Rethinking The Early Mortgage Payoff

The borrow-at-a-low-interest-rate-and-invest-to-get-greater-returns mentality was so embedded in our belief system that there almost seemed to be a stigma attached to not carrying a mortgage balance forever. When Washington Post personal finance columnist Michelle Singletary wrote "The suggestion is that paying off your mortgage is akin to being a chump," her words resonated with me. Some financial experts indicated that the early mortgage payoff had merely a psychological benefit but no clear financial benefit or worse, a financial disadvantage. 

I won't tell you what to do because personal financial circumstances vary, and vary greatly over the life of a 15-year or 30-year mortgage. But I'll tell you what some of these experts were thinking and what they forgot to mention when it comes to paying off the mortgage. There's not a right or wrong approach, just much to consider to the payoff, save, and/or invest dilemma.

The early mortgage payoff

What is an early mortgage payoff anyway? Most precisely, it is paying off a loan prior to its original term; that is, paying a 30-year loan in less than 30 years (perhaps 10 years or 25 years). To a certain extent, though, an early payoff has come to mean paying off in a reasonable time rather than refinancing (often at a higher balance than the original mortgage) to infinity. 

Alternative uses of money

At the core of the early mortgage payoff question is: if you weren't using your money to pay off the mortgage, what would you be using the money for? Here are some alternative uses of extra cash:

  • Pay off non-mortgage debt (if your interest rate is higher than your mortgage debt, there are clear financial benefits to paying off this debt first)
  • Build an emergency fund (having an emergency fund gives you a financial cushion in case you lose your job or have large, unexpected expenses; rather than borrow to pay expenses, you can use this fund)
  • Set aside money in a savings account for regular but not monthly expenses (having cash accessible for life insurance, auto insurance, or an annual vacation, etc. prevents you from borrowing or tapping into investments)
  • Contribute to your 401(k), SEP-IRA, and/or traditional IRA (it’s a good idea to set aside money for retirement; using these vehicles, you can possibly earn an employer match, lower your taxable income, and avoid capital gains taxes on increases in investment value, which one day, presumably, you'll enjoy)
  • Contribute to a 529 college savings plan (your investment will grow tax-free and you'll owe no taxes on withdrawals)
  •  Fund your Health Savings Account (you’ll lower your taxable income, enjoy tax-free growth, and have money set aside for medical expenses)
  • Contribute to a Roth IRA or a Roth 401(k) (your investment will grow tax-free and you'll owe no taxes on withdrawals)
  • Invest in the stock market 

The argument for carrying a mortgage loan rather than paying off the mortgage is that, over the course of 30 years or so, you'll earn more by investing than you'll save in interest through an early payoff. Though I am still in (and will remain in) the market for the long haul, we now know that investing doesn't guarantee a 10% return over just any time horizon. (To see past performance of the S&P 500 for a given time frame, check out this calculator.) So, it might make more sense to invest all along (in good years and bad) over the course of a career rather than investing for shorter periods of time. To get the growth that long-term investing is supposed to yield, don't wait until the mortgage is paid to start investing.

On the other hand, there is a glitch (besides the obvious of non-guaranteed returns) in the borrow-low-and-invest-high scenario: taxes. I'll explain.

Pre-paying the mortgage vs. investing (and investing in tax-advantaged vs. taxable accounts)

Let’s say you have a 30-year fixed rate loan for $200,000 at 6.0% and you have an extra $1,000 that you want to either a) apply to your principal or b) invest. If you happen to be sitting at year 5 of your mortgage when you have this $1,000 bonus, then you could pre-pay the mortgage and save over $3,400 in interest and immediately increase the equity in your home by $1,000. But if you invested that same $1,000 and happened to get an average of 8% growth over the next 25 years, then you’d have an investment account worth about $6,800. 
  • If you had invested the money in a Roth account, you’d have a nice stash of money and never, if you meet all qualifying conditions, have to pay capital gains tax. Ditto for a contribution to a 529.
  • If that $1,000 had allowed you to make or increase your contribution to your traditional 401(k) or traditional IRA, you would you have lowered your tax bill; when you withdraw the money, you'll pay ordinary income tax on distributions.
  • If you were able to contribute to your HSA (Health Savings Account, for those who have high-deductible health insurance coverage), then you’d have reduced your tax liability and enjoyed tax-free growth on your money as long as you use the funds for qualified medical expenses.

