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Why you probably shouldn’t pay off your mortgage early.
1/ The payment doesn’t go down.
Extra cash toward a mortgage comes back as less cash outlay in 30 years.
There are no short or medium term benefits.
Why you probably shouldn’t pay off your mortgage early.
1/ The payment doesn’t go down.
Extra cash toward a mortgage comes back as less cash outlay in 30 years.
There are no short or medium term benefits.
2/ Your cash is gone.
Cash is king and every extra mortgage payment is turning your liquid cash into illiquid equity in your home.
Infinite options to very few options.
Cash is king and every extra mortgage payment is turning your liquid cash into illiquid equity in your home.
Infinite options to very few options.
3/ It’s a poor investment.
Most mortgages are under 4% interest now. Paying it early is an admission that you cannot beat a 4% return by investing elsewhere.
I don’t give investment advice but I’m certain most people can beat 4% over the long-term.
Most mortgages are under 4% interest now. Paying it early is an admission that you cannot beat a 4% return by investing elsewhere.
I don’t give investment advice but I’m certain most people can beat 4% over the long-term.
4/ A paid off mortgage only eliminates part of your liability
Taxes, insurance, maintenance etc will still be monthly carrying costs. There’s no real freedom from housing costs.
Taxes, insurance, maintenance etc will still be monthly carrying costs. There’s no real freedom from housing costs.
5/ You can’t tap home equity if you lose your job.
You can get into an IRA, 401k, HSA, etc if you lose your job and get desperate. But no one will give you a home equity loan without an income.
You can get into an IRA, 401k, HSA, etc if you lose your job and get desperate. But no one will give you a home equity loan without an income.
6/ If you can afford to make bigger payments you might be better off moving.
Really.
Let’s say you commute to a lower cost area. You might be better off moving closer to work in a more expensive area than throwing extra on a mortgage.
Really.
Let’s say you commute to a lower cost area. You might be better off moving closer to work in a more expensive area than throwing extra on a mortgage.
7/ Leverage
Houses have historically appreciated over the long-term.
Say you out $10k down on a $200k house and it goes up to $300k in 10 years. That’s a 10x ROI on your down payment.
If you paid $40k in extra payments that’s only a 2x return.
Houses have historically appreciated over the long-term.
Say you out $10k down on a $200k house and it goes up to $300k in 10 years. That’s a 10x ROI on your down payment.
If you paid $40k in extra payments that’s only a 2x return.
8/ Inverse of 7/
If the market tanks like 2008 or your personal life goes to hell and you gotta walk away / foreclose (it happens!), you’re only out $10k down payment.
You’d be out all of those extra payments you made.
If the market tanks like 2008 or your personal life goes to hell and you gotta walk away / foreclose (it happens!), you’re only out $10k down payment.
You’d be out all of those extra payments you made.
I’m always looking for holes in my logic. If you have a solid argument as to why paying a mortgage early is a good idea, please enlighten me.
FWIW I got divorced at the bottom of the recession and was forced to sell a deeply underwater home. I negotiated a short sale with the lender and they waived my deficiency. Any extra mortgage payments I would’ve made would be gone.
Too many replies to keep up with but I will respond to some of the common retorts here.
1) “There is peace of mind with a paid off mortgage”
Yes! Absolutely. But there is also peace of mind with a $200k mortgage and $200k in the bank.
Which would you choose?
1) “There is peace of mind with a paid off mortgage”
Yes! Absolutely. But there is also peace of mind with a $200k mortgage and $200k in the bank.
Which would you choose?
2) “I can ride out unemployment better without a mortgage”
Of course. But what about between now and when your mortgage is paid off. That money plunked down on the mortgage could pay your expenses while unemployed.
A paid off mortgage is all or nothing.
Of course. But what about between now and when your mortgage is paid off. That money plunked down on the mortgage could pay your expenses while unemployed.
A paid off mortgage is all or nothing.
3) “I’m paying compound interest!”
No, you’re not. You are paying straight interest.
Your principal balance is charged interest each year, but this is not added to the balance and with interest on the interest next year. Hence, no compounding.
No, you’re not. You are paying straight interest.
Your principal balance is charged interest each year, but this is not added to the balance and with interest on the interest next year. Hence, no compounding.
3) Cont’d
Let’s say you pay an extra $5k toward your 4% mortgage.
You will save $200 per year in interest for the remainder of the loan.
Would you hand someone $5k today to get $200 back every year for the next 30 years, a total of $6k?
Let’s say you pay an extra $5k toward your 4% mortgage.
You will save $200 per year in interest for the remainder of the loan.
Would you hand someone $5k today to get $200 back every year for the next 30 years, a total of $6k?
3) cont’d
$5k invested at 4% interest compounding is worth $16,200 in 30 years.
Compound interest is always your friend. It is, however, not what happens when you pay your mortgage early.
Summary: $5k paid on mortgage returns $6k, but $5k invested at same rate returns $11k.
$5k invested at 4% interest compounding is worth $16,200 in 30 years.
Compound interest is always your friend. It is, however, not what happens when you pay your mortgage early.
Summary: $5k paid on mortgage returns $6k, but $5k invested at same rate returns $11k.
A few more thoughts.
We need a place to live. The fed is basically giving us money to acquire a place. Take it.
It’s essentially what businesses are doing. Borrow cheap and invest for returns.
We need a place to live. The fed is basically giving us money to acquire a place. Take it.
It’s essentially what businesses are doing. Borrow cheap and invest for returns.
We’ve got zero business considering extra mortgage payments if we haven’t:
Paid off credit cards
Maxed out 401k
Maxed out IRA
Maxed out HSA
6 months emergency cash
Paid off credit cards
Maxed out 401k
Maxed out IRA
Maxed out HSA
6 months emergency cash
This will be the topic of my first book, coming out in late September. If you'd like to be notified when it's released, sign up here: https://gumroad.com/frugability
