have the peace of mind of a paid-off house and significantly higher cash flow to help fund education costs. Maybe we can even pay the full amount of college out of pocket and roll existing savings to the younger children. Then we’d see the added benefit of a reduction in our monthly savings for our younger children.

    All dreams of course, and life can certainly throw curve-balls that change everything. Certainly seems like a nice plan for us though.

  31. One issue I’ve not seen addressed is whether it makes sense to pay off a mortgage after it is more than half paid down. Since you pay progressively less interest as the loan matures, wouldn’t you save progressively less interest by paying off the mortgage in its later stages? I’m in the 8th year of a 15 year 5% fixed rate mortgage. When I tally up the remaining interest payment, it appears that the interest rate from this point forward is less than 2.5%, which I can get in a five year CD. Am I missing something here?

    • If it’s a 5% fixed rate mortgage, you are still paying 5% on the money still owed….. not 2.5. The interest is on what is still owed, not what the original amount was (which isn’t what you still owe)

      You are paying less dollars and cents in interest, but you are still paying 5%.

      For me, paying it all off is peace of mind. If I loose my job or choose to retire, I have NO house payment and NO rent. My taxes/insurance are less than $100/month total, and THAT is peace of mind :)

    • Thanks..

      You’re probably right, but when I computed the interest rate I based it on the current amount owed, not the original mortgage.

      • Check with your lender then to be sure.
        If it’s fixed 5%, it should be fixed 5% (divided by 12 for monthly) of the total outstanding each month. If you figure it on a yearly basis, and don’t figure in the declining balance, it skews the results, especially once you are over the half-way mark.
        Are you on twice a month payments or something similar?

  32. @mike1329

    Go over to http://www.mtgprofessor.com for some of the most advanced mortgage calculators. Be warned though, just entering the information into some of these calculators can be difficult. It’s worth it, you can some really complex “what if” scenarios figured out. It’s good stuff.

    Also check out the articles, I was impressed.

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