But, if you happen to have already maxed out your contributions to retirement, college-savings, and HSAs, and set aside plenty in cash reserves, then you’ll likely put that $1,000 in a taxable account. Selling the investment will trigger capital gains tax, which lowers your after-tax return; for example, right now, depending on your tax bracket, the 8% return might yield about 6.8% after taxes. In a few years, after long-term capital gains taxes revert to older and higher rates (up to 20%), after-tax returns will be even lower. (See this calculator to determine after-tax returns). Higher returns are better but the risk required to get this spread may or may not be worth it; of course, it depends on your mortgage interest rate, tax bracket, investment growth, and risk tolerance. 

I should mention that the tax situation can get complicated in retirement. Having to remove more money from your 401(k) or traditional IRA will mean higher taxes, not at generally more favorable capital gains rates but at higher ordinary income tax rates. And a higher income from investments might trigger taxation on other sources of income. See Why You Should Pay Off Your Mortgage from the Wall Street Journal by Jonathan Clements for more on these potential tax consequences. 

Jonathan also mentions: "Carrying mortgage debt into retirement doesn't create just tax hassles. You also lose financial flexibility because you have this big fixed monthly cost. That can make for tough choices in down markets, as you try to figure out which investments to sell in order to make the monthly mortgage payment."

What about the interest deduction?

Prepayments reduce the amount of interest paid and accelerate the decline in interest payments, reducing the tax benefit associated with the mortgage interest deduction. But its value can be equated to the annual amount of interest paid less the standard deduction (rather than the absolute interest amount; items such as property taxes or charitable giving can also boost itemized deductions). If you've got a $500,000, 6% fixed-rate mortgage loan and are married/filing jointly, then your mortgage interest should be greater than the standard deduction until the 24th year of the loan; in the loan's tenth year, you'll have about $25,000 in interest payments that could help reduce your taxable income by nearly $5,000 (above and beyond the standard deduction).

If you've got a $200,000 loan with the same terms (and married/filing jointly), though, then you'll lose the interest advantage in the seventh year and reap annual tax benefits of less than $1,000 in earlier years.

What to do about the mortgage

It seems reasonable to pay off the mortgage at some point. Extra payments speed up the mortgage payoff  but between now and payoff day, that money sitting in home equity doesn't do you much good. Nevertheless, what's right for one person, couple, or family -- depending on income levels, cash needs, financial discipline, retirement plans, aversion to debt, risk tolerance, and tax status -- might not make sense for another. 

Please consult your tax advisor for information on taxes and note that I have referenced federal tax regulations and not state tax regulations. When I was researching this article, I realized one of the reasons tax consequences are not frequently discussed: there are so many variables to determining tax liability that it is difficult to capture the actual results without considering lots of details about an individual's income, not just for the current year but subsequent years PLUS tax laws are constantly being changed. My main point in regard to taxes is that they have an impact on returns and that impact should be considered when comparing mortgage interest rates (return on paying the mortgage) with investment returns.


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Guest's picture

My parents bought a home on my dad's VA loan (~1965) but he abandoned us and my mom (23 years old with three little girls under 5, stay at home mom, no education and unemployed) couldn't make the payments. She never owned a home while I was growing up, and we moved a lot (evicted from more than one place due to not making rent payments on time). In my early twenties, I had a friend of the same age and HER mother lived in the family home with no payment as the home had been paid off several years earlier. I thought it was the greatest thing. No house payment. Wow. When I tell people this is my goal with my current mortgage, they act like I'm nuts. But my mortgage is under $50K and there is no tax benefit for such a small amount of interest. I really appreciate the detailed information you have included in this post, thank you. Posting to delicious for future reference.

