Should I Pay Off My Mortgage Early Or Invest?

In a typical week I receive variations of this same question several times via email, comments and from followers on Twitter: “Should I Pay Off Mortgage Early or Invest?”  For the most part, my answer is, “It depends.”  But on a few occasions, when people share more details of their overall financial plan, I tell them to go for it.  Pay off your mortgage early and live in that home free and clear!

Having a mortgage is one of those culturally expected things, along with car payments and credit cards.  Most financial gurus fall backwards out of their chair when you mention paying off your mortgage early, instead of plowing more dough into their carefully selected portfolio of investments – most of which are not properly aligned with your risk tolerance, nor your overall investing strategy.

The market downturn, which apparently is still turning, seems to have more and more people reevaluating the question, “Should I Pay Off My Mortgage Early?” Up until now conventional wisdom said no. Invest that money in the market, and keep paying interest to the bank to get the tax deduction. Now I’m not so sure. Seems to me like we would have been better off to be sitting here with a paid-for house than a handful of worthless investments.

That is basically what Steve was alluding to in a post that caught my eye some time ago, “What If Saving Was Stupid?” One of the more profound statements was that “money in the market isn’t saved – it’s invested, and investment carries a risk that it won’t be there when you need it.”  So true; as many of us have had the recent misfortune of discovering.

But eliminating debt, including your mortgage, is a sure thing.  Assuming you are not borrowing any new money, paying off $50,000 in debt means that $50,000 debt can never come back.  It doesn’t matter what the market does.  It doesn’t matter if we are at war or in peace time.  It doesn’t matter how strong or weak the U.S. dollar is – that debt is never returning to your personal balance sheet.  To me, that is a powerful incentive to use the $50,000 to pay off my mortgage early.

Sure, I could invest that same money in the down market and watch it go to $60,000 by next year.  But that is far from a sure thing.  Besides, without a mortgage I could easily start dropping $1,000 a month into an investment account or in high-yield online  savings accounts.  It wouldn’t take very long at that pace to hit $60,000 in investments. And if you really liked having a house payment, you could always refinance your mortgage.

What this question really gets to is your tolerance for risk, and your dreams for the future.  I hope to “retire” from working for money earlier than most people, and I cannot do that with a mortgage payment.  So for me, thirty years of payments is not an option.  With a paid-for house, and very few expenses, retiring would be a much more viable option because it would not take much in the way of earnings to sustain a frugal living.

Comments

  1. I’ve always been a believer in paying off the house early. The interest deduction is way overblown: You pay the bank $1000 interest to save $280 in taxes. As for the “my investments will return more than my interest rate” argument, how’s that working out for you?

    In all seriousness though, personal finance is personal as the saying goes. The one thing keeping me somewhat calm in this horrific economy is that we live in a paid for house. I’ll trade that security for the possibility of slightly higher investment returns any day.

  2. What interest rates will do in the future is the key to deciding whether or not it is a good strategy or not to keep a mortgage.

    I do think there is a case to have a low-interest mortgage sometimes. For example, currently interest rates are historically low. One could get a mortgage at 5%. With a tax deduction, it’s effectively a lower rate. If one expects interest rates to climb over the next 10, 20 or 30 years, rates on sure-things will climb, too. Borrowing at 5% (effectively lower) for the long-term and putting your money in a risk-free long-term 10% CD can be a good strategy.

  3. down here in Australia we can’t claim a tax benefit for mortgage payments. I haven’t worried about paying off the mortgage until recently as I have refinanced several times to do things with our kids, like a long family holiday around our continent. Now that they are in their late teens and I’m in my late 40s we have got serious about removing the mortgage. We have moved from owing $85,000 Aus to $58,000 in 12 months, and I plan to have it paid off before my 50th birthday in just under 3 years.

    Also we have decided that we won’t to be debt free as we move into our 50s as we may want to make some lifestyle choices that will only be possible if we are debt free. When we become mortgage free, we will suddenly have $1800 a month that is no longer committed to debt – yippee!

    house prices down here have gon ridiculous as well. The median price reached $485,000 approx, and has now slipped back to about $440,000. Expect to pay between $500,000 to $650,000 for a comfortable home in a nicer suburb in Perth.

  4. Not being much of a believer in debt, I would probably pay off my mortgage even if we weren’t in a recession.

    I think you hit it when you said that it has everything to do with risk tolerance and future dreams. I could probably MAKE more money by investing but I wouldn’t be working toward MY financial dream, which is to be debt-free and financially secure enough to help others in a big way (a lot easier to do without a chunky mortgage payment!)

  5. Unfortunately, I got absolutely nowhere with this argument about 18 months ago when I sat down with my husband and a financial planner. They both looked at me patronizingly when I suggested selling some investment stocks to simply pay off the mortgage and move forward with a clean slate. (We could easily have kept a 6-month emergency fund in cash and a nice retirement account while wiping out our only debt.) I got the standard conventional wisdom about the power of the markets, and how it made more sense to invest than reduce debt.

    Asking this question now is like shutting the barn door after the cows are out. It gives me no pleasure at all to have been right 18 months ago. I do my best not to be angry that all we got from that financial planner was the uncritical parroting of what everyone else was saying. And that guy came highly recommended and wasn’t stupid. But look what it got us.

  6. I’m big on paying down mortgages early too.

    The question of the times though is, should you pay off the mortgage or build up cash in case of a layoff? Emergency funds are all fine and dandy, but the more cash you have when you’re laid off, the better you’ll feel about the future.

    I’ve never owned a home (I’m quite young), but when I buy a house someday, paying off the mortgage will be a top priority.

  7. @the weakonomist: You bring up a good point. Perhaps it is smart to keep that cash liquid in these uncertain times, and then pull the trigger on an early pay off when things settle down a bit. With equity lines tightening this makes a lot of sense, because in a real emergency (lay off) you probably couldn’t get any equity of your paid-for house to live on. Definitely something to consider.

  8. There seems to be a big difference between the U.S. and Europe. Here, neither car payments nor credit cards are “culturally expected”, and I am so happy that I never had any! We also paid our mortgage early, and so the recession doesn´t worry us too much.

  9. Yes! If you can at all afford to, then DO pay off that mortgage. I have never viewed my house as an investment. It is our home. Once our home is paid off, we can be much more secure in our station. I often think of my grandparents, who were extremely poor, however their house was paid in full long before I came along. While they had so little money, they were secure in the fact that they had a sure place in the world and a haven, of sorts. If you have no house payment, if the world does throw something bad your way, it would be so much easier to face the hardships (financially, that is).

  10. I just found your blog last night and I think I will enjoy reading it.

    3 years ago, my friend (who was close to retirement and her husband was even closer) asked me what they should do with the profit off the house they had just sold (for 4X what they paid for it). I told her without a doubt she should pay for their new condo with cash and carry no morgage. They took my advice, and now her husband was still able to retire at 55, and she works a part time job to pay the small living costs they have.

    They are definately enjoying retirement!

  11. Another plus of paying down the mortgage is for college aid. My kids are little so I haven’t really paid much attention to this but I thought that home equity was not counted as assets in the college aid equation (I plan on really looking into this as my kids get older)

  12. Paying off our mortgage early has really helped with our peace of mind in the current financial climate. However, given that climate, if we were paying it off early now, I would not drain my savings to the extent that we did two years ago. I’d make sure that we’d still have several months of living expenses in the bank after making that final payment.

