Hi there, Mrs. 1500 today, asking for your thoughts about paying off your mortgage early.
I have seen “paying off your mortgage early” vs. “keeping it for the duration” debated numerous times. I think both sides have valid points, but now I want to see what my readers think.
And now, let’s go check out the answers from last week’s question, What do I do about my new neighbor?
If you will recall, one man moved in two weeks ago, along with his wife, his brother, 5 adult children, a brother and sister-in-law, brother-in-law and sister-in-law, and various and sundry other people.
They also have 15 vehicles and six dogs. SIX DOGS!!! Six dogs who love to bark at anything and everything. I didn’t know what to do. I cannot stand the sound of a barking dog!
I have to admit, I was a little hesitant to post this. Most people are very dog friendly. I was blown away by the sheer number of you who have also lived next door to ridiculous people or situations.
Many of you suggested that I contact the landlord to see if they know about all these extra adults in the house. In most circumstances, this would be a great suggestion. Many landlords specifically prohibit adults from living in the home without also being on the lease. But this landlord is the opposite. He doesn’t care who is there, as long as the rent gets paid on time. Not a wise strategy. From everyone on the Bigger Pockets forums, this will come back to bite you in the backside just about 100% of the time. Thanks to Mrs. Frugalwoods, Million Dollar Ninja, Even Steven, Mrs. PoP, and Reader Scooze for the suggestion.
I was also advised to look into the local ordinances regarding occupancy numbers. The only issue is the occupancy rules apply to people who aren’t related. These people are all related. Thanks to Jen Spends, and Reader Wendy for the idea.
Jim Collins needed a drink after my horror story reminded him of his wretched neighbors. Sorry for the memories, Mr. Collins!
Reader Sak’s husband used to live in an apartment building and had a great way to deal with yapping. He put a post on Facebook saying “free dog at my neighbors house but you must be stealthy since she isn’t aware it’s being given away.” I love it!!! Hey, if you are in Northern Colorado anytime soon, I am giving away six dogs…
The Roamer from Traveling Wallet agreed that dogs can be annoying, and added “…what really gets me is having smoker neighbors…” Oh yeah, they smoke, too. The littlest 1500 was recently talking outside with Mr. 1500, and noticed the new neighbors smoking outside. She pipes up, in her LOUDEST voice, “Those new neighbors smoke. I hate them. They’re hillbillies!” Thanks, sweetheart.
Both Even Steven and Reader Debra suggested anti-bark devices. Mr. 1500 ordered this one from Amazon and it is really effective.
Thank you for the passionate responses and cringe-worthy stories from your own experiences. I cannot believe some of the people you have lived next to, and truly feel bad for that time in your life. I have had some pretty terrible neighbors in my time, and it makes you want to sell your house, shoot them, or just never be home.
(Confession time: Years ago, Mr. 1500 and I lived next door to this HORRID woman, her unbelievably-loud-when-drunk husband and their three routinely-unsupervised children. Rather than fixing this bad situation, they made it worse by adding a dog. They soon learned that the dog barked all the time, wanted attention, needed walked, loved, etc. so they let it out in the backyard in the morning, and brought it in at night. He barked all the time and made our lives miserable. Numerous requests to keep it quiet fell on deaf ears. One day, we happened to be in our backyard and noticed a dead squirrel. We scooped it up with a shovel, took a quick peek through the fence slats to make sure the backyard was empty, and tossed it over into their backyard. I was hoping for the dog to find it and present it to his owners. Instead, one of their kids found it and the dad had to deal with it instead. BONUS! I am not normally like this, but so much barking leads you to do uncharacteristic things… I’m not proud of my behavior. OK, I’m a little proud…)
So now let’s talk about paying your mortgage off early. Please discuss freely, and let me know what you think. Regardless into which camp you fall, please give me your reasons, along with your initial loan length, amount and interest rate. If you paid it off early, I would also like to hear how much interest you saved and how early you paid it off.
Thanks for reading!
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Hey guys! Glad you asked this question, and I’ll add my two cents. I talked to a lot of people about this over the weekend at fincon (you guys included), but it always depends on you. Here are some things to consider:
1) Your Mortgage Rate – if your rate is under 4%, you would most likely be better off paying it down, as you’d be able to net an 3% in a market fund. If your rate is higher than this and you’re one of the people that get squirrely around debt, then it’s probably better to pay it off.
