View Full Version : The Plusses and Minuses of Paying Off a Mortgage?
I have been working with a money coach who is very good at asking probing, hypothetical questions to get at my values around money.
Last night, they asked, "So what are the benefits, to you, of paying off your mortgage early? And why might you NOT want to?"
At first I laughed. I mean, it's so obvious: Relief of that huge debt payment, freedom from foreclosure, safety/freedom-to-live-however-I-want issues, equity, all of the usual reasons.
But is it so obvious? Paying off a mortgage can be hard, hard work when you don't make a lot. Are there any reasons you can think of to not do it? To put those extra payments et al into savings or put them somewhere else instead? Has anyone ever decided not to go that route (of not trying to pay it off early) -- and why did you?
Just curious, and wondering if there's something I'm missing.
A couple of situations come to mind right away:
- If you've paid off your mortgage but do not have a significant source of funds for major expenses, then ... what? Do you buy the car/windows/college/operation on credit because you don't have cash? That's certainly a choice, but you certainly also reduced your options by paying off the house instead -- and the credit will incur charges you wouldn't have had if you had cash for the expense.
- Can you make more money with another investment than you spend on mortgage interest? If you have a 4% mortgage but can reliably earn 6% on some other place to spend your money, you'll be ahead with the other investment.
Well, your circumstances might different than mine.
When we were so close to paying off the mortgage, I chose to use the money that I had saved to take our two kids who were almost 17 and 14 years of age to Europe. DH was not interested in travel to Europe at all and wanted to use the money to pay off the mortgage. I knew that by the time I could get the right amount of money saved again for the trip, the kids would be too old to go or have other commitments.
I felt the mortgage would still be there and manageable even at the high interest rate of the time but the trip to Europe had a priority for me to share with the kids. I never regretted the trip although it did bother DH that I put a priority on something that didn't include him by his own choice. The kids still have never had time or opportunity or money to go and remember that trip as something very special in their lives.
Sooo, fixation on paying off the mortgage has an "opportunity cost", the choice not taken. What choices are you not making when you are choosing to pay off the mortgage?
ApatheticNoMore
1-8-13, 7:45pm
There's always a million emotionally valid things to do with money (if you spend it on anything from stress relief to charity none of that is actualy the wrong choice for the future).
But if you want to beat that return economically from savings without investment expertise it would probably be hard (leaving aside things like employer matching funds - I'm thinking that might be worth it. And the tax advantage of things like Roths up the returns). Maybe there are possible advantages of spreading the tax deduction out for more years? I can't imagine that generally paying off, however if it allows you to itemize in cases where you wouldn't otherwise ....
High five to Razz! I so wanted to do that for my son over the holidays but wasn't able to. Since he is now 18 and only has a few more months of school I hope I might still get one more chance.
As far as the house, we paid off early but not to the detriment of saving. It was never either/or but dedication to both. When my husband had a stroke in November and before we knew where we were going to be, I was very happy in the security that I didn't have to make a house payment on my retirement income alone. We also saved up enough that if we had to we could live on my retirement and only touch savings on occasion. Our biggest expense each month is food and we could always cut back there. It is a good feeling to not have that debt.
Blackdog Lin
1-8-13, 9:03pm
To me, there was never any question. The freedom, the relief, the security of being debt-free: priceless. It enabled us to save more for retirement, and the lack of a mortgage payment is what actually enabled me to retire at a fairly young age. There is no way we could swing it financially if we had a mortgage payment. And retirement is wondermous! Simple living at it's best!
So that was my priority, but I don't judge others with different priorities. Razz with her European trip to me is an awesome use of savings, something to remember for a lifetime. I'm just a little more conservative, and feel so much better about our financials knowing that the house is paid for.
Are there any reasons you can think of to not do it?
When we first started out to getting debt free, we prioritized our debts.
For us, student loan debt was the biggie, which meant throwing anything extra at it. Because we were really young and didn't know anything, we did this at the expense of saving, which means we never developed an emergency fund, and then a trip to get the car fixed would cause a massive problem (meaning going to parents to get money for tires, or putting them on a credit card). After this happened the first time, we came up with a new plan -- which was to put some of our "extra" (after simplifying) into savings and some of it toward student loans. Then we didn't have that problem anymore.
After DH's student loan was paid off, then he threw it at the car payment. It wasn't much, and so once that was paid off, we looked at our options.
One element we had to consider was whether or not we were living where we wanted to live. We were considering two things: 1. selling and moving far away, and 2. running property management (rental property). Only two would have the benefit of having the mortgage paid off, then using that as collateral to buy a bigger/nicer home and running it as a rental. But, since 1 was really about living somewhere else far away, 2 just didn't seem viable really. As such, paying off the debt didn't seem all that necessary, as paying off as we went along at the normal rate as the home's value increased (we had that evaluated each year just to see where we were) demonstrated the value of that "investment" and we still retained the tax benefit of the mortgage -- and we always put our tax refund into savings (usually our CD, which comes up within a few days of receiving the check!).