    Realize, though, that not having that monthly payment is like getting a $1000/month raise, essentially tax free (once you are in a position to pay of the loan early, your interest payments are not affecting your taxes very much, if at all). So building up your emergency fund happens much faster – for two reasons:

    1. You have extra money each month to pay into it.

    2. You have dropped your monthly expenses by that extra amount per month.

    So, if your monthly expenses with a $1,000 mortgage payment came to $4,000, then your 6 month emergency fund would need to be $24,000. After paying off your mortgage, your monthly expenses drop to $3,000 and your 6 moth emergency fund only needs to be $18,000.

    Say you have saved $18,000 and have $12,000 left on your mortgage. You have a 4 and half month emergency fund in the bank. Further, you are able to add $200 a month to that fund.

    If you pay off the mortgage you’ll have $6,000 in your emergency fund. That would have been only a month and a half of emergency fund, but you dropped your expenses by $1,000 a month, so you are actually good for 2 full months. And you are now able to fund that account at a rate of $1,200 a month. So in 3 months you are back to 3 months of expenses in your emergency fund. In 10 months you are back at $18,000, which is now 6 months of expenses in your emergency fund.

    Now lets say it would have taken 18 months to finish paying off the house making your normal payments. You’d have your house free and clear, plus $21,600 in your emergency fund.

    After 18 months of saving $1,200 a month (paying off the house early) you will have $27,600, saving an extra $6,000.

    I don’t know of any investment with that kind of return over that short a period of time with that little money to start…

  13. To me the big thing about ”no Mortgage,“ is that no one can put you on the street. Even if you can’t scrape up the money to pay for homeowner’s insurance, you can scrape up the cash to pay the taxes and water bill. Unpleasant and uncomfortable as it might be, where I live, one can survive without electric, cable, phone, and internet. (Our climate is very warm, so that heat is not a necessity.) That security means a lot more to me than the speculative returns one might receive on an investment held in the market or, frankly, cash in the bank. We are on the downhill slide at this point, having bought small and financed for 15 years, as we owe only 4 years more. At this point, we actually owe less than the price of a new car!

  14. For those who don’t have the money to pay off the mortgage, a 15 year fixed rate mortgage can at least provide a realistic goal, while saving thousands on interest payments, compared to a 30 year loan.

  15. Now, more than ever, when everybody is panicking and stopping their IRA/401 contributions and selling off their stocks, I wonder if dollar cost averaging really works!

    Here’s a question. If you bought your house at the top of the market for $300,000 and now its only worth $200,000 then it looks like a bad financial decision at first glance. Particularly if you had to sell it at the bottom. Fast forward ten years and the house is now worth $500,000 and now it looks like a good decision.

    Isn’t the stock market the same way? It only returns in 10, 20, 30 years. There will be dips in between. If you follow the latest fads and buy the hottest home building stocks, then sell and buy the hottest bank stocks, etc. then you run a huge risk. Stick to an index fund and leave it alone for ten years and, like the house, you should do alright.

    I wish I had a crystal ball to see how my 401 will look if I leave it alone for 5-10 years! Any thoughts on this?

  16. Epicview, here are my thoughts. At 50, 9 years from withdrawl eligibility, I am too old to risk money in the market. I invested 61K over 25 years in my IRA. It has had a less than 0% rate of return if one includes dividends earned. If one does not include dividends earned it is 1.7% return. I played it safe investing in low fee growth mutual funds with major fund companies (dryfus, fidelity, american century and vanguard). I have come to believe that the 8% return touted over time by the financial people is a bunch of hooey. I will stick any future roth contributions into long term cds. Yes inflation is there but principle is still there. My son’s 500 index fund roth is down to 13k from over 20k invested, but he has another 40 years to make it up.

  17. @Almost – ouch! All the rules said that you should have gotten a better return over 25 years. You’re son’s Roth should recover in 40 years. What we are wondering now is have the rules changed? I’m so confused on what to do with my 401???!!!
    Moneyning.com had a post on this topic today. Interesting reading.

  18. Even if the tax write-off coupled with long term CDs somehow puts you ahead, the amount you end up ahead is not worth having an outstanding debt for the next 15-30 years.

    To me, paying off a debt, any debt, decreases risk because it’s one less monthly payment you have to come up with. Should a personal financial crisis happen, you aren’t worried if your investments will stay steady to produce enough income to generate a mortgage payment.

  19. I’m not convinced by paying off the mortgage until you only have a few years left or about to re-finance.

    I have 29 years of my 30 year fixed mortgage ahead of me. If I pay off extra now, all I’m doing is paying the principal from the 30th year and saving that interest. I’m not saving anything from next month’s payment. Why give this money to the bank? Why not stick it in a savings account, however little it earns, and when you are ready to re-fi, or pay off your remaining principal, use it then, in a lump sum.

  20. I paid off every penny of my mortgage before putting a penny into stocks (except for money that I was required to put into stocks to obtain an employer match).

    Then, when stock prices went to insanely dangerous levels (1996), I took all of my money out of stocks.

    I believe that it was largely my desire for financial freedom that helped me see through the Passive Investing nonsense and understand the need for frugality in stock investing. I wasn’t willing to waste money on more house than I needed, so I couldn’t see why I should be willing to waste money on stocks at a time when they didn’t offer a strong long-term value proposition.

    The end result is that I have a lot more money available to invest in stocks now that prices are reasonable again. Frugality is a way of thinking. Being frugal in one area often leads to frugal insights in other areas. I believe that the conventional wisdom is wrong on both paying off the mortgage and on stock investing.

    Rob

  21. I think everyone has to do what he/she is comfortable with. But as a real-life example, my family took a 15-year mortgage in 1972 for about 5-6%. By the 1980′s the interest rates had gone up so much that CDs, a virtually risk-free investment, were paying 12-15%. Had my dad paid off the mortgage early, all of his money would have been tied up with none to invest in high-interest CDs.

    Because he hadn’t paid off his mortgage, he had money availbable to put into CDs, earning up to 15%. In today’s climate, it’s hard to imagine rates that high, but if rates are expected to go up, one could take advantage of it by already having had a low-interest rate mortgage (loan) in place.

    Psychologically, most people want to be out of debt, but that doesn’t mean there will not be opportunities out there to earn money by borrowing low and lending high in the future. Again, I don’t think it’s for everyone, especially beginning investors, but many saavy investors do this.

  22. It’s always a judgment call. For example, in the early 90s I could have paid off the house, but instead, I put every penny I could into the stock market and by 2000, I had made so much money that just a small percentage of the stock profit paid off the mortgage. In hind site it’s kind of strange: In 1990 the house was nearly all of my assets, but by 2000 paying off the mortgage was a matter of less than 3% of my assets and the question became one of simplicity – not having to make another payment every month to a mortgage holder that changed every year. (Does anyone else get a little nervous when they get those “your mortgage has been sold again – send the checks to this new address” letters??)

    So it was a nice feeling and I wasn’t expecting the next decade of stocks to be like the last one, so I did it. Should someone do that now? I don’t know. It does feel nice, though I have no idea what that’s worth in dollars.

  23. If where you live belongs to you free and clear, as already said, the actual essential costs of running your home are relatively small.

    Again, as already said so many of our outgoings are chosen wants rather than needs, take these out of the equation, live frugally and it matters not what life throws at you. You are in a good place to weather any storm.