Guest's picture

I can only speak for myself, married 32 yrs I am 52 and hubby 54 I paid off my mortgage 2 yrs ago to be secure.Husband works for a hospital I am a nurse who works full time for an insurance company and per diem for the hospital neither of us worried about lay offs at the time but we thought it gave peace of mind and security to have the house paid for.We do the same for cars, I drive a 95 camry been paid for since 97.Husband drives honda element 2007 that will be paid off in 1 more year.We have all the safety nets in place like long term disability,health ins,dental/eye ins,life/house/car ins.Last debt is home equity loan to pay off our roof.We have 401K,403b retirement accounts from the hospital towards our retirement AND still I worry.The pay off of a mortgage was the best thing we ever did from psych to financial.If I was young starting out and could get a mortgage at 5-6% I would handle it totally different.I believe it depends on your individual situation

Guest's picture

What is the advice when you are paying PMI? Are extra payments worth it in that case?

Guest's picture

We used a small inheritance 8 years ago to pay off our mortgage. When we sold that house 5 years ago and bought a condo, we "rolled over" the equity and still no mortgage. There's nothing like being debt-free! I don't care what theoretical benefits there might be, if you don't owe you're not owned by your creditors. Peace of mind and a high degree of financial security, what can compare to that?

A suggest for those who don't have a lump sum: stock away that extra money in CDs or something where it'll serve as your emergency fund. When you have enough (plus some left over for emergencies), pay the mortgage. Sure it might take years, but you'll be growing net worth and getting peace of mind the whole time.

Guest's picture

I'm 29, have had my mortgage for 5 years at 6% and am looking to refi to a 15 year for 4% hardly increasing my payment at all. There's nothing I would like more in the world (realistically and financially) than to pay off my mortgage. We've all heard the mantra "It's called personal finances blah, blah, blah..." but who wouldn't like roughly an extra 1k to invest each month. Especially now. The US economy is on sale and everyday is like black friday. I'm buying now and forgetting about it for 5 years or when I feel the market has recovered enough for me (pending significant jumps). When is "enough"? When I can sell what I've invested today and pay off my mortgage. That's my goal. 5 years. Done. To each his/her own though!

Also, regarding the 1k in equity, it should also be noted you didn't factor in appreciating value over the same 25 years. Add that to your interest savings and now you have a more realistic comparison (especially if you are looking to sell in the next few years).

Julie Rains's picture

I'm not really advocating early payoff, and I am really looking at payoff vs. stock, bond, savings investment -- just pointing out that it is helpful to look at the entire picture and to dissect what some financial advisors (who may be better at figuring sales commissions than taxable income and tax rates) are really telling you, and if their assumptions or rather generalizations apply to you personally. For example, the return on early payoff of a large mortgage is reduced b/c of the loss of the mortgage interest deduction but the return on Mrs. Accountability's mortgage would likely be the same as her interest rate (assuming that it is below 20%, which it sounds like it is, and her tax status is married/filing jointly).

As far as PMI, it would depend mostly on how close you were to having 20% equity and how much benefit the insurance is to reducing your taxable income. 

The value of the home appreciation would really impact the purchase vs. not purchase home decision (or your price negotiations), not necessarily the paying the mortgage vs.saving/investing decision; if the home increased to $250,000 for example, you would have a $50,000 capital gain (with no capital gains taxes btw, another point to consider) but that gain would be independent of the equity the homeowner has. The equity though would impact the cash flow from the sale, so basically, you'd get more money back at the closing than if you'd hadn't added extra to your regular payment.  

Right now, with extra cash, I'd make sure I had a cash cushion or very readily accessible funds in case of a job layoff; and take advantage of investment opportunities within your risk tolerance. Funding a Roth could be ideal for some b/c you can earn tax-free returns and take out contributions with no penalty in case you do need the money.