The other thing we had to consider was our savings/retirement. DH got a matching at his workplace, up to X percent, and he could also then go beyond that up to Y percent of his paycheck if he wanted. Our 401k was doing *very* well (even during the downturn, it was excellent. we continued to see gains in our 401k -- but of course this decision was made prior to the downturn). At the time, we were doing X-A of income into there, but the ROI was a lot higher than the investment in our house, so we opted first to go up to X, and then ultimately we worked our way up to Y.
Typically, whenever more money came our way (DH got a raise, I got a new client) we would decide how to spend it. In my case, most of it went to my student loans when I would get an increase. :) But when DH got a raise or bonus, we had to decide what to do with it. It was always up to question whether we would spend it on the mortgage, increase savings, or use it for quality of life.
Because the house going as it was worked for us as an investment strategy, particularly since we were planning to eventually move. We were able to increase quality of life -- which were small changes, honestly, which yes. . . could have been cut for savings, but in our minds are definitely worth it. Some people "need" their cable TV -- we "need" our massages. It's part of our health care! But, the majority of any increases in pay or bonuses for DH went to savings.
As such, it worked well for us.
We sold our home in one day. It was still at full value, even though the market crash was well underway. We'd paid down just about 1/3 of the mortgage, so we came out well on top. We cashed out our 401k, half of which became the money that we used to get started here, the other half has been reinvested in good mutual funds in a Roth IRA. Our savings was also considerable, and we have also used that money to support us, and half of it is squirreled away in CDs that mature and hten we roll them over. The interest rates are currently low, but we opened each CD in a different quarter, so we know that each quarter if we need cash, it's going to be available on X date. So far, we've just continued to roll them over, though we are looking to bring them to NZ, because the exchange rate is good and the interest rates on CDs are higher here.
Currently, we rent. It has a lot of benefits for us. It may be more expensive than owning -- I have no idea. But, the mobility provides us with a lot of opportunity. If we need to move, we can without having to worry about resale, etc. We are also learning in each place we live what we truly need. In our apartment, we learned what we needed in a kitchen. In our condo, we learned that we needed in terms of home lay-out and what we actually use room and Sq-ft-age wise. In our apartment here, we learned about warmth/insulation/expenses. In our current cottage, we are learning about what works for us as a small family and what doesn't, and also about location and commuting. :) I have a couple of ideas for our next place, but we have committed ourselves to this place for the next two years (both DH and I agreed, unless something crazy --good or bad -- comes up).
As our business grows and we acquire more income, we are still following this process above:
1. savings or debt?
2. savings or quality of life?
Typically, we try to divide increased income between savings and debt, and then take the savings amount and decide whether there is a quality of life aspect that we need to improve. Our last quality of life impact was buying more food (both DH and I were living sub calorically due to food costs), which was well worth it. And, we managed to find better prices, so we've been able to put more money towards savings again from that budget.
After saving for a bit, we discovered another quality of life aspect that is important to us -- bi-annual teeth cleaning. We have been doing one cleaning plus dental appointment per year for DH and myself, and just dental check up for DS. The total cost is $470/yr. This costs less than insuring currently, but we are looking at getting insurance that will provide bi-annual teeth cleaning plus check ups (all without co-pay) plus then also any emergency/problems-to-be-fixed care, particularly as DS heads from baby teeth to adult teeth in the coming years. Looking at some of the plans out there, they are quite affordable -- one even includes child orthodontics as part of the plan, but we wouldn't upgrade to that unless DS needs it. Still, the idea of getting dental insurance this year is an important one for us -- so we are looking at taking the savings and putting it toward that.
I think it improves health -- so it might be housed under health care instead of quality of life in my listings.
But anyway, yes. That's why I don't pay down my mortgage (that and I currently dont' have one).
awakenedsoul
1-8-13, 11:14pm
I'm really glad I paid off my mortgage, too. Suze Ormann says that it's the best thing a single woman can do to give herself the feeling of security. That always resonated with me. I've seen so many people in this downturn stressed out about losing their houses. I'm so glad that I bought in a down market, and that I found a one bedroom one bathroom.
Paying off our mortgage was just the best thing ever! It gave us peace of mind, and we sleep better at night knowing we own our home...
Best feeling ever when a home is paid for, for us.