    I’m pleased for those who made a packet on the stock market, but most of us are risk averse and wouldn’t put ourselves in the position to do this anyway. But, it is – again as already said – a personal choice.

  24. I agree with this post. The sooner we can pay off the mortgage, the better.

    Question: A few months ago, our mortgage company offered us an opportunity to make two payments a month – same monthly mortgage, but we’d pay half in the first half of the month, and the rest in the second half. Apparently, this would allow us to pay off our mortgage eight years faster. We haven’t taken them up on this offer yet; instead, we just pay more to the principal every month. Is anyone here enrolled in a similar program? What do you think about this method?

  25. I am big on paying down debt. A friend of mine gave me an incredulous look when I mentioned that we do not have car payments even though our vehicles are less than 5 years old. She asked me where do all my money go each month. I told her under my mattress.

    But the mortgage question is a bit question mark for me right. Though it is at 4.6% for the next 30 years, I cannot imagine having to work until I am 60. So right now we made the decision to sit tight because of the economy. We will still pay a little extra each month, we will not aggressively pay it down because I want a big pot of money in case we get furlough or laid off.

  26. I’ve always paid off mortgages early as my personal choice. I like the debt-free feeling it gives me. Right now I know that I have a paid for roof over my head for the next 50 years or however long I manage to live. It’s a very very good feeling!
    The value of the house does not matter – only that it is a sure asset – a roof over my head, regardless of the ups and downs of the economy, etc.
    I can retire, or not, as I please now ! Good feeling!

  27. Here’s a question for everyone….My husband says we should never pay off our mortgage because if there is a natural / man made disaster and our house is totalled that it is hard to get your insurance to pay up unless you have a lender. Anyone have any experience with that? He recommends keeping at about a 50-60% LTV and refinancing every few years to put the cash in the bank.

  28. For cars, my rule of thumb is that it’s OK to take a loan on the first car you buy, as long as you can pay the loan off within half the life of the car. Once the loan is paid off, increase your monthly savings by the payment amount. When it’s time to buy the next car, you’ll have more than you need to pay for it in cash because you’ve been earning interest on the money you’ve been saving instead of paying it. The dealer may offer some great loan rates, but you can usually get the price down a lot lower if you’re going to give them cash.

    Continue saving at least your original car payment. Repeat a few times and buying cars with cash won’t even seem like a big deal any more.

  29. @JA -

    I think your husband’s fears are a bit overstated, but even so I’d respectfully disagree with the premise.

    I think the continual costs of refinancing the always-lingering monthly mortgage payment is a steep price to pay to protect the off-chance your insurance company will screw you out of a proper home valuation in the event of a disaster.

  30. Having a paid off home helped tremendously when I had to leave full-time employment behind to care for my dying mother.

    Total fixed expenses on my modest home (taxes, insurance, maintenance @ 1% of value) are around $400/month.

  31. Just refinanced 30-yr mortgage to $150,000 15-yr at 5%. Want to pay off mortgage early. First payment is due Mar 1, 2009. HOW do we go about beginning the pay-down process? We have up to $5000 that we can use this year. Should we put $5000 toward principal only when we make the 1st payment? What is the most effective option?

  32. I am with you, I plan to pay off our mortgage as soon as we can. We just moved from a 30 yr to a 15 yr and I am going to try and pay it down more quickly.

  33. But like Bill in NC said, if you pay off your mortgage your monthly expenses go down.

    Ours would be down to about $500/month for taxes and HOA. At $500/month, my husband and I would still be able to live comfortably with two minimum wage jobs.

  34. No matter how I run the numbers, I can’t make a mortgage produce a tax benefit equal to the cost of the interest. Even if I were close enough to a tax bracket to be shoved into a smaller bracket, the amount I pay in interest is more than I save in taxes. The math just doesn’t work.

    I just paid off the small second mortgage I had to avoid mortgage interest. I did it electronically using the snowball method, and I sent the transaction request in just a few minutes ago.

    It felt GOOD to write “Die, mortgage, die!” on the little space where you get to put in a comment about the transaction.

    Next step: more cash reserves. Then I can start killing the big mortgage. I picked off the little one first, even though the interest rate was lower, because it was weaker and it got separated from the herd.

  35. Like Bill in NC – my bare budget expenses without debt and without a mortgage make it easy to live if I needed to without much income. My total monthly bare budget expenses are under $400/month… most anyone can come up with that! That covers food, utilities, gas, insurance, and property taxes – bare budget only.

  36. @bren: You might want to contact the mortgage lender for instructions on making extra principal payments. For some, it is as easy as marking “Principal Only” on the “For:” section of the check. Others require two separate checks – one for principal and one for your regular payment. Just be sure to do it the right way, or your lender will simply apply the $5k to prepaying your interest, will do little to help you pay it off early.

  37. I just posted on this same topic! Personally I would rather pay down the mortgage and pay it off early because it is a sure thing, and as soon as it’s paid – it’s like getting an instant raise! Think of all the things you could do with that money, and how much interest you would save!

    Again, it comes down to your own personal risk level – and how much risk you’re willing to take with investments, how much longer you have til retirement, etc etc.

    For me, I’m paying extra – while at the same time investing 15% for retirement.

  38. Dude, if you’re in the place where you can write a check for your mortgage you’re insane not to.

    The only way it doesn’t make sense is if you plan on renting your house and moving into something else. Then your renters would be paying your mortgage (taxes, interest, insurance ect) and you would be getting the tax deduction and still own the house while having the money for something else. . .

    But most people don’t want to bother with that hassel.

  39. Can you guys advise me? I’ve got 250K in investments, which I live off of, but I owe 150K on my house. I have two kids entering college, and the ex won’t help pay for their education. I’ve stayed at home all these years, with two health issues, but want to return to the workforce (probably not more than minimum wage). Been a great mom, and have those skills, but not much more. So, I am tempted to pay off my mortgage, just so that I never end up homeless. But, that means kissing goodbye a lot of the money to help with the kids’ tuition, and most of my investments!! Any ideas? My financial adviser advises NOT to pay it off, but I’m getting very worried.

  40. @Catherine: Thanks for your question. I would probably continue to make your mortgage payment rather than giving up 60% of your savings. If you find employment with a steady income, even a modest income, then you might want to consider paying off that mortgage and using your earnings to help the kids with college tuition.

    I admire you for wanting to help your kids with school. It reminds me of my mom, who raised me alone and then tried to help me with college my first year, even though it led to financial problems for her and student loan obligations for me. I would advise your kids to look at in-state, public schools, apply for a ton of scholarships, and consider working part-time to cover smaller expenses (books, meal plan, etc.). I actually worked full-time my last 2.5 years and paid my way through. It can be done.

  41. I firmly believe in paying down the debt on your home for reasons which have been well explained here already. The best tool I have had for doing that is a savings account that I used to offset my home loan. This means the bank calculated the interest on the home loan after deducting from the loan balance the equivalent of the savings balance. If the loan balance is $100K and the savings balance is $5K, I pay interest on $95K. This means more of my loan repayment is going toward the principal and, depending on how much I put in the savings account, I can greatly accelerate the repayment of the debt. The other significant advantage is that the money in the savings account is mine to withdraw at any time should I need it. Faster debt repayment AND instant liquidity. Not all banks offer this arrangement, or allow 100% of the savings balance as an offset, and it will probably cost more in interest or fees but it is worth investigating and running the numbers to see if it suits your situation.

