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Should You Payoff Your House?

This is a much-discussed question in today’s financial times. If you don’t pay your house off, the mortgage is there…but so are tax write-offs. If you do pay it off, that’s one less expense to worry about. But you still must cover other home-related expenses like insurance and upkeep.

Paying the mortgage (or not) is one of the strongest issues Liz Weston discusses in her newest book, Deal with Your Debt: Free Yourself from What You Owe. Ironically, considering the title, her answer is no — you shouldn’t.

Reasons given:

  • You need that money to pay off debts with higher interest rates. Like credit cards.
  • You’ll get an income tax deduction on it. 
  • What if you lost your job? Putting the mortgage payment money in a bank account, instead, lets you access it for expenses.

And the biggest reason given:

  • If you put that money into the house, instead of retirement funds, you’ll never have enough for retirement.

Weston believes that people are driven to overpay their mortgage out of “the urge to be free of debt.” They’re worried about losing their home and ending up on the street. This response, according to Weston, is crippling emotionally — and anything but practical. “There are situations where paying down a mortgage makes sense, such as when you’re approaching retirement or when reducing your principal will get you a much better deal on a mortgage refinance,” she says. “But most people still have better things to do with their money, even in this environment, than to pay down a low-rate debt that’s often tax-deductible to boot.”

Should you payoff your house?

Dave Ramsey advocates paying your home off early. In fact he recommends a 15-year mortgage to begin with: “Thirty-year mortgages are for people who enjoy slavery so much they want to extend it for 15 more years and pay thousands of dollars more for the privilege.” His section, “The Truth About Mortgages,” even includes a helpful calculator for figuring how much interest you’ll pay over 15 or 30 years. (Go here for more details.)

But far more financial experts and pundits follow Weston’s line of thinking, especially if the home in question is “underwater;” i.e., so far undervalued that paying the mortgage in full won’t change much. (Len Penzo even argues that the U.S. is printing so much money that soon our currency will be undervalued, and inflation rampant. “Any long-term debt you hold in old US dollars will essentially be wiped out because you should be able to retire it with worthless currency,” he says.  “It’s why I no longer bother trying to pay down my mortgage early.”

Here’s why I think they’re wrong.

Should you payoff your house?

*You’ve got to live somewhere.  Not having to pay on a mortgage means you’re in essence renting to yourself as the landlord. If you’re paying interest, you’re paying it to yourself.

*If you move, and sell a paid-off house, you’ve got a down payment for the new one. Or a hefty amount toward retirement, if you’re planning to downsize, instead.

*Windfalls are more common, the older you get. Bonuses, raises, inheritances — these can all be used to clear off your home mortgage. Pundits are always talking about the cumulative effect of saving for retirement — if you can discipline yourself to pay extra every or most every monthit really adds up.

*Things change. A divorce happens, or your spouse dies. You lose your job. Someone becomes seriously ill. Pay off the house, and it doesn’t matter. You still don’t have to come up with the money for a mortgage payment every month.

 *Filing for bankruptcy…or your college student’s financial aid? Your home is not generally part of this equation. Any equity you, have, therefore, cannot be counted — or figured in as your ‘contribution.’  (Double-check with a professional on this.)

*Set up an emergency fund first….or work on both at the same time. Until you’ve got at least $1,000 stashed away, it’s wise not to go wild on paying off your house. Some people like to keep at least two months of expenses on hand, instead.

*Where will you invest this money, to get a better return? Savings accounts are paying less than 1%; CDs not much more than that. You can make more interest in the market, provided you choose the right stock. Do you really believe that there won’t be another financial downturn…or two…or three? At the very least, you’ll be ‘earning’ the same amount of interest your mortgage company charges.

 *Really strapped for cash? There are always home equity loans. Odds are good, too, that you won’t be turned down. Why would they, when the collateral is so much more than the money they’re loaning?

Credit cards are the bugaboo here. Interest rates are so daunting that you’re probably better off paying them first — or putting a smaller amount toward your mortgage, so you can focus on paying the cards off more quickly. But you must keep yourself from running up your cards again. 

When you need a home loan that doesn’t require you to make monthly payments, you should talk to a lender who specializes in reverse mortgages. Home loans offered by reverse mortgage lenders give you access to money equivalent to a certain percentage of the value of your home. When you borrow the equity from your home through this type of loan, you will still retain ownership of your home. You cannot lose your home. However, your spouse or children may be evicted from the home if you pass away, unless they choose to pay the remaining loan balance off at the time of your death. Otherwise, the home will be sold, and any money remaining after the reverse loan lender has been paid back will be given to your heirs.

*Personal experience. We paid extra on our first house payment nearly every month – a stunning $100. (Actually, that was a lot of money back in the late ’80s, at least to us.) That extra gave us a solid 20-25% down payment when we sold House #1, and bought our second place.  House #2 was much larger, in a quieter, more rural neighborhood overlooking the city. It also cost more than double the original price of our first home. (Stupidly, I did not realize that mortgage insurance could have been waived in the beginning, because of our down payment. By the time we asked about it, we were told it was required.)

More income was coming in by this time, so we began paying extra on our new house payments. (Make sure that your mortgage company doesn’t penalize for this.) We’d gotten the principal down considerably when Husband’s mother died — and left us more than enough to pay off the balance.

“Put that money in the stock market,” we were told. “Stocks will pay you a lot higher interest, and you can keep taking the tax deduction.” (The mortgage interest rate was 5%.) We decided to pay the house off, anyways.

