Paying Off the Mortgage - Good or Bad?
February 20th, 2008 by Ana
I had an interesting conversation late last night in the chat room when a guy asked if I thought paying off his mortgage would be a bad or good idea. There is also a very good thread on that topic in one of the MyTMMO message boards. It seems there is this theory that it is “better” to keep the mortgage and put any extra money into an investment account of some type and that somehow works out better mathematically.
In fact, that was the fellow’s argument last night. He has the cash on hand to pay off ALL his debts, mortgage included. But his hesitation last night was that he would earn $6,000 more over the course of 7 years by not paying off his house now.
Y’all know me … I was scratching my head over this one. When I asked for more details, especially on the “how” part, he said he could earn 4% on his savings and come out $6,000 ahead during the next 7 years of his mortgage. That’s either a money market account or a bond fund I figure, and rather conservative. So, I asked a few pointed questions:
- Just how much has the Fed cut interest rates recently? And what are they predicted to be doing with the interest rates?
- Has he ever heard the words “bear market”?
- and the most effective: $6,000 divided by 84 months is how much extra money per month?
That last question is what got him. LOL He didn’t answer me with a figure, so since I feel lazy this morning I broke out my calculator function. This guy is agonizing over $71.43 per month over the next 7 years. From what he indicated about his tax bracket, I think this might be less than one hour of work per month for him.
I’m not a true math geek. In fact, when you start throwing the alphabet into math problems, I start losing interest in it. If you throw in the Greek alphabet I start disliking math. I will confess to nerd status as I figure my miles per gallon with every fill up on my Pizza Taxi, and still enjoy fiddling with my monthly budget numbers. I don’t know how they figure up mortgage amortization charts, but I know enough about mortgage amortization charts to know I like being way ahead of their time schedule. It ties into my “hate to pay interest” philosophy.
That being said, I am totally in favor of paying off a mortgage as soon as you can. Numbers be damned LOL There is a solid and strong appeal to the notion of owning the home I live in: outright, completely, and fully owning it. There is an even stronger appeal to the dream of not owing any payments to anyone for anything, except for utility use and groceries.
I am so looking forward to the day I get to that point in the Dave Ramsey plan! It won’t be until the end of the year at the absolute soonest, because there are steps in between paying off consumer debt and paying off the mortgage that are vitally important and simply cannot be skipped. After we pay off the truck note we will be out of consumer debt (that’s Baby Step 2). Then we need to build up the big honkin’ emergency fund - 3 to 6 months of expenses (we are going for only 3 months since hubby is military and has pretty good job security right now) which is Baby Step three. Baby Step 4 is saving 15% of our income for retirement, and Baby Step 5 is saving for my rugrat’s college. Paying extra on the mortgage is Baby Step 6, and is done after all the previous ones are in place. But it sounds like a truly great place to be!
I can imagine life without a house note (mortgage) now. I can imagine the walkaway power it gives someone in a job they don’t like. I can imagine the freedom it gives when the worry about how to pay a house note is gone. I can imagine how little stress there will be about job changes (voluntary or not), retirement, the prospect of starting a business, and most importantly the lessening of stress if a major medical emergency rears its head. I can think of a LOT of reasons paying off a mortgage is good, even though I can’t assign a number value to them.
And if the guy I talked to last night for some reason doesn’t like being completely debt free including his house, he can always go get another mortgage! LOL Somehow I don’t think he will. I asked him to tell me next month how it feels to not have a house payment.
Posted in mortgages |
February 20th, 2008 at 1:32 pm
I agree with you that it would feel good not to have a mortgage payment to make every month. My fiance and I are just starting to look for our own house. I think what we will do once we have all consumer debt paid off and the emergency fund saved is take our extra cash and split it in half. We will invest half into mutual funds and use the other half to pay off the mortgage faster. Sure we could put it all to a mortgage and have it paid off a few years earlier, but I like the idea of building up a large amount of wealth in investments and paying off the mortgage faster at the same time. We will be doing both.