  42. @DDFD, your points are crazy. My peak earning years are likely when I’m almost finished paying off my mortgage, not when I first get a home and the interest is higher. Also, please share how “liquid” you investments are right now. Very liquid if you don’t mind taking the 40% loss. But you’d probably claim that taking the loss is a great financial move as well.

    I’m glad to see the majority of the people posting have their heads on straight and realize that you don’t need a huge EF if your home is paid for. And investments aren’t any more liquid than a home. They’re only worth what you can get for them TODAY, just like your home.

  43. Catherine: take care of your finances first!

    My parents couldn’t help me much with my college so I had to work, go part time, get a small Pell grant, take out a small student loan, take some classes at a cheaper community college and transfer the credits….

    Employing all those strategies made it possible and years later I am glad to say I did it. It will help your children become adults!

  44. We paid off our mortgage this month as part of a strategy we adopted 2 years ago. It’s clear now that for many people like us the tax advantages of paying mortgage interest are slowly disappearing. On top of that, Obama wants to tax more of the income I would need to make mortgage payments so my strategy is to reduce the need for that income.

  45. There is a rent value associated with use of a house. If someone else owns it, you pay that rent. If you own it, you get the benefit of “imputed rent”. If the cost of your house was invested somewhere else and you got interest or dividends, you would have to pay income taxes on it. The imputed rent you get for use of your own house is not taxed. If the value of real estate increases, rents increase as well, but your tax rate on this virtual income remains zero. Inflation continues when you are retired, but here are two costs that you can control (rent and taxes).

  46. Paying off your mortgage is the best option if you have the cash at hand, like that, you will save a lot in interests and probably buy a second home if you want.

    Amortization is the best option (a) if you do not have the cash at hand, (b)if house prices are going up above inflation each year with no ending. Amortising your mortgage comes with a big cost by forcing you to pay three times your house in the long run though it depends on the duration of your loan. Lets not talk about refinancing, because you maybe paying six times your house with it.

    Take a look at this calculation. Say you borrowed $200000 at fixed rate of 6 percent for the duration of 30 years. Make no mistake, inflation, duration, prepayment risk, default risk are quantified and calculated into the mortgage.

    $200000/100 = $2000 x 6 = $12000
    $12000 x 30 = $360000
    $200000 $360000 = $560000
    $560000/30 = 18666.667
    $18666.667/12 = 1555.5556

    The interest you owe the servicing banks and the investors amounts to $360000 for borrowing $200000 in 30 years. As a result, for every $555 you owe them in principal each month, you have $1000 outstanding interest to give them. I wish I could find any investment that will give me such return (almost 200 percent return)and imagine the yield if it is compounded. I would become a multi-millionaire in a few years.

    Pay it off if you can but remember that prepaying your mortgage carries financial risks as defaulting on your mortgage for investors and banks, so you maybe putting them out of business without realising.

    Goodluck!

  47. I am 65 yrs old and want to pay off remaining mortgage of $56,000 (mortgage rate is 4.5 %) with $35,000 I have in investments (plus some of what my husband has) for all the obvious good reasons of not having a mortgage. My husband has a secure teaching job and I have a small income of about $600 a month. I wonder how much tax one will have to pay when cashing in the investments to pay off the mortgage and if that harms the advantage of paying it off? I also wonder if starting social security is a good idea now or later?

  48. Glec,

    Good idea but if you are at a stage in the mortgage where big part of your monthly payment comprises the principal, better check the opportunity cost of what you want to do. In other words, You should remember that in the first 15 years in a 30 year mortgage, big part of your monthly payment is interest. If you are nearing the end of your mortgage, it is too late to save big on this transaction now. Better invest your cash safely and use the profit to pay down the debt gradually as you have been doing.

    Again if the interest you are going to save on your remaining mortgage is 4 times the capital gain taxes you are going to pay for withdrawal of your $35000 investment then it makes sense otherwise forget it.

    As for social security issues, for those born between 1943 and 1954, for example, you can start collecting benefits at age 62, but you’ll only get 75 percent of what you’d get if you wait until you’re 66. If you wait until 67, you get 108 percent of your monthly benefit. And at age 70, you’ll collect 132 percent — the maximum you can get by delaying benefits.

  49. Just after nine/11 in 2001, my husband was ill and on disability leave for four months. Fortunately, he got his pay during that time but it made us really think about what might happen if he were not able to work and pay our big mortgage payment. I knew I could not earn the amount of money he normally does.

    The next year, he took another job and we again relocated. We decided to use all our savings as a downpayment so that our note would be low enough that I could earn enough to pay it if necessary. We bought both sides of a duplex, one to live in and one for me to use as an art studio. We figured if ever needed, we could rent out one side for income. We decided from the beginning to pay extra every month on the principal with the idea of paying off our 30 year mortgage in 5 years. In addition, we paid any bonuses he received on the principal. Sooooo, this month, not 5 years but a little over 6 years later, we are thrilled to be paying off the mortgage. Having bought 5 houses in the last 20 years, this is the first time we actually own one, not the mortgage company. It is a great feeling!

  50. @Silver

    Congratulations! It takes a lot of dedication to stick to a plan to pay off a mortgage that early. So what if it took you an extra year or two, right?

    We have similar aspirations – not with just our mortgage, but our student loans as well. They are all on 30-yr plans, but we’re on a 7-year plan for the student loans, and a 10-year plan for the mortgage.

  51. I’m Currently trying to pay off my mortgage with Cash. Seems its gonna be a problem them taking it Cash 112K. My dad left it for me & told me where it was just before he died. There is no inheritance tax in my state so why report it. What will happen if I pay off this mortgage with Cash?? IRS ?? The Bank makes me feel like I’d be doing something wrong, when you would think they would take the cash fast with the way the economy is today……

  52. I was told that no matter what to always have some sort of mortgage on the home so that it can’t be taken in a lawsuit. Even if you have the money to pay it off, you should open a savings account with the value of the principal.

  53. i owe 170000 and i have 20 large on hand should i put it all on the principal and my interest payment goes down how that work help please 1st time homebuyer in the military 25 years old lol help

  54. @beanie: If you drop the entire 20k on the balance, be sure to follow the lender’s guidelines for making additional principal payments. If you send it in as a regular payment, they will simply prepay your interest, which won’t help you pay off the house any faster.

    If your interest rate is on the higher end, might be a good time to consider a refinance, using the $20k for principal reduction and closing costs. You’ll come out of it with a cheaper mortgage and significantly lower monthly payments. Something to talk to your mortgage company about, but move slowly and methodically.

    P.S. Thank you for your service!

  55. HI
    I owned two condo’s. My daughter lived in one and my husband and I live in the other. We would like to move into the one my daughter just moved out of. I have my condo on the market and have 100,000 in equity. When the condo sells should I put that amount toward the principal of the other or should I refinance to get a lower mortgage payment

  56. I’m late to this discussion, but I’ve got to jump in with two rhetorical questions to ponder:

    1. If making extra payments on your mortgage so that you earn only 5% is such a bad idea, then why are all the banks so happy to lend a mortgage and earn only 5% on that money? Or conversely, if it’s so easy to earn 8% or 10% in the stock market, then why don’t all the mortgage lenders just do that?

