Currently, one of our main goals is to save for a down payment for our next house. Due to this, we have been wondering about how much exactly we should save.
With our first house we didn’t put down 20% and had to pay PMI (big mistake), so we will definitely put down at least 20% on our next house.
Also, we are self-employed and I have heard that most self-employed people have to put around 25% to 30% down (and sometimes even 35%!) because banks want to see more upfront from small business owners.
Now, that’s a lot of money!
This has got us thinking. While we are aiming for 30% or more, at what point should we stop saving for our down payment and ramp up our retirement savings instead? Yes, we are still saving for retirement, but should we be saving more?
In the personal finance world, the decision seems to be split. Some are all about paying off a mortgage quickly, whereas others don’t think that’s a good idea. There is no right or wrong answer, which makes the decision a little more difficult.
Of course, I do realize that this is a good situation to be in, so I am not complaining. However, how do you decide what is best for you?
Below are positives and negatives of paying off your mortgage early or even buying your house upfront with cash.
Related content: How can I pay off my 30 year mortgage in 10 years?
Positive – Your house will be paid off early!
Of course, this is the biggest positive.
Your house will be paid off, you will be able to free up some cash each month, and you won’t have to worry about paying for a roof over your head each month.
Not having that huge amount of debt hanging over your head would be a wonderful feeling. Life would probably be a little less stressful and you may feel more financially independent.
Negative – Your money may do better if it’s invested in a different way.
While paying off your mortgage early can feel great and be a big accomplishment, mortgage interest rates right now are low.
You may do better by investing your money in other ways and earning a higher return. This can mean investing in certain companies, paying off high interest rate debt, investing in passive income, and more.
Positive – You can earn a guaranteed return by paying off your mortgage early.
On the flip side, by paying off your mortgage early, you can earn a guaranteed return.
Other investments most likely will mean that a return is not guaranteed (unless we are talking about paying off other debt), whereas when paying off your mortgage early, you will be certain what your return is.
Negative – A lot of your money is in one place if you pay off your mortgage early.
This is one big reason why I’m not sure if paying off your mortgage early is a good idea. If you have other investments and are on track for retirement, then by all means go for paying off your mortgage early.
However, if you don’t have much saved, then having everything you own in one place may not be a good idea.
Also, since all of your money is tied up with your house, it might be hard to get money if you end up needing it. Having at least some liquid money is a good idea.
Positive – You don’t have to deal with the hassle of getting a mortgage if you pay in cash.
If you have enough cash, then you might be able to skip the whole process of getting a mortgage.
Skipping a mortgage can be a positive for many reasons. Sellers love cash buyers, as it makes the buying process easier on them since they don’t have to wait for a mortgage to go through. This means you may get a discount if you buy 100% in cash or your offer may be chosen over others.
Also, if you are self-employed, skipping the mortgage process can be a good thing. I’ve heard stories of self-employed people trying to get a mortgage and it sounds like it’s a very difficult thing to do.
Are you wanting to pay off your mortgage early? Why or why not?
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diane @smartmoneysimplelife says
I can’t wait to pay off my mortgage! It’s mostly about the security of ownership but also about the debt. While there’s debt, the bank has the controlling interest regardless of your equity.
The other thing to consider is any possible tax advantages in paying it off early versus putting that money into a retirement fund or other investment vehicle. It’s probably only a consideration if you have a high tax bill, worth thinking about though.
In the end, I reckon your home is more than just an investment so emotions will come into play somewhere along the decision making process. Take your time and you’ll come to the right conclusion.
Michelle S. says
Yes, I’m definitely leaning towards paying off our next home quickly. We only paid the minimum monthly payments with our last house but that was because we knew it wasn’t our forever home.
Kasia says
I think it’s probably best to get rid of debt as quickly as possible. As soon as that monthly repayment is gone that’s less money that you need to sustain your lifestyle. Another thing to consider is the interest rate. If interest rates are significantly lower than the rate of return on your money elsewhere than it might be worth investing rather than paying down the mortgage too quickly. In Australia, we have great tax advantages for investment properties but not for your primary place of residence so it’s best to get rid of the home mortgage as quickly as possible.
Michelle S. says
I agree! I would want it gone.
