6 Great Reasons for Paying off the Mortgage on Your Home
By Xin Lu 8 comments
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alexsl Should you pay off the mortgage on the home you are living in? Mortgage interest rates are at historic lows and a fixed rate mortgage seems to be a deal of a lifetime right now, so why would anyone pay it off? Here are six reasons why paying off your mortgage is still worthwhile in the current economic climate. (See also: How (and Why) to Help Your Parents Pay Off Their Mortgage.)
A Mortgage Is a Cost
Even with a tax deduction, the interest you pay on a mortgage is still a cost. I don't think it makes sense to continue to sending the banks interest just so that the government returns a little portion of it back to you. It is really only a great deal for the bank if you keep your mortgage for its full term.
Cash Flow
One reason many people do not pay off their mortgage is that the extra money you put into your house isn't as liquid as cash sitting in an account. However, once the mortgage is completely paid off, you will free up the amount of money you used to send to the bank. That money can be saved or spent on other things as you wish.
High Investment Returns Are Rarely Guaranteed
I know that many folks would argue that today's low interest rate mortgages mean that you can use the money to invest and earn a yield higher than the mortgage. However, it is fairly impossible to find a guaranteed investment that pays more than the average mortgage rate right now. Money markets are yielding near 0%, and the stock market is quite volatile and has long periods of stagnant or negative return as we have seen in the past decade. Basically, there is no guarantee that you will beat your mortgage rate with your investments.
Security Against Income Loss
If you have a paid off home, then you are much better insulated against income or job loss because you do not have that liability every month. Many people take 30 year mortgages these days, but how many people actually have a job guarantee for 30 years? My guess is that most of us will go through a period of reduced income in three decades. The sad thing is that if the mortgage isn't paid off then the bank could take back the home after three or four missed payments even if the homeowner has been paying on time for years.
Home Equity Is Accessible
One argument against paying off the mortgage is that money put into a home is illiquid. This is true to an extent. There are ways to release the home equity as long as you have equity in the home. Home equity lines of credit are relatively cheap compared to credit cards, and seniors can opt to take a reverse mortgage. It usually costs some money to release the equity in your home, but it is possible to still live in the home if you really needed to tap your home equity. For some people, the fact that home equity is less liquid is actually a good thing because they would be less likely to spend it. I think of home equity as an emergency fund, and it should only be tapped when absolutely necessary.
Debt Is Bad During Deflation
Although mortgage rates are near historic lows right now, I think that deflation is a possibility in the near term. In the face of deflation any type of debt is getting greater in real terms. Basically, your wages will probably decrease in the current economy while your debt is just as large or grows even larger. It is better to retire the mortgage or be a renter in the face of deflation.
Although I completely understand that it is possible to keep a mortgage on your home and then make a profit on investing, I feel that it is a gamble on your residence. The stock market has had long terms of zero or negative growth so unless you have a guaranteed investment that pays more than your mortgage rate, then it is probably best to retire that debt once and for all. Once you are free from a mortgage you will actually be a homeowner, and no longer a home debtor.
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Good advice in general though you could argue a couple of points. First, if you fall on hardship due to a job loss, good luck getting an equity line of credit. It is important to have that in place if you want the equity to be liquid.
The second thing to consider is how you pay off the mortgage. There are real savings to be made in making extra principal payments but I would opt for a "side pot" for the following reasons. If you encounter a job loss situation, you can continue to make payments from this side pot. You will not get any credit from the lender for all of those extra principal payments and if you end up losing the home to foreclosure, you lose the extra principal payments. This is assuming you are currently upside down in the home or are unable to sell. Once the side pot is large enough you can either pay off the home, or if interest rates improve, invest the side pot and keep your mortgage tax credit. The home can still be payed off if needed. The only downside to this extra liquidity is the fact that the money in the side pot will have a hard time keeping pace with the mortgage interest rate in our current investment climate, but for some, the extra liquidity may be appealing.
I completely agree with the premise of this article. While you limited the reasons to six there are many, many more. I recently made the same decision with my student loans (http://stepawayfromthemall.blogspot.com/2010/07/january-15-2035.html), which have even lower interest rates... Sometimes keeping it simple is better. Isn't the stress of the payments worth something? It is to me - even if I could earn an extra percent or so. The freedom is worth a lot. I'm on my way.
Are we talking about paying it off early, or paying it off at all?
If we're talking about paying it off early I'd disagree with two points:
*Security against income loss - you still have to pay the minimum payment regardless if your balance is going to be paid off on time or early. So if you lose your income, you either have a lower mortgage balance or that much more in savings you could tap to pay your bills
*home equity as emergency fund - good luck getting approved if you have no job
to Kevin M:
If you paid off your mortgage completely then you wouldn't have any more minimum payments so I don't see a problem with what the article is saying. Also, helocs are fairly easy to get and most places just require that you have equity in your home. Retired people can get helocs, but it is a good idea to set one up before you actually need it.
It's amazing how things change. I remember a few years ago that I was taught to mortgage my house to the max and use those 2nd, 3rd, 4th position lines of credit to invest in more real estate and on and on. Even with positive cash flow it became a house of cards.
We paid our mortgage completely off 12 years ago now and I have not regretted it one single day. The peace of mind that comes from knowing that you truly own your home is of great value to me. No matter what financial storms come along, deflation, depression or whatever, we are that much more ahead because we don't have that payment to make any longer.
Right on..A paid off mortgage is like living in security heaven...
The deflation aspect you pointed out above is something I have never considered. Thanks for the advice.