    The truth is it’s not a bad idea at all to prepay your mortgage; if it was, all these banks wouldn’t be stupid enough to lend you that money in the first place. The return on investment is priced exactly where it should be, according to its risk. But actually, this is one case where the consumer can sort of come out ahead, in a flip-side of a rerverse logic sort of way–for the same 5% interest that the bank is earning from the mortgage they are assuming the risk that you will default on the loan; however the 5% you “earn” by prepayment comes to you risk free.

    2. If you ask most hardworking, middle class people if it’s a good idea to borrow a couple hundred thousand dollars to invest in the stock market, they will tell you “No, that’s not wise, that’s speculating.” But by keeping a mortgage that you otherwise could be prepaying, you’re essentially doing the exact same thing. What’s the difference? Actually, it’s worse than that, because in the first case the speculation was probably unsecured debt; with a mortgage you’re speculating in the stock market with secured debt.

    So, in a historical perspective, it’s kind of interesting how we ended up as a nation of hardworking, middle class Americans, relatively prosperous all the while unknowingly becoming margin speculators in the stock market. We did this, mostly, through a number of big, unrelated factors like the replacement of defined benefit pension plans with 401k’s, the love affair with HELOC’s and tax deductions, and the accidental way that mortgage interest is even tax deductible in the first place.

    But my point is, when you make this decision, think long and hard about what your real financial position in life is, not conventional wisdom.

  57. my parents are 70&65 receiving $4000. mo.In SS benefits with a bal owing of $119.000 on their mortgage of a house valued at $200.000 Should my dad who still works,opt to draw a pension of an addtional $900.00 per month for life, or should he cash out his $120.000 pension and pay off his mortgage. In the event of his death, my mom will only have $2300.00 per mo.to live on. I think she can make it if she only have taxes, insurance, utilities,medicines and food to pay.This situation would be the same if my mom went before my dad. Please advise

  58. Hi C. Johnson, isn’t it true that you dad’s pension would go to your mom if he passes away? If that is the case, your mom would continue to receive the same amount as the primary beneficiary of your dad’s benefits.. would this change your thoughts?

  59. I’m going to payoff my mortgage with an inheratince I reciently recieved. Along with all the advantages mentioned here, I am convinced there is going to be rampid inflation in the near future due to printing money to fund all the bailout and social programs that are being passed by the Federal Government. Leaving money in a CD or other reasonably safe investment is only going to be devalued by inflation. If I pay off the bank I save intrest and the house increases in value in inflationary dollars.

  60. Absolutely pay off that bad boy, but first make sure you have money set aside for emergency fund/living expenses for a while.

    That’s what i’m going to do, the bankers don’t need anymore of my money than they already get.

  61. We just made the decision to pay off our mortgage in 4 years or less–we’ve owned the property for 9 years already. I wish I had made this decision at the very beginning. It is a personal decision (obviously), in our case it comes down to the fact that we are not disciplined in our savings or investment. We spend money each month because it’s there. Also, things happen when you have lots of savings–not all of them good. A friend was talked into paying off a debt he probably didn’t have to pay (it was 10 years old) because he was threatened etc…the bottom line is that he had (and the debt collector knew) lots of money available. While it is difficult to get money out of your home in an emergency–it is equally difficult (more so actually) for anyone else to get to your equity; creating a wall of security unlike any other I know of. There’s a lot of things to consider–especially if you’re a shrewd investor–but paying off a mortgage (like a poker bet) is at minimum NOT the worse financial choice you will make–and likely the best.

  62. I’ve already retired and have about $710,000 in retirement savings. I put down $100,000 on a new house in January of 09 and owe approximately $130,000. Would it make sense to take out enough from my retirement investments to pay off the mortage and taxes which would leave me with about $525,000. I’m on disability so I’m getting that plus drawing a small amount each month from investments. If I pay off the mortgage, I would only need to draw half of what I am now from investments.

  63. @Sheila: Sometimes it helps to look at the opposite scenario. If you felt the way you do now with $710,000 in savings, would you go out and get a $130,000 mortgage? Probably not.

    By paying off the mortgage you are probably freeing up several hundred dollars a month in payments, meaning you can stretch your disability and investment income even further.

    If I were you, I would pay off the mortgage, but the decision is ultimately yours. If you have concerns about wiping out almost 20% of your nest egg, simply continue to make regular mortgage payments.

  64. My wife and I bought a house in Oct 2000 for 170K, it is now worth nearly 300K. We decided to pay it off early and have been making steadily larger payments as our income level increased. The past 2 years or so I have been making what I have started calling “mega-payments” which are almost 4K a month (about 4 times the actual payment). As of Sept 1 we have the principal down to something like 35K. This is the point where we could pay it off by completely draining our savings. But what we have decided to do is to wait until Dec, at which point we will owe something like 22K which we will then pay off leaving a chunk of our savings just in case we need it.

    After that we are planning on speaking to a financial planner to help us decide what our next steps should be.

    We waited to speak to a financial planner because, like other posters have said, I am sure he would say we should invest and not pay off the mortgage. But we really wanted to be out of debt, with that peace of mind that goes with it. I look forward to it. :)

  65. @Non Investor: I don’t blame you for waiting to meet with a financial planner. They definitely would have tried to steer you clear of making those additional $3k a month payments, but you did what was right for your family, and good for you!

    You will soon be the owner of a paid-for $300k home! That’s incredible – way to go!

  66. I am so thrilled to hear this advice. I put everything I can into paying ahead on my mortgage. I’m keeping some cash on hand as an emergency fund, but otherwise it all goes into the house. An added benefit is that my home equity doesn’t count when I’m applying for financial aid for my kids’ college.

  67. This is a very good topic. I had some money to invest and instead of putting into stocks or bonds I paid off a large portion of my mortgage. Why? Your return on paying off debt will be equal to the interest rate on the debt. So let’s say the mortgage rate is 5.5%. Where else can you get a guaranteed rate of return of 5.5% with no risk? Nowhere.

    With CD yields very low, I bonds zero, it was a no-brainer for me.

    Of course, before doing this a person should pay off any high-interest credit cards or other higher interest loans and have a decent emergency cash fund set aside.

    I still take some risks by owning stocks and bonds, but my safe money investments go to pay off the mortgage.

  68. Pay off the cars, credit cards, etc. Keep the mortgage – invest all you can with much care to allocation (cash, bonds, equities). Refinance to 5% in this low interest rate environment – in 3 to 5 years when the 10 year is at 8 percent, you’ll be making money the way the big boys do — arbitrage.

  69. Mike – you are right but this site is for simpletons that need a non-brain required strategy. Pay off mortgage good – stocks that have gone and may go down – bad.

  70. @Mark: I am a simpleton – and proud. I also strongly dislike risk. And none of the scenarios presented by those who point to arbitrage as a way to make money like the big boys factor risk. To each his own.

  71. @Frugal Dad: Nothing wrong with being a simpleton. My statement may have come off wrong. Peace of mind and less time spent worrying about how to invest are both benefits. Simpletons of the world unite!

    However, “arbitrage” is perhaps a misleading word as stated above, but the age-old conventional wisdom of have a low interest, deduction eligible mortgage and investing the debt into sound diversified stocks/bonds/mutual funds, etc. is historically a sound way to have a more secure retirement – while acknowledging there is more risk than paying off the mortgage as soon as you can.