Guest's picture

The comparison of $3400 in interest savings vs. $6800 in potential investment return is a bit misleading. I'm not saying it's incorrect, it's just that a few key pieces of information were not mentioned.

1. That extra $1k at year 5 does indeed cut the overall payments by $4,434. (netting you just over 3,400) But more signifiantly, it makes the payments over and done with almost 5 months earlier. (last payment would be about $363) The example payment would be $1,199.10, so that gives you an additional $5,633 extra cash when compared to the same term ending date as not paying the $1k. Total net from the 1,000 payment = $8,067.

2. A fixed rate mortgage has no sense of investment risk. Adjustable rate mortgage? Sorry I can't help you there. You have total control over when and how much extra you pay on a fixed rate "no pre-pay penalty" loan. With an investment, 8% is a great goal but honestly not in our control. Markets do what ever they want without regard to you specifically. It may go up, it may go down. Pre-payment savings are 100% guaranteed.

I bring this up because my mortgage was for 198k, and otherwise nearly identical to the example. By paying an extra $200 nearly every month, (if I was secure enough with the extra part-time income I would have maybe just picked the 20-year loan), I was able to cut about 8 years off the payments. So for the first 10 years it was about $25k extra cash. Ouch, right? But the interest savings comes out to over $90k! Nets out to about $65k actual savings, but that's still not too bad considering all I had to do was send a little bit extra if I had it. And the best part is the 8 years at the end with NO payments. That's another ... $115,000 ... that I can put to whatever other use I wish.

Housing is expensive enough, but when you realize that when you get done paying the mortgage it usually costs between 2 and 3 times the original amount, who in their right mind would want to pay so much interest?

Guest's picture

The one thing your scenarios of investing versus paying off the mortgage ignores is the risk associated with two. Obviously it makes mathematical sense to borrow at 5.5% with tax deductible interest payments to invest at 8% with tax deferred interest payments if the risks associated with the two are equal. The problem lies in that you are locked in to pay the 5.5% no matter what, rain or shine, housing bubble or boom, job or no job. The 8% could actually end up being 2% it could end up being 12%. There is risk involved.

If I have a paid off house and then start investing and then lose my job I can stop investing. If I am still making house payments and I lose my job I may be able to use my investments to make my house payments or they may be in a low period like we are in now and I would have to sell them at a huge loss to make my house payments. I'm sure there are many that are in this very situation right now. No job and having to sell investments in the stock market at 50 cents on the dollar to make their house payments.

My wife and I plan to have our 15 year mortgage paid off this May in 5 years while still investing about 15% of our income in retirement and college for the kids.

Julie Rains's picture

The interest savings vs. the potential investment growth does look skewed, partly because the $1,000 is in home equity rather than an investment account. And once you pay off the house, you can then have money to invest, save, or spend, possibly using that money you used to have to use to make the mortgage payment, or you can pursue some sort of work or leisure that is not dependent on a steady income. 

Many were so concerned with the "spread" that they didn't consider the absolute costs of owning a home (all that interest). Not only is that spread not guaranteed (the fixed rate part is but the investment returns aren't), which I think we see now, but the spread is also skewed by taxes. So, even when the S&P was returning an average of 10%, the invest advantage, depending on the tax set-up and individual returns as well as your loan rate, wasn't quite as good as it seemed to be.


Julie Rains's picture

It would be nice to put a measure on risk -- as I mentioned that getting an 8% return in the market could be viewed as 6.8% after taxes (capital gains), which doesn't seem to compensate much for the risk taken. Just for the record, my mortgage will be paid off this year also and I do have investments -- timing is everything and we can't really predict what will happen next. For example, I wouldn't necessarily want to be five years away from paying the mortgage but with lots of money tied up in the house and little in investments or savings right now.  I think it makes sense to pay attention to all areas, taking some risk but keeping a level of safety also. 

