Pay off mortgage early?

[adlove]

We don't own a house yet, but we've been discussing it lately because we plan on buying one next year.

My husband seems to think we should be aggressive in paying it off as soon as possible. I'm trying to convince him that that's not always the best option. BUT my main question is this - if we are maxing retirement, putting a good portion of income in savings and investments, and still have a bit extra, what are the benefits of paying off a house early?

Would it be better to put MORE money into investments than into our future home? This seems like a really stupid question, but I guess we both need a little help understanding our options. Any recs for books or websites we could check out would also be appreciated.

[Deleted]

It's mostly a cash-flow advantage if your mortgage is at a low rate. Like, we're paying 3.75% interest on our mortgage, and even in this not so hot market, we've made 5-7% on our investments. That means any dollar put into our mutual funds is earning more than the interest we're paying on our mortgage, so there's no real point in rushing to be rid of it. We do plan to stay in our house long-term, and we're not underwater on the mortgage - those factors can influence wanting to pay it down.

We would like to be done around the time our kid(s) hits college, though, to allow more freedom in helping out if we choose. We are saving some for that, but I can see it being pretty sweet to be mortgage free then. We've got 19 years left if we don't do any pre-payments.

[Susie]

Interest rates are pretty low right now, so say your house is financed at 4%. I wouldn't want to put money toward paying off the home early unless I felt I couldn't earn more than 4% if I invested the money. That probably isn't the case.

Plus, at least for me, mortgage interest is tax deductible, so there's added incentive to do other things with my money (like pay off SLs) besides pay off the house early.

If I were older, though, and the 30 year mortgage term would overlap with years of my retirement, that might change my opinion. I want to pay off the house before I retire.

[adlove]

Yea, this is basically my thought as well.

I should mention, I don't know how long we will be in the house, at least 7-10 years. Would it be wise to have a shorter mortgage term or go with a 30 yr for smaller payments and therefore more $$ in investments?

[Deleted]

Benefits of paying house early? There's a different feeling or sense of peace to have a paid for house. When we paid off our house, I felt a huge sense of accomplishment since I can really say it's MY HOUSE and no one can take it away from me. Sounds too dramatic? LOL. The peace of mind was just at a different level and I felt more confidence and felt really good that we have something to show where our money have gone.

After paying off the house, we felt more freedom on doing things we like, spending more on stuff, and were amazed on how fast our savings was growing!

Paying off a house is not all about the math. It depends on what you find more important and sometimes on the circumstances. Even when you chose an option that would get you more $$$ in the future, it may turn out the other option was better financially because of uncertainty and not knowing the future. For instance, we paid off our house quickly because I was just too worried about too many stuff when we found out we're expecting a baby. Paying off the house calmed me down and made me worry less. That's around when the market crashed. Since the house was paid off, all our $$$ went to investments when everything were at rock bottom prices. So years later, I do believe paying off the house was the best option since I think our networth is higher because the investments have grown. That was just luck, I think.

Having said all that, we are jumping back into getting another mortgage for the house we're building. With the very low interest rates, we have no plans on paying it off early. Maybe things will change when I get pregnant with baby #2 and want to pay it off then. Yeah, hormones! LOL. ;D

[gt7301b]

We went ahead and refied for 15 years. When we refied it didn't save us enough to go with another 30 year to make it worth while. If I were refing today we might have gone with a 30 year. We figured a 15 year would give us a paid off house before our hypothetical kids were entering college and we could just cash flow college. We don't pay any extra on our 15 year. Truthfully we could save more, but at this point we are enjoying being DINKS.

[Melissa W.]

We refinanced to a 15 years because we are paying a lot less in interest and it will help us cash flow college. Based on the experience of our friends with similar situations, we would be looking at footing the whole bill should our kids not get financial aid outside of loans.

[adlove]

Thanks y'all - this is really helpful.

[adlove]

Aug 24, 2012 11:38:42 GMT -5 RockNVoll said:

There is no 100% right answer and it's a matter of what works best for you. This is one of those scenarios where it's interesting to read the perspectives of different financial experts. Ric Edelman is known for advocating holding a big, long mortgage with the thought that you'll make more if you invest the money, especially in this market of low mortgage rates (much as tokenhoser points out). On the other end of the spectrum is Dave Ramsey who says that all debt is bad and you should get rid of it ASAP.

I am somewhere in between. At 3.875% I am in no rush to pay off my mortgage, particularly since we don't intend on being in this house forever. I don't really understand why you would want to tie up liquid cash in your illiquid house if you don't intend on staying there. For similar reasons, I generally prefer a 30-year loan over a shorter one since it gives you more cash flow flexibility; you can always pay more if you want to or just pay the lower minimum if you don't.

This makes sense to me. I'll have to get H on board.

[SJ]

I would not say that it is a bad idea to pay off a mortgage, it's just fairly far down my list of financial priorities, IN THIS CURRENT INTEREST RATE ENVIRONMENT.

I have been doing a lot of reading of personal finance books lately and I do think some of the traditional 'advice' is simply dated. Dave Ramsey's position makes a lot more sense in a world where people don't have $100K+ of SL debt, mortgages cost 9%, and savings earn 5%. That's not our world.

I would certainly max out retirement, strategize about education savings, donate to charitable organizations as much/little as we wanted, save for various other ST/MT/LT goals, pay off higher interest debt etc. before turning to the house (assuming you have a great, low rate). That being said, if you are stable enough and your ducks are in a row, I can't think of a compelling reason not to pay down/pay off the mortgage.

I don't want to underestimate the feeling of freedom it must bring to be completely debt-free and to have a paid-off house, but at the same time there are just so many other things I think should come first given how cheap money is these days.

[aurora]

We were overpaying a little (while still meeting retirement and other savings goals) when we had a higher rate, but we won't do so any longer now that we have re-fi'd to a 15-year at 3.375%. Some would argue that we were not making smart financial decisions by overpaying before, but we live in HCOL, our mortgage was huge, and we simply felt better about watching the principal drop faster.

The other big reason to consider overpaying is if your house is in a volatile area and you want to make sure you still have enough equity to cover realtor fees and closing costs when it comes time to selling. You really don't pay much principle in the first 7 years of a 30-year mortgage.

[Deleted]

I think a 15 year mortgage would be a good compromise in your situation. The difference between a 15 and 30 year for us is only about $400 a month, which we can easily pay. We are in no big hurry to pay additional because of the super low interest rate and mortgage interest deduction and yet, we don't feel like we are losing a ton of money on interest like for a 30 year loan.

[MadamePresident]

I am not an expert at investing and the investments I have haven't been giving a great return the past few years. So my husband and I decided to pay off the house sooner (in just under 5 years). For us, it was a security thing. If both of us lost our job tomorrow, we could live a really long time off our savings alone.

Now that we don't have that large mortgage payment each month we are bumping up our retirement funds and putting more into savings that will eventually be invested. This made the most sence for us, even if its not necessarily the most popular line of thinking.

If it makes a difference, when we first bought our house, we both made significantly less money and bought at the lower end of our price range.

[barefootcontessa]

I would rather have my money is liquid investments than have all my money tied up in a house. I personally would feel more secure knowing I had $500K in liquid savings than a paid off $500K house. If we have a major loss of income, it is going to be hard to access all that equity since no one will want to do a HELOC. Plus, as payroll employees, we do not have a ton of tax deductions.

[vanillacourage]

Our house will be paid off a couple months after our oldest son starts college - so we'll still be writing the big checks every month, they'll just go to a different recipient. Knowing this has allowed us to not have to save as aggressively for college, especially now that we'll have kids in college for at least 8 years straight.