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I had an epiphany recently. I often hear people talk about how unwise it is to pay your mortgage off early. The argument usually goes something like this: "it doesn't make sense to pay your mortgage off when you can make so much more in the market." I have even heard people proudly proclaim that they are "keeping their mortgage for as long as possible."
This mentality makes sense is a person whose investment philosophy is to chase after every possible dollar (aka high risk). However, that is not most people. If one is willing to leave money on the table in other areas (i.e. investing in index funds or pursuing more conservative investments for example), isn't that inconsistent with the idea of not paying off one's mortgage out of fear of not maximizing gains?
Mind you, I am not talking about a person who pays their mortgage off at the expense of retirement, emergency fund, saving for college etc. I am talking about the person who has a decent nest egg, but is weighing whether it makes financial sense to dispense with their single largest expense. Are people really saying they'd rather be saddled with a mortgage than to have those additional discretionary dollars?
Does it really make sense to pay the bank hundreds of thousands of dollars (depending on the size of the mortgage) in interest, while chasing the possibility of higher returns in the market? Sure, a lot of financial experts advocate not paying down the mortgage, but in most cases they benefit financially (directly or indirectly) by you keeping your mortgage and maximizing your exposure to the market (i.e. fees, commissions, etc)
I can't believe I am saying this, but I think I am starting to fall in the camp that says it is wiser to prudently pay your mortgage off as soon as possible, then use those risk-free dollars that you were paying on your mortgage to increase your position in the market.
I probably haven't expressed this as clearly as I would like, but I am interested in others thoughts on the matter.
I had an epiphany recently. I often hear people talk about how unwise it is to pay your mortgage off early. The argument usually goes something like this: "it doesn't make sense to pay your mortgage off when you can make so much more in the market." I have even heard people proudly proclaim that they are "keeping their mortgage for as long as possible."
That statement only makes sense if a person actually invests their money into the market.
If you keep your mortgage and just stick your cash into a savings account earning 0.0001% interest each year, then you are better off paying off the mortgage.
While the potential exists to invest your money and earn more than the interest rate on your mortgage, you actually need to do this for it to be a smart idea about not paying off your mortgage. And if you aren't great at investing, you possibly may lose money in this venture.
If you are the latter, i'd recommend just paying off your mortgage early.
Anybody who says it isn't smart to payoff your mortgage early is probably going to be the same person who goes and gets a HELOC to pay for a new boat...
It's a smart move to payoff any debt, especially one that is required to survive such as a house. If you strictly run the numbers, in theory you can find better investments that pay more than the interest on your mortgage however those investments come with risk.
I had an epiphany recently. I often hear people talk about how unwise it is to pay your mortgage off early. The argument usually goes something like this: "it doesn't make sense to pay your mortgage off when you can make so much more in the market." I have even heard people proudly proclaim that they are "keeping their mortgage for as long as possible."
This mentality makes sense is a person whose investment philosophy is to chase after every possible dollar (aka high risk). However, that is not most people. If one is willing to leave money on the table in other areas (i.e. investing in index funds or pursuing more conservative investments for example), isn't that inconsistent with the idea of not paying off one's mortgage out of fear of not maximizing gains?
If they are holding more than a small amount of Treasury securities and a modest emergency fund, the answer is yes, unless one thinks interest rates will rise so much in the near future that they can simply keep the money in short-term securities like T-bills or CD's and then buy long bonds when rates are significantly above their (fixed) mortgage rate.
Oh, one more exception might be if they can pay an after-tax rate on their mortgage of 2% and then buy bonds yielding 2.25% or 2.5% in tax deferred or tax exempt accounts like a Roth. But the stars have to line up for that to work - very low mortgage rate, and high tax bracket at the least.
Quote:
Originally Posted by dmills
Mind you, I am not talking about a person who pays their mortgage off at the expense of retirement, emergency fund, saving for college etc. I am talking about the person who has a decent nest egg, but is weighing whether it makes financial sense to dispense with their single largest expense. Are people really saying they'd rather be saddled with a mortgage than to have those additional discretionary dollars?