  72. @Mark: You make a solid point. Thanks for responding. I took no offense to the simpleton label…maybe it was my response that sounded defensive. Sometimes things are lost in the written word, ya know?!

    This is a subject I’ve battled with for some time, and like most things, my own personal experiences have molded my opinions.

    My grandfather helped raise me, and was a product of the Great Depression. He has never owned a stock. Says investing in the market is only slightly less risky than gambling in Vegas. Of course, I don’t feel quite that strongly about investing, and own a few stocks myself (mostly in mutual funds), but I’m conservative with all my investments.

    I also love the idea of owning my home free and clear, and once I’ve done that, I plan to invest in even more mutual funds to build wealth.

  73. Simpleton was not a nice word either. I was only making the point that if ssfer/simpler was always better, we would not own any stocks/funds at all – only CDs/Treasuries/Cash.

  74. Mark and Dad -since I broached the arbitrage subject — Ive gone back and forth on this subject — aside from peace of mind, I cannot come up with a logical argument for paying off a mortgage in this interest rate environment. Arbitrage, opportunity cost, whatever you want to call it – money can be invested elsewhere for better gains – even a long term muni will make you more than you’re paying in current mtg rates. Also inflation argument, paying off your home in yesterday’s dollars for the next thirty years seems to make sense. Peace of mind = emotion….emotion can be a portfolio wrecker.

  75. I believe the best reason for paying off your mortgage is you never know what the future holds. You don’t know if you’ll be sick, loose your job, etc; therefore much better off to owe nothing on the place you live in to protect against such circumstances and the stress it creates in your life.

  76. If there are really all these munis that are a better deal at current interest rates than mortgage prepayment, then why are the banks still lending fixed rate mortgages? Why wouldn’t they just buy the muni bonds themselves?

    Obviously something doesn’t equate in the risk/return matchup.

  77. Ryan – guess you got all the answers. Mortgage rates are tied to the 10 yr, not longer duration. Pay off the double-wide if you think it’s a smart move, no big deal.

  78. I did it. No more mortgage! I would have probably done it anyway, but it really helped reading through the posts on this site. Thanks for the encouragement Frugal Dad (and everyone else too).

    My New Years resolution: find a good financial adviser and start building up the retirement fund. Also this first year of being mortgage free I am going to take about half of the previous monthly payment and start investing in the house (i.e. new roof, furniture, new carpets, etc.).

  79. We owe $300,000 on a 30 year loan at a fixed rate of 5.75% interest. We are 3 years into the loan.

    Is it better to pay additional on the principle every month to pay off the loan sooner and save interest or is it better to refinance at a fixed rate at least 1% lower than our current interest rate? Considering closing costs, etc, to refinance, I am not sure what is the wiser method to decrease interest paid over the long haul.

  80. I have created a excell spreadsheet which tells me how much savings i made by paying the loan off quicker as a motivation tool. From a initail loan of $75,000 paid in 14 yrs out of a 30 year loan I have in theory ‘robbed’ the bank of $65,000 in interest payments alone! My total interest payment will be just $23,000 out of a possible $85,000. (much more reasonable) My house was brought for $112,000 from 14 yrs ago and is now worth in excess of $300,000. In fact I have got ahead by paying in real terms $100,000 for a current house value of $300,000 a 200% return over 14 years.
    Better to pay off…hell yes!!!!

  81. I’ll preface this with I’m a big/firm believer of Dave Ramsey’s principles and have been following his methods as much as I can for a number of years. I say as much as I can because my wife does not believe in them and so it becomes a balancing act to please both of us…

    We currently have no debt except the house and believe me, the peace of mind you get when debts are no longer there is priceless. I’m now in the position where I can payoff my mortgage and I will not hesitate to do this. Here’s at least three reasons that I think you should (these are really Dave’s reasons but I believe them 100%).

    1)Paying off the house lowers your risk. 100% of foreclosed homes have a mortgage on them… Think about that for a second

    2)There’s the argument that you can invest this money elsewhere and make more money. Having a math background I agree with this but after you factor taxes and risk into the standard equations the returns are lower than everyone touts.. And of course 2 years ago if you started to invest that money where would you be right now. Say no more…:) Also ponder this.. Let’s say you owe $200K on your house and you have $200K invested. This would be exactly the same as if you were debt free on your house and then took out a loan against it for $200K to invest. Would the average person really do this? I don’t think so though its the same thing….

    3) Then there’s the argument that you lose your tax deduction. Yes you do but again ponder this. Lets say you have a mortgage for $200K at 5% interest. You would pay around $10K per year in interest which you can write off on taxes. If you were in the 25% tax bracket that $10K write off would save you $2500 in taxes. So what you are essentially doing is paying the mortgage company $10K so that you don;t have to pay the government $2500. Doesn’t sound like a good deal to me… I could also be debt free on the house, pay a charity/church $10K and get the same tax benefit but feel a whole lot better about it…

  82. Debt is slavery. Always pay down debt.

    ALWAYS!

    Financial advisers are like realestate agents. There is never a bad time to buy. Each and every word a financial adviser ever tells you on whether or not you should give him your money is based on the fact that HE WANTS YOUR MONEY.

    Forget those guys. invest in the stock market yourself. Time the markets. after debt is paid then put money into some crappy GIC. When you hear the pathetic news of money worshippers committing suicide and maybe even taking there families with them….. THEN GO ALL IN! That my friends is the only way to time the market.

    I waited years for this crash. $$$$$$

  83. James, I can’t agree with you more “Debt is slavery.” I have been reading some of Dave Ramseys books and I can’t wait to pay off my mortgage. I think I will be very cautious when paying it down though, I won’t spread myself too thin, and I will make sure to have a rainy day fund.

    I am in the process of refinancing my house to a 15 year mortgage and I am hoping to have it paid off in under 7 years. I can’t wait until my next raise so I can put it all towards principal. If anyone wants to track my progress you can check out my site http://www.payingoffmymortgage.com I know I will need some encouragement when I want to spend money on a new tv or camera :)

  84. @Lori Keep,
    Here’s some easy refi math for you.

    Let
    X = (Total Costs to Refinance [points, attorney's fees, closing costs, etc, etc, etc])
    Divided by
    (Mortgage Balance)

    Y = reduction in interest rate

    Then X / Y is approximately how many years it will take to recoup the expense of refinancing.

    Example:
    Mortgage Balance = 100,000
    Refi Cost = 2,000
    Interest Rate reduction = 1%

    Then 2% / 1% = 2 years (APPROXIMATELY) to get back to even in terms of refi cost.
    Everything after that is interest cost savings.

    p.s. “Refi vs pay down” is not an either/or. You can do both. Be sure you get a mortgage with NO PREPAYMENT PENALTY, then the monthly payment is just a minimum – you are free to pay more.

  85. Dave Ramsey is a sheep herder….If you cant do your own investment research, or figure out how to diversify a portfolio – fine, pay everything off. If my mortgage is 5.25, why would I pay it off? Stocks, bonds, cd’s, options, mutual funds — in the long haul a well diversified portfolio’s return will exceed my mortgage rate. That’s the bottom line. If you’re claiming that you ripped off the bank of their interest income by paying off the debt you’re wrong. The fee you paid is called “opportunity cost” ie what you could have done with that money.

  86. @Mike

    You smooth smoothie you. You have figured out that the path to wealth is paved with leveraged assets.