We are saving for retirement and paying off the mortgage at the same time. In 12 years, it will be paid off! I am hoping for 10...let's see if we can do it! I am not sure why someone would not want to pay it off early, for us it is a huge peace of mind knowing that we don't have to worry about $1850 a month! We could live very comfortably on that figure alone in retirement!
We're about a year or two away from paying off our mortgage, (depending on when my mother's house sells - We owe about $38,000 now, and my portion of the rest of Mom's estate is $20,000, some of which will go into the emergency fund and some toward the mortgage).
I know that people claim that you can get more for your money by investing it at a higher rate of return. Lately, however, that rate doesn't seem to be so fixed or so good, though to be honest, I don't follow our mutual funds closely, so I can't say for certain how we're doing in that department.
I think paying off the mortgage is nice for all the reasons people list, but also, there is a fixed goal. I can see the principle shrink by $1300 or so every month with the extra we are paying. It's something I can rally all my enthusiasm toward working on. Investing is much more open-ended. You just put your money out there are watch the rates of return. That elicits a "meh" from me at best.
Can you make more money with another investment than you spend on mortgage interest? If you have a 4% mortgage but can reliably earn 6% on some other place to spend your money, you'll be ahead with the other investment.
That's how we determined which course is right for us. In fact we have borrowed to have more money to invest when interest rates were low enough. One consideration that helps us sleep at night is that the investment must be as secure as possible, but still have enough liquidity that we can get to the money to pay that mortgage if other income streams dried up.
I can see how it would be great to have a paid off house, particularly if you are right where you want to live.
jennipurrr
1-10-13, 3:19pm
We have thrown a lot of money into our mortage over the past two years. We've almost got it paid off (below $20,000!). I am very happy about that. At the same time I am becoming less content with my house for various reasons...mostly location and school zone should we have kids, some also in that the current house is not worth doing renovations to to meet our expectations.
So, now DH and I are considering selling/moving. We have a lot of money tied up in the current house that could be used as a down payment on the next house should a fabulous deal come along. So now I am torn on if we should plow ahead or hold out a bit in case a great house comes along. We are not in a hurry to move but have a very specific set of criteria for the next house...right now only about 5 houses in this area are listed and maybe one or two come on the market each month. So I wonder if it would be best for us to be able to act quickly? I don't know...I've been having this conundrum for a few months but keep plugging away at the mortgage. I think we will be releived when it is paid off and then can truly assess the buy or not buy situation.
ToomuchStuff
1-11-13, 5:09am
Going in some part to depend on your state laws. Having a house with a mortgage, and a spouse going into a nursing home, or having a house with a mortgage, that wouldn't be cost effective to lien against, are the only two reasons, I could come up with, for not having it paid off.
I would only string a mortgage along IF my savings were earning more than I was paying out in mortgage interest AND I had enough cash to just write a check to the bank if I had to.
I am really trying to pay mine off as quickly as possible.
So I wonder if it would be best for us to be able to act quickly?
I can't give you financial advice, but can tell you that in any kind of competitive market cash IS king. In real estate, a cash reserve is really the only way most people have that allows them to move faster and write more appealing offers if the right property came along. Liquidity has a big advantage over equity at that point in time.
I would only string a mortgage along IF my savings were earning more than I was paying out in mortgage interest AND I had enough cash to just write a check to the bank if I had to.
We were in a similar position - we contacted the bank about five years before we made the payoff, and asked about paying TODAY in cash. We wanted to know if they would accept less. The answer was, no, they want the full remaining amount. Well, our mortgage was adjustable, and they kept adjusting to term - so that means that the amount of payment was calculated as if there remained whatever was left of the original 30 year term. Since we had been making additional principal payments, in the end the mortgage payment was about $75... we kept making it until the game grew old...then finally made a payoff.
To the OP - the answer is "it depends"... and sometimes today's answer is different than the one that would be made in another year or two. If it were me, in today's market, I think I would preserve my cash and keep the mortgage. (Said by someone who owns their home outright).
We've done both. The house we live in how is paid off. We started when I met DH, who had already purchased the house. I began to pay extra on the principal since I had previously been paying rent, and eventually we had a lot of equity. We used some savings for a lump sum to pay it off. However, we had moved to Phoenix in 2008 and bought a house....not at the bottom of the market. So, that house is not paid off and we have not been paying extra on it. Why? Several reasons including: emotionally, it's not inspiring to pay extra on a rental home; one car is 14 yrs old and we feel like we should be aggressively saving for a new(er) car instead; the value of the Phx house is (finally) increasing so it might be that we wouldn't save much on the interest in a couple of years anyway because we will sell as soon as we are close to break-even on what we owe.
I paid off our house a few years before I quit working. The reason was because it meant I would not need as much income to maintain the same standard of living. Thus lower taxes and now I can probably even qualify for Obama care money.
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