2) Personal goals – some people want to start business, some people just want freedom. If you’re one of the former, a large pile of cash would be better for you than a paid off house.
As always, this is “personal” finance, and it’s a personal decision. Im (still) determining what to do with our mortgage, but here are the specifics
107k left on a 15 year note (~13 years remaining) a 3.375%. Initial Loan amount was ~120k. As of right now, I’m investing MOST of the spare cash, but am sending in 200/mo extra to the mortgage.
I was having this discussion with Mr. 1500 this weekend, too. I think there are some people who have been in a ton of debt, who would feel better about everything if the house were paid off. I think you were perfect when you said it is personal finance, so it is a personal decision. So good to meet you this weekend!
So this is something that we ponder. We have a 15YR mortgage at a 3.48% interest rate. The original loan was for $107,500. We took out the loan December 2013. So we will be mortgage free December 2028. We’ve thought about paying off the loan early, but it seems like we should invest our money instead since our interest rate is so low.
SavvyFinancialLatina recently posted…Home Ownership Expenses You Might Not Expect
That is a pretty sweet interest rate. Not too many were ever lower than that. I am firmly planted in the don’t-pay-it-off camp, but as Jeff so eloquently put it above, this is personal, and you and your husband should come to a decision that you both agree on.
For some people, paying off a mortgage early is purely a numbers game. If they can do better in the stock market (and one usually can), then they will keep the mortgage. I keep my finances simpler than that. I want my mortgage to be gone when I retire. In fact, I want it gone by the time I’m 60. Therefore, I pay enough extra every month to have it paid off by then. If I move soon (as I plan to) my mortgage duration will reflect that. Heck, if I buy a new place when I turn 55, I will make sure I can pay cash or have a 5 year mortgage.
Hi Scooze.
We want to have enough readily-available cash to be able to pay off the mortgage by the time we retire, but will probably keep it after Mr. 1500 no longer works. It is just too low a rate to pay off quickly. Borrowing money is so cheap, we can play with those numbers and make more off the stock market by keeping the money in our pockets.
But I totally understand wanting to pay off your mortgage. Before I met Mr. 1500, I was in that mindset, too.
It’s a VERY personal decision. I go back and forth a bit even myself. My biggest point on this is that your age matters a LOT. You might gain some advantage if you’re relatively young, but if you’re older, you may have trouble withstanding a simultaneous market and housing downturn. Imagine a cashflow crunch where you still have to make your mortgage payment but don’t want to sell your stocks while they’re down.
That’s why to me paying off your mortgage is your best hedge. If there was a big market downturn and you had significant equity, tapping that equity to buy in could give you a big boost as well.
We’ll probably pay ours off (I’ve paid off my half and Pretired Mama is nearly down with her half). However we may also pull out a controlled amount, say $100K, to keep some growth going while also limiting our debt exposure. So potentially the even smarter answer is somewhere in-between. Perhaps paying off nearly all of your mortgage is good enough.
Recasting is another way to get there without refinancing, fyi: http://pretired.org/debt-/recasting-mortgage/
Pretired Nick recently posted…Harleys are dumb
OK, so I read through that post, and will have to re-read again much slower. But that is awesome for you!
Paying off our mortgage in September of 2007 was the best financial move we have made. Our ESPP shares and company stock options exceeded our mortgage balance in the summer of 2007. I wanted to cash enough in to pay off the mortgage. My wife wasn’t so sure. I finally talked her into it. We paid it off. Not long after the stock market crumbled. The share price of the stock we sold tanked. Yes, our other investments suffered along with everyone else, but with no mortgage, we were able to step up our investing during the financial crisis. We bought on sale. We increased our 401k contributions. We loaded up on mutual funds that were heavily discounted.
You can look at the numbers of paying off your mortgage early and justify both sides. It is hard to put a number on freely and clearly owning your home. It is refreshing. I highly recommend joining the mortgage free club. If you just hate it, I’m sure several banks will give you a new mortgage.
Wade recently posted…$15k per year for elementary school
I am sure I could find any number of banks that would trip over their feet to give us a mortgage, but our current rate of 3.25% is difficult to match. I believe it is already a point higher.