    Good thing those rubes down at the bank who HOLD your mortgage are such simpletons. Imagine. If they were as sharp as you, they wouldn’t lend you THEIR money. They’d go for the higher rates of return in the other investments you list and leave you out of the loop.

    Instead, they lend their capital to you so that you can go for the gold while they settle for measly mortage interest. Gosh, I don’t know WHY they behave like that, do you?

  87. What an interesting discussion, though most folks seem to be talking past each other.

    No one has made the point that, in general, the best strategy for any investment return is diversification. One’s home equity is an investment, but concentrating 100% of one’s wealth in that investment may not be a much better idea than leveraging it to the hilt to buy penny stocks. A “black swan” can hit your home equity investment just as it can hit the stock or bond markets.

    Also remember that mortgage interest is generally deductible, so for most of us the government is giving us a 25% – 40% (or more in some high-tax states) discount on the interest cost.

    One must make some judgments about the near future and then diversify to avoid the worst cases and benefit from the most likely cases. In my estimation, we are currently in a historically low period of interest rates, so a new 15-year mortgage at 4.5% is probably a good deal, provided one can find a place to park the money with an appropriate level of risk to one’s taste.

    But treating one’s home as a wholly different kind of investment than any other is a mistake, albeit one that only bites now and then.

  88. @ Pedro

    Sarcasm isn’t a substitute for reasoning — comparing an institution’s strategy versus an individual’s strategy is a flawed thought process. If I have a loan to value ratio of 25%, would it be an intelligent decision to pay off the home? If the value of the home is 30% of my overall net worth, would it be a smart move to pay off the home? Big bad bank, right? Don’t be a lemming.

  89. @Mike,

    Since I’m a sheepherding lemming, substituting sarcasm for reason is all I’m capable of.

    You ARE correct in noting that noting that comparing an institution’s strategy to an individual’s strategy has inherent flaws.

    Institutions are in a much better position to pursue maximum expected value in the face of risk than individuals are.

    However, your recommendation that individuals arbitrage higher expected returns from the stock market against lower fixed interest rates is MORE risky than the strategy that banks use, not LESS.

    If your strategy was complete and correct, professionals who “do” money all day every day for a living would never give you access to “their” money. Yet for some reason they do.

  90. @ Pedro

    It’s not an all or nothing proposal. If the loan to value ratio is low (ie a house’s current market value is $750k, with an outstanding loan of $250k), why am I going to tie up more equity in the home? Im confident I can earn more than 5% going forward (even less needed when you consider a 35% tax bracket). Yes, home values and market return can fluctuate, – but long term returns are on my side. We haven’t even considered age, cash needs (college, etc), and tightening credit — one solution doesn’t fit all — but for your overall argument, the trend is not your friend. Also, they are not giving me access to “their” money, they are giving me access to “your” money (as a depositor socking your cash away in your 2% cd).

  91. I’m thinking of refinincing our home- we owe 275K with a 5.375 mortgage, 25 years left on a 30 year term. Our new rate/terms are 4.625, 20 year term. But, the fees to refinance, are about 4K, which we would roll back into the new loan, which will be appox 279K. Is it a smart move to increase what I owe? I guess the big savings are the 5 years of interest I won’t be paying. Thoughts? Thanks.

  92. 1. How long will you be staying in the house is the first thing you have to figure out. If it’s only a few years, it is probably not going to pencil out.

    2. How long will it take to recover the $4000 ? Do the math.

    3. You’re only saving about 1/2 of a percent… not a big enticement to me… but may be to you over the long haul.

    4. Find an amortization program and do the math. That will tell you exactly what each one will cost you over the cost of the loan.

    5. Remember that the five years extra is not definite on the higher percentage loan. You can pay a little bit extra each month and knock it down to 20 years also.

    6. what’s the diffence in the monthly payment between the 275 @ the higher rate, and 279 at the lower rate?

    7. Once you do the math and KNOW what both plans entail, then figure out which one makes the most financial sense for the time frame you will be in the house, and goes best with your financial goals.

    It’s a personal decision :) Just gather ALL the facts – do the math – and then make your decision!

  93. Bren,
    See my post #91 above. In your case, your closing costs are 1.455% of your loan amount (4 / 275).

    Your interest rate reduction is 0.75% (5.375 – 4.625).

    So, it will take you roughly
    (APPROXIMATELY YA ONLINE NITPICKERS!)
    2 years (0.01455 / 0.0075) to get back to even.

    That is, after around 2 years, the amount you paid in closing costs will be equal how much you will have saved in interest with the new, lower interest rate
    (whether you roll the closing costs into the loan amount or not).

    Thereafter, the money you save on interest each month is gravy for you.

    What you have to decide is whether
    1) the 2 year break-even point is short enough for you (in this case, “shorter” is better) and
    2) how likely it is that interest rates will go lower in the next two years – thereby offering you a better deal.

    I don’t know the answer to either of those questions.

  94. I ran across this article because I just paid off my mortgage and was searching on what to do with my monthly income now.

    My view is that everyone needs to consider their own personal financial situation and risk tolerance when making the decision about paying off their mortgage. People have made good points about paying off other debts first, fully funding retirement plans and emergency funds, and diversification.

    I made the choice to pay off my mortgage because I’d done all that, and was left with what I call “the big what if?”. I’m a 42 year old single woman and have only myself and my earning ability to rely on. Yeah, I’m making good money now, but that’s not guaranteed in the future. What if I’m layed off and can’t find another well-paying job – or any job! – for a long time? What if something happens to my health and I can’t continue working like this? What if I burn out and need or want to take a less demanding, lower paying, maybe part time job? What if the thought of working until I’m 67 makes me want to scream and I want to retire early?

    It made the most sense to me to kill the mortgage so I wouldn’t have to worry about a monthly payment should something bad happen. And because now is when I’m making a good salary and bonus with no mortgage payment every month, my savings is increasing every month in leaps and bounds and I have a lot of investment options with plenty of time before retirement to build up an even bigger nest egg than is in my 401(k). I also now have the freedom to consider alternate careers in the future.

    The peace of mind, though, that’s what is priceless to me. I will never have to pay someone else to have a home (except the taxman!), and all my net income is mine to do with what I want. ALL of it. Debt-free is a beautiful thing.

  95. I am not sure how much the whole “if paying off your mortgage is such a bad idea, why do banks lend it in the first place” argument is worth. Banks are lending multi billions of dollars in mortgages so they do not have all the investment options that you have. Earning 5% on billions is a lot harder than 5% on 100k. Also, we shouldn’t just assume that mortage lenders always know what they are doing, as 2 of the largest ones became insolvent as a result of bad mortgage loans :)

    Paying off a mortgage cam very well be smart, but I am not sure on that specific argument.

  96. Mike McDermott: Listen, here’s the thing. If you can’t spot the sucker in the first half hour at the table, then you ARE the sucker.
    “Rounders” – first line.

    Of course,
    “we shouldn’t just assume that mortage lenders always know what they are doing, as 2 of the largest ones became insolvent as a result of bad mortgage loans”
    is a point well made, and well taken.

    MY beef with above financial savant above is that, in grasping the concept of maximum expected value, he thinks he understands EVERYTHING about finance and investing. Even though he is blind to risk, utility, and ruin theory.

    Like a chimpanzee with a handgun, he means no harm, and yet…

  97. Mike’s argument is that you can arbitrage expected higher returns in the stock market against lower interest rates on your mortgage to help you generate wealth: the expected value of the higher return in equities makes keeping a mortgage balance for as long as possible “a good thing”.

