Should we pay off our house early? What about the next house? Don't worry guys, we haven't bought our next house just yet. We're keeping our current one for at least another 12 months.
However, we have been thinking about whether we should pay off our current house quickly (we have been debating whether we want to rent it out or not – if we decide to sell then we of course wouldn't pay off the current house quickly) and even whether or not we should pay off our next house quickly as well.
Our income has increased by a lot over the past couple of years, and I talked about this in my post from last week Financial Goals and Increased Income – Many Changes. Because of the increased income, it is hard not to think about just throwing everything extra (after student loans and retirement) towards our mortgage.
We've been making around $8,000 extra each month because of all of our side hustles, and it's hard to not want to pay down all debt, regardless if someone thinks that it is good or bad debt.
Earlier this month, Holly made a post about how she wrote a check for $8,700 so that they could pay down their mortgage a little more quickly. Most people were extremely happy for her and her family, but of course there are others out there who would rather pay down their mortgages slowly. Crystal also recently made a post about how they paid off their first house recently, WOOHOOO!
I have calculated it over and over again, and we could pay off our current house early next year if we wanted to. WHATTT? Then why would you even want to buy a second house?!
This is something that I've/we've been asked often. We love our house, but we bought it when we were 20 years old. It's a great home, but we bought it knowing full well that it was only a starter home for us.
Anyway, I do have my Finance MBA and realize that I should be using debt to my advantage, such as with taking advantage of historically low interest rates (boy, do I sound like a commercial). But there's that nagging inside my head that keeps saying “MORTGAGES ARE DIFFERENT! Pay that baby off!”
Advantages of Paying off Your Mortgage Early
The main advantage is that if I pay off my mortgage, at that point it would mean that we would have no other debt. That just sounds awesome.
And, I'm the type of person who keeps a large amount in our emergency fund. Even though we will probably never have to tap into it, I still want it. I like the comfort of knowing that it's there, and that if something did come up, I wouldn't have to run around with my head chopped off trying to solve whatever went wrong.
And this is how I see paying off our mortgage early. I see freedom, comfort and everything else. Yes, I do realize that paying off our next house completely is years away (hopefully less than 5 years from the purchase date though) and that there are other costs of having a home such as property taxes and home insurance which will still need to be paid even though we would no longer have a house payment. However, having a big chunk completely eliminated from our budget every month sounds nice.
Once my student loans are gone, which should be next month, then I of course want somewhere else to shovel my money. We do have car loans, but that is at a low rate (much lower than our mortgage), and I'm not worried at all about paying those off. I am not saying that I want to shovel 100% of all leftover money towards paying off our next house quickly. We would still save for retirement and other fun things, but we would also make extra payments as much as we can as well.
If you have a high interest rate on your mortgage, it is probably worth it to pay off your loan as well or at least get it refinanced. However, it doesn't seem like I hear about too many people with high interest rates on their mortgage these days though.
Advantages of Paying off Your Mortgage Slowly
There are many advantages of paying off your mortgage slowly or just making the normal payment every month. You can invest your extra cash elsewhere and earn a higher rate since today's interest rates are very low, especially when you factor in inflation. If you have a fixed rate loan, then a $1,000 payment today will still be a $1,000 payment 30 years from, but with inflation 30 years from now, $1,000 will be nowhere near the amount that it is worth today.
If you don't pay off your mortgage quickly and put it in other investments, then all of your money won't be tied into one thing, which is real estate. This point doesn't really apply to us, as we would be working on paying it off quickly, but we would still aim to be saving for retirement at a larger rate. But for others who shovel 100% of their money towards their mortgage, this could be a problem if they needed a large chunk of change at the last second. Then there is of course the tax factor and how you can deduct interest expense as well.
If you have loans at a high interest rate (or anything higher than your mortgage), are not saving for retirement at all, have no emergency fund and so on, then making mortgage repayment your priority might not be the best option. Pay off those high interest loans!
Why are you paying down your mortgage quickly or slowly?
If you don't currently have a mortgage, what would you do?
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Mr. Bonner says
April 25, 2013 at 12:52 amAlways a tough call that's a balance of emotions and financial goals.
You might want to take a look at your current amortization table for your mortgage. Maybe I missed it in the article, but you said you could pay it off in a year if you paid it down quickly. How long would it take to pay it off slowly? If you don't have more than a few years left then you are probably paying mostly principal and just a small amount of interest. If that is the case you might want to put the money to work elsewhere.
We don't have any equity right now, so we're looking to put every last penny we have into our condo and even borrow from my 401k and put that money into our home so we can get to 20% equity within the next month. We've started the refinance process and our new mortgage payment will be a huge drop from what it currently is, which nearly offsets the cost of the 401k loan. When my 401k loan is paid back in 5 years we should have a decent amount of equity in our condo, a mid to low 3% interest rate and after the refi we will be saving our extra money, so we should have a healthy down payment saved up. We plan on buying another place in roughly 5-6 years and renting our condo. At that time I don't think we will pay down our condo quickly, but I would definitely consider paying down the house quickly if the interest rate is high and simply for peace of mind.