MyMoneyDesign says
Another interesting point to take in: By NOT paying off your mortgage early, you’re actually locking in to a non-inflation adjusting cost that will actually seem to decrease as time goes on. For example: If you have some bill right now that is $200, we know that with 3% inflation and the Rule of 72 that in 72/3 = 24 years that bill should increase to $400 due to inflation. However if you’ve got a 30 year fixed mortgage, your bill will always be the same: $1,000 now or $1,000 in 24 years. That means your mortgage will effectively “feel” like half of all your other expenses.
Michelle S. says
That is something I was thinking about as well. $1,000 30 years from now won’t feel like a lot of money at all.
Paul says
Peace of mind is high on our agenda. Get rid of the debt as quickly as possible as money in your pocket gives you lots of options.
Michelle S. says
I agree! The peace of mind has to feel good.
Holly@ClubThrifty says
We are definitely paying our mortgage off early. We pay a few hundred extra bucks faithfully every month. I don’t mind any potential returns I lose on that money- I want my mortgage gone.
Michelle S. says
I think we will end up doing the same as well.
Lynn says
My dream is to pay off my mortgage. I want my only housing expense to be property taxes and homeowners insurance.
Right now this is only something I can only dream about since my financial life is a complete disaster.
Michelle S. says
I’m sorry Lynn. I hope you can improve your situation soon.
Robin @The Thrifty Peach says
We are absolutely trying to get our mortgage paid off early, actually by summer of next year. Once we do, we plan to take the money we save on that mortgage payment and invest it elsewhere. Since it’s only a year or so away, I don’t think we’ll miss out on that much investment earnings if we had invested it elsewhere.
I’m just having a hard time with having debt of any kind lately.
Michelle S. says
Wow that is awesome Robin!
Chonce says
35% does sound like a lot depending on how much the house is. I’m aiming for at least 20% though when I buy a house because I don’t to deal with PMI but I honestly don’t know if I would try to pay my mortgage off early or not. It would heavily depend how long I anticipate staying in the home. I love the pros and cons though, and I’m sure you’ll do what’s best for you. Good luck!
Michelle S. says
Thanks!
Elroy says
I go back and forth. I was a big NOT to pay off mortgage guy until last Oct when oil went down to $45/bbl. Now, I wish I had my house paid off. But, I think it is important how one goes about paying off the house. If I do it, it will be in one giant lump sum, not in huge sporadic payments. Yes, I’m going to throw a couple hundred bucks at it every month, but when the big payoff comes, it will be one big payment. Why? Cash = choices.
Michelle S. says
Yeah, I go back and forth as well. It’s not an easy choice.
Amy @ DebtGal says
While it would be great to not have a mortgage, we’ll focus on saving for retirement, first. We have a good rate – 3.5% – and since I work part-time, I don’t get the benefit of a 401K match. As a result we have to save more for retirement on our own. If we reach our retirement savings goals early, then we’ll look at paying off the mortgage faster.
Michelle S. says
Great plan Amy!
Barry @ Moneywehave says
Interest rates in Canada are stupid low right now so it definitely makes more sense to invest your money. That being said, if paying off your mortgage faster makes you sleep better at night, then do it!
Michelle S. says
This is why the decision is so hard!
Dani says
I think it should be a different answer for everyone, but for most people, it makes sense to ensure that at least 15% of the income is going into retirement, and THEN start attacking the mortgage. Run the figures to see where you are on your retirement horizon versus how much you’re going to need in retirement at the rate your investments are averaging. Most people underestimate how much they’re going to need in retirement. Also, mammy wait until later in life to start saving for retirement, so they’re further behind anyway. For the people that are a year away from paying off the house, it might not be a problem, but a significant delay in investing for retirement will cause someone in their 50s to wish they had put away more, earlier. And neither should happen until there is at least5 to 8 months of living expenses saved up in a fairly liquid form, too fight of job loss, illness, other unexpected expenses that would otherwise cause additional mortgage debt.
Michelle S. says
Yes, ensuring that retirement is on track is very important.
Shannon @ Financially Blonde says
Because we don’t see this home as our long term residence and we have such a low mortgage rate, we have no interest in paying it off early. We are using our extra money to invest outside of the home in the hopes of not only getting a better return than our mortgage rate, but also to diversify our investments.
