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.
- 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.”
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.
*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 month, it 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.
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.