My recent post The rich got richer and so can the rest of us
MakingSenseofCents says
May 6, 2013 at 2:35 pmWe bought our house 4 years ago with a 30 year loan. We have only made very minimal extra payments, so essentially there is still 26 years left on the loan if we don't make extra payments.
cjb says
April 25, 2013 at 6:04 amIf I were in a home I'd want to stay in, I'd want to hurry up and pay it off. $1000 a month would go a long way to getting my retirement goals set up (since I'm a little behind in that department). Also, paying off the mortgage would mean less risk. I wouldn't have to work to pay bills, I could work because I want to and I could travel or go part time…something I can't do with a mortgage payment.
In my area, the average mortgage payment is 2k. What would you do with 2k a month. Then add all your utilities and taxes…ouch.
Just on my little condo alone…my mortgage interest was about 5500 and I have a nice interest rate…not great but I'm not willing to refinance because I hope to be moving….I hope to be moving next year and the cost outweighs any savings.
If I do end up having to keep it and rent it, then I will treat it like any debt and hurry up and pay it. But my hope is to sell it and run.
I just really don't see the advantages to keeping a mortgage payment…I'd rather give 5k to my favorite charity, than to some huge bank…and still get the right off.
MakingSenseofCents says
May 6, 2013 at 2:36 pmI agree! Luckily our mortgage is less than $1,000 currently.
Justin says
April 25, 2013 at 8:30 pmThis post pretty much sums up my plan after our debt is gone. Our mortgage is higher than the car rates, but also don't receive a tax deduction.
Also, having a paid off mortgage also means less bills every month and if life happens we wouldn't be in quite a bad bind if the mortgage was paid off.
My recent post We Don’t Have a Plan for Retirement…yet.
MakingSenseofCents says
May 6, 2013 at 2:36 pmI agree, it would be nice to have the mortgage paid off.
Canadianbudgetbinder says
April 26, 2013 at 11:46 pmWe should have the mortgage paid in full if all goes well with paperwork and red tape by the end of May or sometime in June. The money is saved. We just want to have no debt and then take that extra money every month and continue investing and see where life takes us. Nothing over the top, just simple.
My recent post PF Weekly Reading List #17-Customer Service, Business Suicide And Social Media
MakingSenseofCents says
May 6, 2013 at 2:37 pmWow that is awesome! 🙂
Nicole says
April 30, 2013 at 10:37 pmI think that paying off a home early is always a good idea. I listen to Dave Ramsey a lot, and he gets asked this question many times on his show.
MakingSenseofCents says
May 6, 2013 at 2:37 pmI agree Nicole. Thanks for stopping by.
shopaholicsavers says
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MakingSenseofCents says
May 6, 2013 at 2:37 pmThanks so much 🙂
Adam says
May 6, 2013 at 2:28 pmWith an interest rate at 3.75% on a 30 year fixed loan through the VA I'm not concerned with paying our loan off early in the overall schemes of things at the moment. But I can certainly understand why people would to rid themselves of that debt.
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MakingSenseofCents says
May 6, 2013 at 2:38 pmThere are positives for both ways, so that's what makes this decision a hard one 🙂
Sam@CreditCardShoppe says
June 3, 2013 at 2:19 amWe do have our house paid off completely. While some may argue that it is wiser to not tie up your cash in a house, we felt that the freedom of not having a mortgage was well worth it. We have no house payment and know that if anything happened, we would at least have our home….and the bank can never take it away. And that’s a pretty good feeling.
organo gold says
June 18, 2013 at 2:15 amFor me, having debts mean that they must be paid as soon as possible. I did not know the cons involved in paying mortgages early. I only knew that the only downside is that when something bad happens, you cannot get a new mortgage quickly. Goes to show I’m not that knowledgeable about mortgages. Glad to know them here. Thanks for sharing!
Gajizmo says
June 24, 2013 at 5:40 amI’m glad you discuss the pros and cons of this issue. It’s disconcerting when people characterize all debt as bad. Some debt is good, when it allows you to make investments you wouldn’t otherwise make. Like so many commenters mentioned, a mortgage less than 5% allows you to use your excess cash flow to invest in retirement accounts or the stock market, reap an average 10% return, and essentially keep the difference in yields. However, if you are sitting on a boatload of cash in your checking account earning less than 1%, use a good portion of it to pay down your debt.
More than anything, I think the idea of “owing” a bank or company just has a psychological stigma.
Thomas | Your Daily Finance says
July 20, 2013 at 6:13 amThe wifey and I have not plans to pay off our house early at this point. We still have student loans and the rate we got is so low we can invest the money into something else. In the future we are thinking about the 15 year make and having it paid off but then we would have a better understand of how close we are to our financial goals. I like that you put the pros and cons to each.