Does it really make sense to pay the bank hundreds of thousands of dollars (depending on the size of the mortgage) in interest, while chasing the possibility of higher returns in the market? Sure, a lot of financial experts advocate not paying down the mortgage, but in most cases they benefit financially (directly or indirectly) by you keeping your mortgage and maximizing your exposure to the market (i.e. fees, commissions, etc)
I can't believe I am saying this, but I think I am starting to fall in the camp that says it is wiser to prudently pay your mortgage off as soon as possible, then use those risk-free dollars that you were paying on your mortgage to increase your position in the market.
I probably haven't expressed this as clearly as I would like, but I am interested in others thoughts on the matter.
Also consider your need for the funds in the future. If you pay down the mortgage, you can only get it back by selling the house or re-qualifying for a loan. I am not saying everyone needs hundreds of thousands of dollars liquid, just that you need a plan. If you have any huge expenses coming up or are going to buy an education, car, or other house, at the very least make sure you can get a HELOC open once you pay down the mortgage.
That statement only makes sense if a person actually invests their money into the market.
If you keep your mortgage and just stick your cash into a savings account earning 0.0001% interest each year, then you are better off paying off the mortgage.
While the potential exists to invest your money and earn more than the interest rate on your mortgage, you actually need to do this for it to be a smart idea about not paying off your mortgage. And if you aren't great at investing, you possibly may lose money in this venture.
Exactly. When I bring up this point with others, they usually concede that they themselves don't have the discipline to "invest the difference" they're supposedly saving by having a mortgage.
I really don't care about my interest rate. I would rather get my mortgage paid off sooner than later so I don't have the monthly payment anymore. Then I can invest at least part of that monthly cash that will be freed up.
Are people really saying they'd rather be saddled with a mortgage than to have those additional discretionary dollars?
*raises hand* I am!
A house is the most illiquid asset most of us will ever own. As someone who's currently in a bit of a cash crunch because I chose to put my extra cash into paying down my mortgage faster rather than sticking it into something equally safe but more liquid, like a bond fund or a CD, I've come to appreciate the downsides of paying off the mortgage early. It's a fine choice for a soon-to-be retiree who's pretty certain he or she may never move again, but it has real downsides for younger folks who may well move in the future, as it can take months to retrieve all the equity out of your house.
Going forward, I'm choosing to give up some earnings in favor of more liquidity. I will NOT be paying my new condo's mortgage down early, but instead will be putting the money into bonds and CDs instead. A paid-off house is nice, but a very big bank account is nicer!
its a obvious choice to me to pay off the mortgage when you have enough retirement savings and emergency cash.
A paid of mortgage is equivalent to a retirement savings, assuming house prices don't crash.
And like someone pointed out, the feeling alone is worth it. I would not bend over backwards to pay the mortgage, though, assuming tax benefits, I am paying around 2% on money owed, I would weigh that cost against other costs.
But, makes perfect sense to pay it down when you can.
A house is the most illiquid asset most of us will ever own. As someone who's currently in a bit of a cash crunch because I chose to put my extra cash into paying down my mortgage faster rather than sticking it into something equally safe but more liquid, like a bond fund or a CD, I've come to appreciate the downsides of paying off the mortgage early. It's a fine choice for a soon-to-be retiree who's pretty certain he or she may never move again, but it has real downsides for younger folks who may well move in the future, as it can take months to retrieve all the equity out of your house.
Going forward, I'm choosing to give up some earnings in favor of more liquidity. I will NOT be paying my new condo's mortgage down early, but instead will be putting the money into bonds and CDs instead. A paid-off house is nice, but a very big bank account is nicer!
Remember, my caveat was at the person was not sacrificing other financial goals in order to do it (i.e. Retirement, ermerge cy fund,craving for school, etc). I am in full agreement that it does not make sense to make one house poor, by dumping all (or even a substantial amount of) their assets into their home.
I will be approaching this decision shortly. We will already be saving ~45% of our gross so the decision will be to pay off the mortgage faster or to save more than 45% into brokerage accounts. I think my decision will be to start paying down the mortgage, but won't know until I get there.
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