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.