Three things happened in the next six months: Husband lost his job, and found a new one three months later — at a third of what he’d been making. (Going from mechanical engineer to a school bus driver will do that to you.) Then the stock market imploded.

We would have lost a high percentage of that money, and had a mortgage we could now barely afford. Instead, we had peace of mind knowing that we only had to come up with money for home insurance and property taxes each year. On our newly-reduced income, that was an incredible blessing.

I’m not a finance professional — Husband and I are everyday people. We’d paid our credit cards off every month, and had no other debt. (Albeit with some sacrifice to do it — like living with one car for years, shopping at thrift stores and doing other things to save money.) For us, paying off the home mortgage made perfect sense. It could for you, too.

Should you payoff your house?
Be it ever so humble, there’s no place like Home paid in full

P.S. Yes, I disagreed with some of her conclusions. But Liz Weston’s book, Deal with Your Debthas some interesting ideas, and unusual solutions — especially when dealing with credit card debt. A good read.

8 Responses to Should You Payoff Your House?

  1. I don’t own a home, yet, but I can see both sides of the issue. On one hand, not having a mortgage payment frees up that money to invest or save, but on the other hand, if a person isn’t saving any money towards retirement and throwing all their extra cash into a house that may or may not increase in value much, they may be in trouble come retirement. I definitely think a mortgage should be paid in full come retirement, but maybe earlier on retirement should come first. It’s a tricky decision.

  2. I find it interesting that the advice to invest instead of making early mortgage payments comes almost exclusively from those making their living selling investments! We paid off our mortgage early, and doing so may have been the best financial choice we’ve made, period. I like the freedom of being mortgage free, and I like making guaranteed, risk-free investments (like pre-paying a mortgage or other debt).

  3. This is definitely a highly-debated topic on a lot of personal finance blogs. I think the choice mostly depends on two numbers: What your mortgage rate is vs. what you would get if you invested that money instead. Other secondary numbers to look at are your age, what’s left on your mortgage, your rate of savings, what type of investment you are doing, and your financial discipline.

    Personal story: After I purchased my home, instead of starting an aggressive payoff plan, I started investing. About 5 years later, after investing aggressively, I refinanced my home to a much lower rate and now my investments are throwing off enough cash to pay my mortgage completely. By the end of this year, my property tax and insurance may also be paid completely through investments. I’m not free-and-clear by any stretch, but I also don’t pay anything out-of-pocket.

    What if I did the opposite, though? Let’s say I were to not have invested in anything, but take all that cash put it into my home and refinanced. I figured this out and it would have dropped my mortgage payment by only a few hundred dollars. What a difference!

    Being a “saver” by nature, it took a lot of discipline essentially ignore my mortgage and it was hard to convince myself that what I was doing was the right thing. But, the numbers speak for themselves and I’m glad I did it.

  4. Cindy, I would consider a serious reason the interest rate. If you are an experienced investor you will make a better return over long term. Even with a downturn like 2008 – 2009 looks where the market is today, just 3 years later. If you argue that this market is inflated, OK, let’s take a look at 2001 – 2003 crisis, again it took the market just two years to fully recover and exceed the previous high. With a 30 years horizon investing your surplus rather then paying it towards the mortgage will bring you in average 7 – 9% return and in some cases even more. If you invest into dividend investing stocks, you may even reach 12% return. Over 30 years it is a sure thing. Trust me. With my current interest rate 3.5% on 30 year fixed I am investing all surplus money and tax credit into dividend paying stocks. I guarantee you that in 15 years I will be able to pay the whole mortgage off using the savings.

  5. My husband and I paid off our mortgage early and don’t regret it. I love being completely debt free, and I am able to save a huge amount every month for the future. I have the peace of mind that if anything unexpected comes up, I am debt free and have the money in order to handle what comes my way!

  6. I think you’re ignoring liquidity, too, at your own peril. If stocks and real estate collapse (oh, like they did in 2007?) and you lose your job, you could be stuck with equity tied up in a house that has lost value, that you can’t sell, and you can’t afford because of job loss.

    Put that extra money in an low-cost, broad index fund? Well, even if all of the above happens, you can still sell the fund for 50 cents on the dollar (or whatever its gone down in value from its peak) and have liquid funds to pay bills and the house, etc. while looking for a job. (Oh, and that 50% loss? Since you’ll have been dollar cost averaging by putting in whatever extra house payment you would have made each month, odds are your loss will be FAR less than that, if you even have a loss in the end compared to the principal you put in).

  7. Every one of you are making excellent points. If you’ve got the experience and are confident (and the interest rate is low on your mortgage), you might well do better to put that money in the stock market, instead. Certainly you could make more than the 4% or so mortgage rates are currently at. IF, that is, the market holds steady.
    But what happens if the market does another swan dive, and you end up with a depleted account, instead? The mortgage people will not be sympathetic.
    I read an interesting book by one of the people Bernie Madoff defrauded. She had a chance to use her funds to finish paying off the mortgage, but didn’t. Said she was getting too good returns from Madoff. One of the things she regretted most was not paying off the house when she could have — and it was one of the items she was setting herself to do as she rebuilt her savings.
    There are certainly arguments either way, and a lot depends on your particular situation. But like Kurt, I find it fascinating that the experts urging us NOT to pay are almost all people marketing their services selling investments. If the bottom drops out of the market, they won’t be writing that mortgage check for you.

    Thanks, all of you, for contributing.

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