    A real-life example of why maximizing the expected value of the return is not always the way to go:
    When you buy homeowner’s insurance that is correctly priced, you will ALWAYS pay more than the expected value of any loss you might suffer.

    In order for your insurance company to remain viable, your insurance premium must cover
    1) the annual expected value of any loss you will suffer.
    2) administrative costs (administering billing/premium collections, paying adjusters to evaluate your claim when you suffer a loss, determining and filing insurance rates, underwriting & pricing your policy, paying agents’ commissions, etc.)
    3) a PROFIT for the insurance company.

    Paying for all of the above means paying a premium that is, on average, MUCH higher than the average loss suffered by a group of similar properties in a given year.

    Despite the fact that, on average (like investing in the stock market vs. paying down your mortgage) you would come out ahead skipping homeowner’s insurance and investing the premium, reasonable people would rightly view someone who chose to “go it alone” as an idiot.

    This is because not all dollars are created equal.

    $400,000 LOST to a house fire (for argument’s sake, with a probability of 0.0015 X 400,000 = an expected loss of $600)

    is much more BAD than $800 GAINED in saved insurance premiums is GOOD.

    That is, for most folks (and rightly so), investment losses have a higher negative utility (they “hurt” more) than similar investment gains have positive utility. People intuitively get this. It doesn’t make them “sheep”, it is actually very reasonable.

  98. Pedro – I may be a chimp but you still haven’t explained why i should pay off my house if i can afford the payment and have a 250k to 750k loan to value ratio. Maybe the numbers are too big for you — lets say: your trailer is worth $75k, and you owe $25k and you can make your $325 monthly pmt without difficulty — should you pay it off? You try to disguise your ignorance with dumb metaphors and equally useless movie quotes. (By the way, re-writing others thoughts does make you a sheep). And please leave my cans upright when you empty them each week.

  99. Pedro: Bottom line issue with your posts (or advice as you like to call it), is that you have not conceded (as I have) that one solution does not fit all. You summarized my point by saying I think keeping a mortgage balance for as long as possible is a good thing — not true. Once again, there are many factors to consider for each individual situation — emergency fund, job security, cash flow, investment knowledge, risk tolerance, college funding, age, credit environment, interest rates, retirement funding etc. etc. Your theories, links, formulas mean nothing — each person’s situation is different and one size does not fit all — despite what your text book says (you gotta be an engineer or an actuary). For me, the solution lies somewhere between total leverage and no leverage. And AAPL hit a new high today, glad I didn’t sell those shares at a 45% gain to pay the house off, because the new high now represents a 92% gain.

  100. @Mike
    “Dave Ramsey is a sheep herder” …[1/9/2010] “Don’t be a lemming” [1/30/2010]
    “please leave my cans upright when you empty them each week” [3/26/2010].
    and yet
    “Bottom line issue with your posts (or advice as you like to call it),
    is that you have not conceded (as I have) that one solution does not fit all” [3/29/2010]!!

    I readily concede that one solution does not fit all AND I salute your newfound moderation in tone.

    MY bottom line issue with your posts, sir, is that you’ve done a little math and found an investment strategy that you like.
    Having done so, you have come onto this forum to berate a bunch of people whose gut-level understanding of risk is leading them to a strategy that might well be “better” than yours.

    By “better”, I’ll even concede that what you recommend will likely yield more money 8 times out of 10.
    However,
    (gotta throw this in there because I know you love it when I use metaphors I’ve heard from someone else)
    if you cannot swim, the fact that the average depth of a lake is 3 feet WILL NOT HELP YOU when you’re in the 9 feet deep part.

    Translation: people who live well within their means and pay off their mortgages are managing the risk that they will get laid off, become disabled, or otherwise loss significant sources of income. Even if these unfortunate events never occur and they suffer some opportunity costs based on their actions, that doesn’t necessarily make them wrong. Or sheep. Or lemmings.

  101. or a “chimp” or a “smoothie” or a “savant”? If you can’t swim…learn. 8 out of 10 — how much “little math” did you do to come to that conclusion? You can have the last word, but first, clean up your cubicle or you’re not going to get that 2 dollar raise you’re pining for…..

  102. I know this article is old and probably everyone has moved on long ago, but I wanted to add my two cents:

    1- Mike, I was rather horrified by your degrading messages. Money strategies aside, making asanine and inane comments about someone’s trailer and alluminum can selling is ridiculous and certainly brings no merit to your arguments.

    2- I wanted to share my personal plan, which is as follows:
    we own two houses, one in my name and one in his. We live in “my house” and rent out “his.” He has a 30 year mortgage but has been paying on bi-weekly payments plus extra payments for a few years, and is roughly three years from paying it off (about 12 years early.) I bought my house in 2008 at 5.625% on a 15 year fixed loan. I made the minimum payments until around 2010 when I started making bi-weekly payments, but still the minimum payment for that plan. We started the plan to pay off all other debt, he sold a car, paid off his 2010 dodge ram truck (4 years early), and I just paid off my TL-S last month (3 years early.) We have no other debt besides our two mortgages.

    I was contacted by my mortgage company (Wells Fargo, for those interested) who advised me that my loan was owned by Fannie Mae, and just managed by WF. FM was offering a program for a free refinance. After a lot of questions and research on my end I discovered it is actually a zero cost refinance being paid for by the American tax payers (so, thank you!) and have chosen to go through that process. They’re dropping my rate from 5.625 to 3.625% with zero cost to me (yes, I’ve read the fine print.)

    I’ve made the decision to a) continue with bi-weekly payments, b) keep paying what I WAS paying on my mortgage, which will be about $300 more a month than the new minimum required payment, and c) ADD the $750 I was paying each month on my car to the mortgage payment.

    By doing this I will have my house paid off in under 6 years, so that by the time I’m 39 (and he’s 46) we will own outright two homes, one worth about $155,000 and the other worth about $200,000.

    At the same time he puts what he can into his IRA and I put 15% (with an annual increase of 1%) into my 401k until I’m maxed out on the amount I can contribute (at my current income level I will be maxed out in something like 2 or 3 years, so will just maintain the maximum contribution limit after that, and start adding more into my IRA.)

    So, I am accomplishing two very important (to ME) things: 1) I’m paying off my mortgage as early as I can, thereby reducing my stress and my personal risk, and 2) I’m contributing to my 401K and IRA (i.e. diversifying my investments) to aid in my comfortable future.

    Combined with my pension and SS (if that’s still around when I retire, which I’m highly doubtful of) I should be doing okay.

    Our plan after we pay everything off is to increase our investments but also dramatically increase our savings so that we can purchase another home and have two rentals plus one live-in (and possibly have additional rentals down the road, as we can afford to purchase them with cash or near-cash.)

    This is our plan for our future, at the risk level that we tolerate.

    If our cars break down, we will have money in savings (liquid) to pay for a new one (or should I say “gently used one”) with cash, maintaining a zero-debt balance.

    I applaud everyone who has looked into their hearts and minds and chosen the right path toward financial independence, the path that is right for THEM. This is MY path for financial independence – my ultimate goal of being totally independent of anyone else for my comfort and wellbeing.

    Oh, and Mike? I actually DO recycle my aluminum cans for money, so I guess that makes me a trailer park sheep? :)

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