Athena says
July 25, 2013 at 11:51 amI favor paying off the mortgage early. I have an MBA from a top business school and I work for a Big4 consulting firm in strategic finance. I know a lot about finance.
Financial advisers often provide advice to individuals based on finance theories about how the capital structure in corporations should be managed. There is a [huge] difference in how capital structure is approached for an individual versus a corporation. A corporation has a lot of tools to manage risk that an individual (or couple) do not have.
Of course, you should pay off high interest debt and build up a cash reserve first. But, having done those things, if you are generating extra cash you should apply it to your mortgage.
First, the mortgage deduction is a wash and at best it is not a factor. People who bring that issue up have never run the numbers themselves taking all factors into consideration. It you are paying AMT then the mortgage interest deduction argument is laughable. Second, financial advisers will often tell you how you can make a better returns by putting the money at risk by investing in the stock market. That is nonsense. For the last 15 years the market has gone sideways at best. The models financial advisers present where you are making 7% per year consistently are a joke. Counting on the market to provide good returns over a 15 to 30 year period is also an unrealistic expectation.
In addition, our leaders in Washington DC are making decisions that have and will continue to result in tragic consequences for investors and the economy. If you invest the money you have to take a risk on the companies/funds you are investing in (could be good or bad), the overall economy (could be good or bad), and the policies of the government (consistently bad). As government debt and unfunded obligations snowball you are taking the risk that the government might confiscate financial holdings someday.
Just in the last 15 years we have had two dramatic plunges in the stock market that were 100% attributable to bad policies from Washington DC. And the medicine that the politicians prescribed is more of the same. The politicians (both Republican and Democrat) in Washington DC bailed out their friends by confiscating your financial holdings (in a tricky way). When government prints money or credits money to the accounts of banks at the Federal Reserve it is stealing value from the financial holdings of the people. The government is confiscating people’s wealth without them knowing about it. Outright confiscation is just one step away. Outright confiscation was authorized by the Dodd-Frank banking reform bill that passed during Obama’s first term.
Think about what you get if you pay off your mortgage. You are debt free. You have to worry less about job loss. You can retire earlier. You could afford to take a less stressful job with lower pay if you choose. You know you will always have a roof over your head. After paying off the debt you have freed up cash flow. While it is easy for government to confiscate financial holdings it is very hard for government to confiscate real estate holdings. You have a economically and emotionally valuable asset to leave to your children. You have all this guaranteed.
One more thing to remember. A lot of financial advisers make commissions on the sale of certain financial assets. They may charge fees based on the amount of money you are investing in the stock market. They have a personal financial interest in convincing you to invest in the market rather than paying off your mortgage.
If you are investing in an education or a business or paying medical bills then paying off the mortgage might not be the right thing to do at the moment. But for most people in their working career, eliminating the mortgage is a smart thing to do.
Praveen @ Piggywise says
September 4, 2013 at 6:05 pmNice article…… i still struggle in balancing my home loan and investing in shares. As is see the ROI from shares is higher than home interest, so i kinda of do 7:3 split.
Shobir | Find Some Money says
September 18, 2013 at 5:37 amI would definitely try to pay off my home early and have gone so far as increasing the over-payments as well as making a few extra payments per year. The interest rate at the moment for my mortgage is 4.74% and the way I see it is paying more means spending less on my mortgage in the future which means I will have more income to spend on the things I really enjoy. It would be such a liberating feeling and would unleash your from the burden of debt and give you the green light to pursue your dreams. Great post, really enjoyed that.
Bill Nast says
January 29, 2014 at 3:27 pmOh, I’m pay it off slowly all the way. Something I learned in my early 20s that has stuck with me ever since was to look at the interest rates on all debts and likely returns on all investments. So, massive credit card debt with high interest rates, anybody should pay off first.
Regarding my mortgage, I was lucky to get a 3.25% interest rate, and I expect about 10% on average from the stock market, so I always invest in stocks first and do the minimum payments on the house.
garry burgess says
March 15, 2014 at 4:54 pmI paid off first and second house as soon as I could. Debt tends to act like Cancer. If you don’t have any, then you tend to want to keep it that way. No car loans, no student loans, no credit card debt, no furnaces on hydro debt, no anything debt -ever, for any reason. There are always risks with investment, and if your portfolio is down by 50%, you might start wishing that you had paid off your mortgage first.
But I’m a person who has lived through very high interest rates, and it’s hard to forget, and hard to believe that double digit rates won’t return. If they do return, there is going to be a financial slaughter.
Nightvid Cole says
September 5, 2014 at 10:47 amIf I were in your situation, I’d pay off the mortgage and start saving the payments (plus the property tax and maintenance savings from continuing in the starter house) to buy the next house cash. Starter home your current one may be, but c’mon, is a little deferred gratification really such a horrible thing? To be DEBT FREEEEEEE!!!?
G says
December 5, 2017 at 9:49 pmNever borrow from retirement it is protected from bankruptcy you will also lose 10% in fees and penalties and you pay tax on the money twice.