Guest's picture

I agree that you are considered a chump by most investment professionals and tax accountants if you decide to pay off you mortgage early.

But, I think way too much is made of the 30 year; invest money in other things along the way, will do better in the market over time..way of thinking..and it leads people down the wrong road for them and their situation.

I really think it depends on the person, their life situation, risk tolerance and their ability to handle money. It really takes a lot of discipline to have several things going at once [multi-taskers] and as much as people like to say their good at it, truth is, for many people, they are not (i.e. regular contribution to 401K; 529; emergency fund; health savings accounts, roths). And that is okay in my book.

Just because you choose to pay down your house first, its not really that bad in my opinion. It does not mean you cannot invest after your done with that. And for people with unique situations, for example, there is a 9 year difference between my husband and I. We married much later in life, we had a wonderful surprise, a daughter at me at 44; my husband at 53. We took out a 30 year mortgage, but it will help us a great deal if we pay it off sooner, so we are looking to refinance to a 20 or even a 15 year mortgage, because we may have tuition payments and other stuff.

So attention all financial people, be careful what you preach!

Guest's picture

My take is that spread between tax-deferred investments and mortgage prepayments is so great, it's worth it despite all these gotchas, _as long as you still have a steady wage income_.

When you retire and start living off investment returns, an unpaid mortgage is a severe liability because it's a large, fixed bill (generally), and your income fluctuates with the markets.

A mortgage balance is effectively a bond you owe, and could be counted as a negative-valued holding. Suppose a couple has $800k retirement savings, and follow the "age in bonds" rule to get 35%/65% stock/bond, or $280k/$520k. All well and good.

Now add in a 400k mortgage; then effectively they have 520k-400k=120k bonds and 280k stocks, or 70%/30% stock/bond, which is a rather aggressive growth kind of allocation that will be WAY more volatile than they were bargaining for.

Guest's picture

I think today you have to buy a house with the assumption that you'll move in a few years. (Job/life changes, need more space, downsizing, moving to be closer to aging/ailing family etc. etc.) Given that, one major advantage to owning a house free and clear is that come moving time, you're not stuck with 2 house payments, or forced to take a lower offer on your house or even prevented from making an important move.

We rented for years and finally took the plunge into home ownership only once we found a house we could afford in cash. (And we moved to a smaller town to do it, but that's another story.) We did this specifically for the security of low fixed expenses and the knowledge that if our circumstances changed, the house wouldn't be a burden.

Even though we could have paid cash, we took out a 5 year mortgage (it was a small, inexpensive house). I think it was partly because of the chump factor you mention, and also out of fear of plunking down that much of our savings. But, after 2 years it just seemed to be more of a hassle and mental drain to have these small, recurring monthly payments so we just paid it off in full.

We've since bought several more residential properties to rent out, and we've always paid cash for them because it just doesn't seem worth it to come out a just few bucks ahead of the game after mortgage payments. But, renting a few houses you've already paid for -- that's how you can quit your day job! ;)

When it comes time to sell any of these properties, we know we won't be in a financial crunch and can hold out for the right offer. Similarly, if our situation changes and we do decide to move somewhere that doesn't have such cheap real estate and where we would actually need a mortgage, we don't have to worry about paying for two houses at the same time.

Guest's picture

Thanks to a few thoughtful personal finance blog articles about pre-paying one's mortgage, I realized that was the only personal finance "thing" I had left to do. No debt otherwise, maxed out 401(k), HSA, investing extra into regular taxable investments, etc.

I decided to do it! I sold some stock that was bought through my employee stock purchase plan. (Too much of a percentage was still in it, IMO.) I took some cash. I cut my living expenses by quite a bit. I was so motivated to be frugal! With some help from my husband (we have separate finances), we got every penny of that loan paid off about a year ago.