I can’t say we paid ours off early because we actually will have extended it by about 3 years by the time it is fully paid in 2018. We bought our home in 1990. However, the rate at which we are paying off our remaining mortgage is very high now. We took out a $235K mortgage in 2012 that will be paid in 6 years. Going through all this, I now realize that a 15 year mortgage life is the maximum one should afford. If you can’t pay off in 15 years, then perhaps you have bought too much house, IMHO. I’m speaking from a Canadian perspective where mortgage interest is not tax deductible.
debs @ debt debs recently posted…Frugal FinCon Fiesta – Ask me Anything
I think that is a great point about the 15-year loan.
I think every situation is different, and you need to run the numbers to see what works best for you. That said, I am definitely going to pay my mortgage early. My basic strategy is instead of making extra payments monthly, to put that extra money in an investment account and try to make it grow as much as possible. For me, it helps in 3 ways:
1) I always have access to the extra payments should I need it in an emergency situation, as compared to when the extra payment(s) are made to a mortgage, it’s gone.
2) There will be some compound interest occurring (In my case it will be a 5 year period).
3) Provides more options when the remaining balance of the mortgage equals my investment account total.
I really think that either way you go, you can’t lose! You will either have an investment account with a considerable amount in it, or a mortgage free home.
Hi Danny!
This is a really great idea. A best of both worlds situation. Like you said, once you pay the bank, they won’t give it back.
As someone who paid off his fixed 15 year, 4.25% mortgage, I can say that it’s not all it’s cracked up to be. The opportunity costs of our decision are HUGE.
Now, it’s nice to be mortgage free. But there’s a cost associated with that good feeling…be sure you’re okay with the cost of what you’re buying, so to speak.
Done by Forty recently posted…Social Capital vs. Financial Capital
Our rate is 3.25% We have returns of much more than that in the stock market and P2P lending, so we prefer to not pay it off. But if you have struggled with debt in the past, it can be a huge weight off your shoulders to have it gone. And not everyone has a 3.25 rate.
I am on the side of keeping the mortgage – for now. I agree that this is a decision that is very dependent on your age and financial situation. Right now we are both still working, and at ~3.5% we can make better returns by investing. But – we do plan to have the mortgage paid off when we retire in ~5 years. We do plan to move though, so we will sell our current house, and buy a smaller, less expensive house and pay for it in cash.
I should admit – a few years back, I had an internal fight with myself on this issue – I didn’t like the idea of having any debt, even a mortgage, but eventually made myself comfortable with the concept.
Mrs SSC recently posted…WTF Student Loans
Way back when I bought my first condo, my bargain rate was 7%. I really wanted to be debt free, and tried to pay it down as much as possible. I still like the concept of debt-free, but I could also talk myself into considering to be debt free even with a mortgage if I had enough to pay it off.
To me, this is the perfect real-world implementation of the concept of opportunity cost.
You have to ask yourself the question: what are you going to do with the money if you DON’T use it to pay off your mortgage? If you plan on doing anything that brings in a return that’s less than your mortgage rate. It’s a bad investment.
If you use it on anything that brings you a better return than your mortgage rate, then you have to assess whether or not the volatility of that investment is worth it to you. Because paying off that mortgage early is a guaranteed rate of return.
Of course, just because something is a bad investment, doesn’t mean it is the wrong choice. Different people have different quality of life levels that trump investment returns. For instance, if you could pay off your mortgage, but your family would have to eat ramen noodles for the next 5 years, you might choose a healthier lifestyle over a better mathematical investment.
Typically, though, I like the idea of paying off your mortgage early, because far too often, the money that you COULD get a better rate of return on, ACTUALLY just goes to needless spending. If you think “oh, I could get 10% over the long run in the stock market” and then you take a trip to Disney World, it doesn’t really help.
Oh – and tell your husband it was great meeting him at FinCon!
Dave @ The New York Budget.com recently posted…Forget Your Money Mistakes (But Only After Setting Up Good Habits)
Dave, he pointed in your direction at FinCon to introduce us, and you were gone. Next year for sure.
This is also a great point. Keeping the mortgage with the intention of investing, but then blowing it on frivolousness is a bad idea.
I’m in the paying off your mortgage early camp on this one. I struggle with the concept of thinking it’s ok to have debt, since a mortgage loan is debt, I think that not having this payment will only increase your wealth potential. Why not take your entire extra mortgage payment and invest the remaining or now that your home is free and clear, let’s travel to the West Coast for a few weeks, because your ability to save more money faster is ready, able, and willing.