February 20th, 2008 at 2:09 pm
I can’t WAIT to not have a mortgage…and we’re still renting! That’s a big part of the reason Will and I are contemplating a move back to the South. We know we can prosper there with cheap housing and COL. And a cheaper COL generally means paying off the home faster. Yippee!
February 20th, 2008 at 4:50 pm
The math is simple, as long as your investment recoups more themn your mortgage you are ahead investing, especially when you concider that 1/3 of that amount is return as a deduction on your taxes.
That being said, there is a psychological reason…it makes us feel more secure. Say you had a 6% mortgage and a 8% ROI on investments. You would make 4% more investing (6%-1/3 = 4-8% invest=4%). but whay do you get for that…piece of mind.
It is whatever works better for you.
February 20th, 2008 at 9:42 pm
People have asked my why I’m not treating my HELOC as a mortgage, and leaving it out of my debt snowball. Welllll…
I’m currently paying $300 in interest on my HELOC. Could I really find a place to invest my money that would pay me more than $300 per month? I don’t think so!
THAT is why I’m paying off my HELOC, and then going hard after my mortgage.
February 20th, 2008 at 10:47 pm
Well folks, I just heard from the subject of this post. He PAID OFF HIS MORTGAGE! And he says it feels good
February 21st, 2008 at 2:04 am
Good for him!
And something tells me the arbitrage thing was just an excuse anyway. It sounds silly, but I know some people find comfort in having moderate debt, since it gives them something tangible to work towards.
Freedom can be scary!
February 21st, 2008 at 11:45 am
I’ve heard a lot of the ‘don’t pay off low-interest debt’ talk before. Their take is that they can take the money they WOULD have paid off the low bills with and invest it in HIGHER interest investments. An arbitrage investment.
What most don’t take into account is the risk involved. The debt never goes away, but investments DO DECREASE IN VALUE.
What you might have been able to pay off totally, might not suffice should you suddenly HAVE to pay it off. Lose too much in the market and you will be stuck between a rock and a hard place.
February 21st, 2008 at 12:08 pm
Randall, that is exactly why I had asked this person if the phrase “bear market” had any meaning. LOL Investments have their two kinds of risk.
February 24th, 2008 at 2:27 pm
I’m a happy permarenter, but I would have a big pile of liquidity before I ever accelerated a mortgage payoff. Liquidity is good. A paid off mortgage can’t pay the bills if a megamurphy hits.
And no, you can’t always go out and get another mortgage. Mortgages aren’t approved based on the value of the house–they are based on your future income. If you have an income hiccup, you aren’t getting that mortgage. Better not get caught short with low liquidity during the megamurphy. I’d say at least 12 months of expenses…the more unique, professional niche job you have, the longer the potential un/under employment period between jobs. 14 months was the last frictional ununder employment period I had. Ouch!!! Glad I had the liquidity pile o’ cash rather than a house (paid off or not).
March 18th, 2008 at 8:55 pm
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March 31st, 2008 at 9:39 pm
Does anyone have advice for me about accelerating my own mortgage myself? I learned about the HOA by CMG financial and then there’s the book “Let Your Mortgage Make You Rich” by Lin Ennis. I dont’ want to buy a book or anything, I want to know if we have a 1st at say $200,000 at 6.25% and a HELOC at prime minus -.5%, would it make sense to pay chunks of the 1st onto the HELOC and then direct deposit our paychecks directly and then charge all our monthly onto a credit card which is paid in full by the due date. How do I do this to maximize the timing of interest calculations?
March 31st, 2008 at 11:59 pm
Nekocat, that is much too complicated for my tastes.
May 16th, 2008 at 9:13 am
my husband passed away and i recieved 500k from life insurance the agent wants to invest the whole thing and give me an allowance I’m 40 yearsold my children are 9 and 11 they recieve 2400.00/month ss and currently have 82k each for maturity ( the agent wants control it in an allstate UTMA account for them as well) I want to payoff my home 235k invest 150k and have ing accounts for the rest with a high percent for emergency fund i have no other debt except a car. i make $2500/month at my job. I just need to know what to do. The agent is a financial advisor but he is also the writer of my husbands policy.
please give advice. Thanks