I have to say it IS the best feeling to put loads more money into the stock market now. It also ended up being excellent timing. I got guaranteed 5.5% returns when otherwise a lot of that money today would have been worth half of what it was back then. Wow!

Today it may not be the best choice given the "sale" on the stock market, but in general, I think it's a fantastic idea assuming everything else is in line.

Guest's picture

We made a lot of extra payments in the first couple years of our mortgage, at no much opportunity cost - we don't spend much, and we were both at our risk/safety boundaries with savings and stock investing already. It was intenstly rewarding to pay an extra $1200/mo and know that it was worth something like $8k over the life of the 30 year mortgage.

Then we had a kid, and I didn't work for a few years, and for the last four years we've just been paying $100-$200 extra a month, mostly out of habit. Aside from being in the situation you describe, where the alternative is investment and both the housing market & the stock market aren't that much fun to be in, it's also just less exciting, 6 years in, because the multiplying factor is less.

Guest's picture

Thanks for the wonderful post.

I paid off my mortgage couple of years back. If I had invested the money in stocks instead paying the mortgage, which I would have done normally, I would have lost 30-40%. Prepaying helped me to diversify and reduce my losses.

Guest's picture

We have only recently brought a place, but we are quite a bit ahead on our mortgage already.

I still think it's a great feeling to see that balance go down, to pay less interest each month and be able to withdraw those additional funds we have paid if we ever have any of those little catastrophes in life.

I'm not so sure about the sharemarket bouncing back. That little saying "past performance is no guarantee of future performance" keeps ringing in my head. The United States Government is going to end up with a huge debt burden which I can't see as sustainable. Then there are other calamities looming on the horizon such as peak oil, overpopulation (which strangely no one ever talks about) and global warming.

Guest's picture

It makes sense to me to have an emergency fund of about $5,000 but then after that to put most of your extra money into paying off the mortgage. I mean maybe the stock market will give you better than 6%, but you KNOW that you'll be saving 6% if you put the money toward the mortgage. I'd rather go with the sure thing. I just got my first mortgage and I plan to top off my emergency fund at $5,000 and put my extra money into paying down the mortgage. My savings account definitely doesn't give me 6% so it doesn't make a lot of sense to put money into that while I'm having to pay 6% interest on $70,000. I know I shouldn't think like this, but after having lost about 40% of my money that I had in the stock market I'm more inclined to go the safer route and bet that I won't get higher than 6% returns in the stock market. At least right now.

Guest's picture

I think that this article hits on some very good points, but I am surprised that there was little talk of the emotional satisfaction and reduction of stress that many people feel when they finally pay off their mortgage. Check out a few other pro's and con's here if you are interested:

Julie Rains's picture

I wanted to show that there could be a financial benefit that many advisors and even personal finance columnists didn't talk about, with some exceptions such as Michelle Singletary (who writes the Color of Money for the Washington Post) and Jonathan Clements (who used to write for the Wall Street Journal). Maybe it was just me but I felt that the psychological edge was seen as a weakness in making PF decisions, not a strength; the flip side relating to the psychology of wanting to have your home paid off (on the positive side) is that you might ride out market fluctuations better, and in the end become a better investor.  

Guest's picture

I think the current economy makes clear that it is a really good idea to have 1-2 years worth of mortgage and house insurance payments banked at any given time. Yes, you can prepay that amount, but it doesn't stop the monthly mortgage bill coming and if you lose your income, well....

I don't have a mortgage at this time, but if I did I would be putting extra money aside to serve as a cushiion for that. At this point I think that any amount over 6 months' worth of payments I would have invested in the stock market, as I would be willing to take the risk on it descending further.

This is actually the approach I am taking on a credit card balance transfer loan I have. I am holding $5000 in cash reserves, and the money that I *used* to apply to pay extra payments on the debt is going into equities. That is a reasonable balance between absolute liquidity and potential gain (in equities) for me, and I am willing to lose money on the equities because the $5000 cash reserve is sufficient for me, in combination with the fact that if necessary I can sell equities to raise cash, even if at a loss.