We also have renters in our home mortgage, so using the example of a 1K rental income, plus your 1K mortgage payment you are making on your 1K mortgage payment, you will have this paid off in about 3-4 years and you have taken your -1K expense and instead turned into a +1K revenue each month. I’m not even going to mention the interest saved from going from 30 years to 3 or 4. When I say it out loud it almost sounds to good to be true.
Even Steven recently posted…Selling on eBay from Chicago to Miami
That is the big bite, Even Steven. The interest. My first mortgage was 3% down on a $49,900 condo at 7% interest. (It was a looooong time ago.) I remember looking at the papers they gave me during closing, and being astonished at how much I was going to ACTUALLY be paying for this little condo. Interest rates are lower, so the total amount will be far less. But it is still a lot of money.
Our mortgage is below 2 %, so we do not make any extra payments. I would rather invest the money.
But as other readers have already said, it all depends on the rate. Above a certain point (maybe 3.5 %) I would make extra payments. Investment returns are taxed with roughly 30 % – so the rate of return would have to be much higher than the mortgage rate.
EurFI recently posted…September 2014 – Expiration Report
2%?!?!? How did you get such an awesome rate? Another good point about taxation. So many things to think about when deciding…
It is a special offer from the government (for energy friendly buildings). But even 10 year mortgages are close to 2 % now (2.05 % currently). But we financed two years ago.
EurFI recently posted…Looking forward to the end of the month…
Since I bought my house in 1997 and paid it off in 2010, I will certainly lean towards the paying it off early camp. Maybe I could have kept the balance and achieved a greater return putting the money in the market. On the other hand, I could have invested the money in the market or something else and lost money. Then I would have a mortgage and a portfolio that I would be upside down in. Since 2010, I have been able to contribute more to my 401k and taxable accounts so it has worked out pretty well.
However, the best reason for paying my mortgage off early is the wonderful feeling that every time my wife and I enter our house we know noone can ever take it from us providing we pay our taxes of course. 🙂
MDP
1997 should have netted you a higher rate than currently available. I got my first mortgage in 1998, and was thrilled at the time for it to be 7%. And too true, people just assume you will make money in the market if you keep the mortgage and use the money for investments. Always the risk of losing it all. Enron, anyone?
I’ve never heard anyone regret paying off their mortgage. My current plan is to look at paying it off when retirement is knocking at the door. I am still at the stage of paying off student loan debt and will then be focused on debt free rental properties, so it’s not in my short term plans, but certainly before the term of the loan period.
When we first bought in 2009 we had a 30-year at 5.375% and immediately set up a bi-weekly pay schedule to accelerate payoff a little (biweekly at that APR strips about 6-7 years off the loan length and saves a good bit in interest) – not too much though since we were still trying to buy other investment properties. When we re-financed in 2011, though, we went down to a 15-year loan at 3.25% and have never accelerated payments. We’ll pay it off on schedule in 2026, I assume.
Mrs. Pop @ Planting Our Pennies recently posted…Getting The Plans For Our Dream Kitchen
With money so cheap, it just makes sense to keep the mortgage.
I know I’ve written an entire article about the merits of not paying it off early, but for us, being mortgage-free will be an important part of pulling the plug early. We are not yet in our forever home, and are making the regular payments (nothing extra) on our current loan (15-year, 92k remaining at 2.75%, we bought the house for $110k). However, once we get into our next home we should be able to get a better idea of when we will achieve FI.
The reason for us is cash flow. We should have no problem living on $2-3k per month with no mortgage and there’s just something about the added flexibility that’s appealing.
So are we paying extra right now? No. At some point? Yes.
Big Guy Money recently posted…The Transformation From Wasteful To Frugal
I don’t have a mortgage right now but I do have student loans. I haven’t done the math recently but I do know that I promised myself long ago that I wouldn’t make financial decisions based on emotion – even if that emotion is the sweet freedom of being debt free. It’s still a poor (or lack there of) strategy and can turn easily into a bad habit that I think everyone in the FIRE community preaches against.
Refinerr recently posted…How I Took 1 Year Off My Retirement Goal By Selling My Car!
We’re going to be paying our new mortgage off early (10 years vs 30 years hopefully), but that’s only after we’ve paid off other debt, and contributed to our retirement accounts. We don’t want a mortgage payment when retired, and we’re shooting for 10-12 years at this point. We’ll be focusing on the car loan first, then split 50/50 between retirement and mortgage.
I think it’s a super personal decision though – we’ll feel more secure without it, but I know the math doesn’t really work out that way.