Michelle S. says
I think this is a great reason to not pay off your mortgage quickly. I would do the same!
Talaat @ His and Her Money says
We are definitely on team pay your house off early! We have additional principal payments on auto pilot and any extra money that we can squeeze out of our budget goes to the mortgage as well. We just simply hate debt and want absolutely no parts of being in debt not even what many consider “good” debt,
Michelle S. says
Good job!
Fervent Finance says
MMD had a good point above. I’m in the same boat with my student loans. I could pay them off, but why when they are at 3%? The smarter financial move would most likely be pay the minimum and invest the rest, but it’s more of a mind game. I hate those little buggers hanging over my head so I also want them gone. Therefore I settled in the middle and will pay more than the minimum, but not pay them off.
Michelle S. says
Student loans at 3% sounds amazing! Mine were between 6.8% and 9% I believe!
Michelle S. says
It’s a tough decision!
Michelle S. says
Thanks Elisa! It’s definitely a tough situation.
Dan @ Our Big Fat Wallet says
Paying off a mortgage early all depends on figuring out the best use of the money – in other words if the savings from paying down the mortgage is higher than the after tax expected rate of return by investing the money – it makes more sense to do so. Personally our mortgage rate is 2.6% and I can earn about 8% in the markets so it just doesn’t make sense to pay down the mortgage early. Of course I want to eliminate all debt including the mortgage, but the money is better used elsewhere (ie. investing)
Gen Y Finance Guy says
Dan,
In theory your statement makes sense. but the fallacy that I think most people forget is that the 8% historical return in the markets is not guaranteed. So although you have the potential to make 8%, you also have the potential to lose 20-40% in the next recession. We are now 6 years in to an incredible bull market.
For the longest time I was a hater of paying off the mortgage early. But looking at the risk/reward of the financial markets, I would much rather through extra money at my mortgage to pay it off early then buy equities at all time highs.
If we were talking about this 6 years earlier when stocks were heavily discounted after a massive correction and decline, I would be arguing against paying off the mortgage early at that particular time.
Obviously no one know what the market is going to do or when it is going to correct. But at some point you have to ask yourself is the next 5% in upside is worth a potential downside of 10-20%.
Now I am not saying don’t be invested in the market. Its just not a great time to commit new capital to equities in my opinion.
Personally, I am working to pay off the mortgage early, while still maxing out all of my pre-tax accounts. Should we get a large corrective move in the market I would reconsider my 7-year strategy to pay off the mortgage early.
Cheers!
Michelle S. says
GenYFinanceGuy – You definitely have a great point. It’s a hard decision and there are many factors that come into play.
Michelle S. says
Dan – I can definitely see where you are coming from. You have a very low interest rate so investing instead makes sense.
Jessica says
This is such a tough decision since there are so many factors and no “correct” answer, as you pointed out. We’ve been rounding up payments on our house that is now a rental, but we don’t really plan to pay it off early. We’re just waiting for the market to rebound so we can sell it. When we actually buy a house in California, we would like to make a big down payment to try to avoid a jumbo loan, so I’m not sure how motivated we would be to pay it off early.
Michelle S. says
Sounds like you have a good plan Jessica!
Crystal says
We were fully self-employed when we bought our current home in late 2012, and we just had to show proof like normal of our bank accounts and income and put 20% down.
As for paying it off early…that’s tougher. We paid our first home off as quickly as possible because I hate debt and the mortgage started off at $92,000. So it wasn’t affecting our everyday life to just kill the mortgage.
But our current mortgage is now around $199,000. We’d feel the hit of overpayment. Right now, we are fully funding our 2 Roth IRA’s instead and use about $2500-$5000 a year on vacationing and fun travel. We figure we need to invest something in our youths so to speak. Paying off our mortgage in 25 more years may sting a little, but that still means we’ll own at least two homes outright by age 57. We’ll also know that we had many adventures while our bodies weren’t aching every day…a current lower back issue is making me even more aware that aging is going to feel sucky and I want to do it all while I still can, lol.
BUT, if we could pay off this mortgage years faster without feeling it much, we will. The last two years have just not been amazing for income goals.