Guest's picture

We have less than $40k left on our 15 yr mortgage- and we intend to pay it off early.

First off, we paid about 12% as the down payment- and got a 5% fixed rate (4 years ago). I pay an extra $100- $200 every single month towards the principal, and then each December, my present to myself is making a extra payment towards the principal. We already have 3-4 months emergency money squirreled away. It is my main goal to have the house paid off by at least year 9.

We have 4 kidlets and the eldest would be 14 by the time the house is paid off. We are already putting some money aside every month towards college or secondary education for each kid, but savings towards our retirement and their schooling would increase dramatically w/out the mortgage.

Guest's picture

We've just finished refinancing $130,000 to 4.75%, and ironically we won't be able to deduct our mortgage interest anymore. We'll pay $6,000 in interest the first year, plus $2,000 annual real estate taxes. No sense itemizing.

There goes our last excuse to not prepay! Our plan is to keep contributing to retirement accounts, keep the e-fund in place, and plow any extra money into the mortgage. We hope to be mortgage-free in 16 years, by age 40. Imagine the freedom of being debt free!

Our financial advisor told us again and again not to prepay, and not to lose our valuable tax deduction. What's so valuable about paying $10,000 in interest to save $1,500 in taxes? We have a new financial advisor now. :)

Guest's picture

There may be be ramifications, tax-wise, in paying off a mortgage. If seriously considering doing this, either consult a tax professional or do your homework to avoid surprises. From what i understand, there may be implications if you decide to take on another mortgage after you have one paid off.

Guest's picture

I bought my 1st house in 1985 for $76K (mortgage interest rates were 11-13%). After marrying in '88, we stayed in that house and refinanced a couple of times to 15 year loans. We had one child and moved to our current house in 2006. I paid the mortgage off on the 1st house in 2001 and we have been mortgage free for 8 years. I set a goal in 1996 to pay the mortgage off in 5 years and not move until the goal was met. As a commissioned sales person with a good salary, I was able to pay off the mortgage early plus max out my 401K, Roth IRA, Health Savings Account and 529 contributions. That is how we really accumulated assets. Since my 401K was invested in domestic and international stocks and my lump sum pension was invested in Treasury bills, owning our home was another way to diversity our assets. With a degree in finance, I've always made decisions that made sense for our financial situation not what some financial columnist wrote. Having a good salary and living well below our means was the key to our financial success. I retired last year at age 51.

Guest's picture

One thing is certain though: getting a mortgage 10 years ago is not as "secured" as getting one today (at least for now). Unless the economy recovers overnight, I think it's best to hold on your present savings. People can not afford to spend much these days. It's a wait-and-see game for now.

Guest's picture

Right now, I'm already having a difficult time paying off my mortgages. I don't see myself and my husband getting another one at least in the next six months. Uncertainty of these times surely kills me. I might as well fix my priorities before scouting for mortgages.

Guest's picture
Wavin Raven

We have a 15-yr $190,000 loan (5.375%) that we started paying Sept, 2005. That same month and every month after that, we are paying $700 extra. By the end of March, 2009, our loan balance will be around $124K. If we continue doing what we're doing, our house will be paid off in July 2014, the year that my husband and I will turn 40 years old.

We have extra money we can use to pay off the mortgage but as they say don't put all your eggs in one basket. We allocate our money in the following manner:
1) We give 4% of our gross income to our church and a few charities
2) We contribute the max to 401k and Roth IRA
3) We contribute the max to Coverdell ESA for our 2 kids
4) We contribute the max to HSA
5) We pay $700 extra monthly mortgage payment
6) We put $200 to non-retirement Vanguard acct (dollar cost average $50 each to Energy Fund, Total Stock Market, Wellington, and GNMA)
7) We received a huge tax refund for tax year 2008 and was able to pay off our car loan. So what used to be $500 per month that we pay for the car loan, we are now putting in an ING savings acct (we are trying to increase our liquid asset)

The teachings of Crown Financial Ministries have really made a positive impact in our lives. Listening from them made me and my husband strive to be good with our finances so that someday soon we can be "free and clear" to serve God.