Mom @ Three is Plenty recently posted…Closer to Closing
It’s a super personal decision, but I’m choosing to pay mine off early. I did, after all, take out a 5/1 ARM. There are a gazillion reasons why I’m doing this.
* One of my primary motivating factors is to have it paid off before I get married because otherwise, it could get messy with trying to calculate who owns how much of it when payments were made on the mortgage with married money.
* Another part is I had never had debt before I bought my place and I really was not comfortable with debt.
* I would love to own my place free and clear.
* If I withdrew 4% from $X in investments, $X would need to be more than my original mortgage balance.
* Because I can. I’ve paid off 47.9% in the 2.25 years I’ve had my mortgage and am reasonably confident it’ll be paid off within 4-5.5 years of ownership.
* How cool would it be to say I’m mortgage free by 30? I think that’s almost cooler than the fact that I’ll likely be a millionaire by 30.
* I’m already maxing out all of my retirement accounts!
* I’m reasonably risk-adverse.
* I have somewhere around $65k-90k of extra income each year to save (after maxing out my retirement accounts), so why not use it to pay off the mortgage early? My alternative really is to plow all of that money into a taxable investment account, which I suppose is a pretty darned good option too!
Leigh recently posted…August 2014 net worth update (+21.1%)
We have a 30 year mortgage at 3.8%. We’re not paying it down early because at the moment our effective interest rate (taking into account the tax deduction) is about 2.6%. I am all for debt reduction, but that’s darn close to free.
I’m also not eager to pay down our mortgage because it’s an awesome hedge against inflation. It’s easy to forget that the current low inflation environment isn’t how the economy always works. When inflation picks back up (and it certainly will), I’ll enjoy paying 3.8% for the ability to pay back my debt with cheaper dollars.
Mr. Frugalwoods recently posted…The Zen of Vacuuming
You’ve made me feel better! We also have a 30 year mortgage at 3.25%. I was too chicken to speak up earlier because pretty much every expert I’ve read says that 15 years is the max you should do…and, well, we didn’t. One of the reasons, right or wrong, was to avoid getting locked into a higher payment in case of a job loss. I would like to pay it off before 30 years, but it’s dead last on my list of priorities for now. Ideally we’ll do so well with saving/investing (almost certain to return more than 3.25%) that sometime down the road we’ll be able to pay it off in one fell swoop.
Jen @ Jen Spends recently posted…Who owns your child’s toys?
I think accelerated payments from within your usual budget is a wise use of additional income, bonuses, or windfalls. I’d keep the mortgage, but just accelerate the payments.
Once the mortgage is paid off, donate the same amount to your favorite charity and get the same write offs as having a mortgage.
I’m somewhat split on this but I like the idea of not having a mortgage so I pay $100 extra each month. We have a 30 year mortgage at 3.75%
The only important thing when considering paying off a mortgage (or any other debt for that matter) is the difference between the rate of return on your savings and investvestments versus the interest rate on the mortgage: if you’re earning 10% in a high-interest rate account and paying 2% mortgage interest, you would be a fool to pay off your mortgage. Similarly, if the interest on your savings was 2% and the mortgage interest was 10%, you would be wasting money if you didn’t pay off the mortgage first. It’s simple maths.
Myles Money recently posted…#SmartMoney | 28th Sept 2014
“The only important thing when considering paying off a mortgage […] is the difference between the rate of return on your savings and investvestments versus the interest rate on the mortgage […] you would be a fool to pay off your mortgage. […] It’s simple maths.”
This is a bit of a harsh comment. Everyone has different priorities. My mortgage interest rate is at 2.5%. You probably think I am a fool to pay off my mortgage, but it is an incredibly personal decision and I’m quite happy with it. Personal finance is very personal and not just about numbers, but also about the psychology of the decisions you make.
Leigh recently posted…August 2014 net worth update (+21.1%)
I agree that money is an emotional subject, but I stand by my original comment that throwing away 8% in interest would be nothing short of stupid: psychology is certainly important, but where’s the sense in throwing money away? In the end I suppose it depends on how much you value the psychological reward of paying off one debt (a low-interest mortgage) against a higher debt (a credit card, for example), or investing the money to give you a greater return than the 2.5% mortgage rate. Sorry if it sounds harsh, but I still think it’s simple maths.
Myles Money recently posted…#SmartMoney | 28th Sept 2014