Michelle S. says
That’s good to hear Crystal! I have heard stories from other self-employed people and they’ve said in the past few years that it’s been getting more and more tough.
Michelle S. says
Good plan Catherine!
Mark@BareBudgetGuy says
Honestly, I like the thoughts of following in your footsteps and going back to renting!
Michelle S. says
Haha I am looking forward to owning again one day soon! 🙂
Adam @ AdamChudy.com says
Definitely not paying ours off early. We locked a 30 year at 3.25 plus get a tax discount on the interest. We’ll keep plugging that money elsewhere.
Michelle S. says
Sounds like a good plan Adam!
Kim says
If you have proof of income and cash reserves, low debt, and good credit, you won’t have a problem getting a mortgage. I would love our home paid off early, and we do pay some extra every month, but it’s just not the smartest move right now when we are in a high tax bracket. We need to put as much as possible into my solo 401k and we are putting lots of money into rentals right now. I never think it’s a bad idea to pay off any debt early, though. You never hear anyone with a paid off house wish they hadn’t paid it off.
Michelle S. says
Good to hear! I don’t know why I kept finding scary stories online about self-employment and mortgages.
Nicoleandmaggie says
Your cash is not completely locked up if you prepay. You can recast even if you can’t refinance. https://nicoleandmaggie.wordpress.com/2012/11/05/november-mortgage-update-under-100k-and-playing-with-amortization/
Michelle S. says
Interesting! I didn’t know this.
Mike Collins says
I’d love to pay our mortgage off early but that’s not priority right now. We have some debt to ditch first and we also need to sock money away for retirement and with 3 young kids we have plenty more bills ahead of us. Still, the idea of not making a monthly mortgage payment is enticing.
Michelle S. says
I think you have clear reasons not to pay off your mortgage first. I would do the same!
Jayleen @ How Do The Jones Do It says
I would love to have our mortgage paid off just for the extra cash flow each month. Think of the things we could do with an extra $1500/month! We have ten years left on our mortgage … if we stay put.
Michelle S. says
10 years isn’t too long! You got this 🙂
Mary says
I was self employed when we bought our home and the bank did not give us a hard time about having a larger down payment. We paid the 20% without hassle but I did need to prove that I had been successfully self employed for the last two years — they wouldn’t even consider the loan before then. In the weeks leading up to closing they also made me provide proof of every deposit into my checking over $100. After the whole fiasco I switched jobs so I was no longer “self employed”. While I don’t plan to move for a very long while, the hassle wasn’t worth being able to make my own hours.
In other news, I wouldn’t mind paying off my mortgage early but it’s not really a goal of ours. I don’t see it as “debt”. We have savings to cover our butts should one of us get fired plus another fund to save for our future but yeah, I feel my money is better spent elsewhere.
Good post 🙂
Michelle S. says
Nice to hear about another self-employed person getting a mortgage. Providing proof for every deposit would definitely be tedious!
canadianbudgetbinder says
We paid our mortgage off in 5 years so just this past year and it was the best thing we did for ourselves financially. It may not be for everyone but it works for us. It was a sure win… we knew the rate, we paid it. No worries of renewing he mortgage and interest rates going up. We also balanced this with investing our retirement savings. I think putting all the eggs in one basket would not be something for us. Now that the mortgage is gone we can actively invest as much as we want. We are still under 40 and just had our first child. It’s a great feeling.
Michelle S. says
Wow awesome job!
Pam says
We are also business owners and have had a harder time getting a home loan, but it wasn’t impossible since we are in our 3rd home now. But after the mortgage crisis the banks definitely got stricter in giving out home loans and I know we had to pay a little higher interest rate on our current home. I think with interest rates being low that you might want to try and see if you qualify and put down the amount of money you have saved. We always have thought paying off our house is the best way to go since you wouldn’t have to pay all that interest. Your post was a good reminder to keep making extra on that monthly payment! thanks!
Pam says
Hi Michelle, I am definitely interested in making money by blogging however I do not yet have a blog and I have no idea what to blog about! Does it have to be about making money? Do you have any suggestions? Thank you in advance for your guidance and for all of the advice you offer on your blog! ~Pam