Guest's picture

In the ideal world your "blunderbuss" approach makes total sense if the individual has the financial means to meet all his or her financial goals .e.g 401k, Roth, HSA , 529 etc. However, this is the exception rather than the rule.

I am very tired and moreso very skeptical of hearing about all these projected potential earning rates of 6% or greater over a long duration. Most of the time these projection never truly pan out as experience has taught us. Besides, the effect of inflation never is calculated into earnings , forget about capital gains taxes ( if you invest into a taxable account).
Read this link for further information

Don't get me wrong, I will continue to contribute to my 401k, primarily to lower my tax burden rather than to get giddy about some unrealistic projection most of those so called TV experts on talk shows talk about.

Besides, the interest rates on CD's TIPS and other safe investment vehicles are crappy now. Stocks, especially in the US companies are shaky. No one can predict how the alluring markets in the BRIC countries will last or are really reliable.

Rather than park my money in a less than 1% earning account (provided I have money saved for emergencies), I would sooner pay the albatross of a mortgage payment. Once paid or before I pay it off, if interest rates go up, I will then divert it into long term CD's of 5% or more. I know that inflation and taxes will eat some it , but I am not a greedy guy anyway.

Guest's picture

Yes, invest in the stock market and watch where that will take you. Quoting from the url provided by the poster above, "since 1999, the S&P 500 has been a loser, and the next 10 years could be just as grim."

As for me, I choose to invest my extra money towards my mortgage. I now do both, pay more to reduce the principal and make early payments to have a cushion. In other words, my next payment is due 14 months from now, so I have peace of mind knowing that I am not one paycheck away from losing my house. Do the math anyway you want.

Julie Rains's picture

I'll mention that paying extra on the principal is not necessarily the same as paying ahead. Mortgage companies may apply the extra to the principal (typically you have to specify where that money is going); but even if you made a double payment in one month, for example, they may still expect a full payment the next month -- at least that is how my mortgage company handled payments. Early payments may be applied on a month-to-month basis, rather than reducing the principal now. A call to the mortgage company may clarify how payments are applied.

Guest's picture
Mike T

I have $180,000 mortgage and $90,000 in a money market making $0.00. What should I do?
Pay down the mortgage big time or invest the 90K somewhere else and keep the mortgage?
Mike T

Julie Rains's picture

Here's the deal: 1) if you pay down the mortgage, then you'll "earn" whatever interest rate that you're paying now ; but you'll tie up your money in the house and it won't be available to you for emergencies or investments; 2) if you invest now, you should have a chance to earn higher returns than 0% but there's no guarantee. Everyone's situation is different and there's no way to predict the future but if I had the money, I'd take some of the money and pay off the mortgage, invest some, and keep some cash handy.

Guest's picture

It is significantly more advantageous to NOT pay off your mortgage early. I spent days running the numbers and various scenarios (I blogged about it). I am absolutely holding on to my 30-year mortgage.

Guest's picture

All debt is evil. Sometimes a necessary evil, but evil all the same.

Pay off all debt. (After an efund of 6-12 months is established)

Once debt is are one owns you....

Then aquire no new debt, save and invest and buy things with cash.

Spend less than you so for many years....

Retire with crazy amounts of wealth, and no payments

Also....stop buying more house than you need.

Never take an FHA loan. if you can't save 20 percent can't afford to buy.

Mortgage insurance (no longer removable from most FHA loans) is additional interest
and no benefit.

Why would you even want to pay interest on something you claim to own so you can make someone else wealthy?

That's why bankers drive paid for with cash Bentleys, and most people drive leased BMWs. Your mortage interest is paying for their no mortgage mansion.

In the what you want...Free Country (If you don't count the chains of your debt)