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June 24, 2009


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Regardless of your long-term plans, it is best to pay off the mortgage. Why continue paying the interest when you do not have to. Rates on CD's, etc. are not that great. Once you pay off the mortgage, you can then direct the monthly savings into investments as then you can probably take on some (or more) market risks ask you are in a better financial position with no debts.

I think you should pay of the mortgage even if you are not sure about the long term possibilities related to the house. What is the risk, if any, of paying off the mortgage? Maybe a tax deduction that will lower your liability to the Federal Government by a portion of the amount you send to the bank in interest. So, why would you pay the bank (for example) $10 to keep from paying Uncle Sam $2.50? The only other risk I can think of is not having the capital to put to use into more lucrative investments. However, you have to understand that you are earning a guaranteed 5% (or what ever your mortgage rate is) for paying off the mortgage. I'm not aware of anywhere that you can as easily earn a %5+ rate of return. Finally, you have to consider the emotional benefit of being mortgage debt free (and hopefully entirely debt free). I think that is worth forgoing most, if not all, other opportunities.

To the benefits mentioned earlier, let me re-emphasize the double gift of turning a monthly payment into positive cash flow for whatever purpose you choose.

In Days of Old (before '08), the 'smart'money folks said put your money in stocks, don't pay off the house.
Well, probablilty is you will not stay in the house 'forever'but you can get your cash out then.
Most folks aren't able to take the 'interest' deductition - they are not house poor.
As long as you have a mortgage, you are a tenant of the mortgage company.
Pay off the mortgage, you have a guarantee savings of future income.
The house smells better.

As long as paying off the mortgage does not make you house poor,pay off the mortgage.
There is a lot of peace of mind knowing that the house is paid for.

pay it off, just make the renters do it

I think it depends on what else is going on in your life, what else you might do with the money instead, and how you feel about debt. We don't intend to live in our house forever, and may or may not keep it as a rental, but we're still paying it off early because we are very debt-adverse.

The decision depends on what you would do with the money if you DON'T pay off the mortgage.

Your mortgage is probably the cheapest loan you will ever have. Also, inflation will rise in the next 10 or 15 years due to current government spending. So when you do eventually pay off, you will be doing it with dollars which are much less valuable than the ones you have today.

20 years from now, you're going to look like a genius for locking in a loan at around 5%, fixed for 30 years, with a government subsidy (tax deduction) reducing the effective rate to 3 or 4%.

If you have the money invested in something easily accessible, you still have the peace of mind of knowing you could pay off any time you want, AND you have the flexibility to usethe money for something else if you need/want to.

For those who say you can't get 5% on any safe invesment - please remember the 1980s - when you could get 10% on a one-year FDIC-insured CD at yuor local bank. I'm betting those days will return within 10 years. (My first IRA was a CD at 10%.)

I used to be in the pay-it-off-quickly category, but now I am carrying the mortgage as long s I can.

Nobody ever gets rich paying off all their debts. it is a very safe, secure way to live but if you're looking to get a little more wealth, keep the debt and invest the money is more real estate, whether it be a 2nd home or a rental property. You will be building up equity and your net worth faster than you could with the most other investments.

Pay off the mortgage - then when you do convert - refinance and take the cash for your house, using the rentals equity. Better to have your home paid for and the rental with debt, if you can not have both payment free.

We're currently taking out a mortgage. It's $99,000 for a 30 year mortgage. The interest (at 4.85 or something) will come to around $100,000 over the 30 years. We plan on paying off the mortgage ASAP so that we pay less of that $100,000 of interest.

I've always wondered something about the suggestion to make extra payments on a mortgage. Why would someone do that? I understand getting out of the mortgage earlier, and thus paying less interest, but instead of making extra payments to the mortgage company, wouldn't it be better to put that money into a CD, and then once you have the balance of the mortgage saved up in CDs, pay off the mortgage? That way, you get interest on your "pre-payments". What am I missing that makes it beneficial to make payments to the mortgage company instead of putting that money into savings?

The first Mark is right, DO NOT pay off your mortgage early! If the real estate meltdown means anything, is that there is no guarantee your house will go up in value, so there's no guaranteed 5% return. It is the cheapest loan other than a student loan that you will probably ever get. If you lock in a fixed payment over the life of the loan, inflation is your best friend as your payment will be less and less a percentage of your income (assuming you have a growing salary over time).

As you make more money, and your mortgage payments falls as a percentage of income, put the difference into a Roth IRA or 401k and let it sit there through retirement. You'll have your house paid off by the time you retire, and your nest egg will be big enough so you don't have to take annual withdrawals in excess of of their average annual returns.

This idea that interest is why you should pay off the mortgage early is an illusion of security. If you divert more income to paying off the mortgage because you don't want to pay interest, you'll just defeat the growth and compounding in your retirement funds--especially over 30 years! When time is on your side, you take advantage of the greatest return, which is NOT in the house. Think of the fools in San Francisco that paid off their $750K house two years ago, and now can't sell if for more than $500K. If they didn't have any cash savings, and they had to move because of a job, they just lost all the "interest" they would have saved by paying off the mortgage early.

Juanny --

Usually the interest you save by paying off a loan is greater than the interest you could earn by putting the money in something like a CD.

Rental income in a down real estate market is also a risky venture. If you're struggling with your mortgage payment, and have decided to move to cheaper accomodations, don't think anyone is going to live in your house and pay $2000 a month. Think of the thousands of other homeowners who are trying and failing in that strategy. If there's too much supply, and not enough demand, don't expect anyone to pay more than a fraction in rent to pay your mortgage.

How about doing both, invest for retirement and make extra payments on the mortgage?

Doing both is fine. You'll sleep better either way.

The mortgage interest tax deduction is different on a rental property. Even if you only pay $500 per year in interest on your rental property, it's still 100% deductible.

I am a landlord. I have just refinanced my primary from a 15 year at 5% to a 30 year at 4.375%. Yes this violates Susy Orman's rules and she would call me an idiot. Too bad. People like her and Dave Ramsey are dispensing advice for idiots. And their advice is needed by the idiots. But if you are responsible, being able to lock up debt now at 4.375% for 30 years is a deal that will never come along again. I also have a huge HELOC on the equity in my house at 2.75% that I can tap to buy rentals with cash and then I can refinance those when the rates are right and buy more with cash from the HELOC.

People above are advising that you should pay it off and then refinance it out later or pay it off and then put the mortgage on the rentals because that is a way better scenario. As someone currently doing this, I can say without doubt that in my situation and if you run the numbers, they are wrong. You can never get debt on an investment property at a rate as cheaply as you can on your primary residence. They will always charge you one half to one full percentage point more, and they will scrutinize your debt to income ratios etc more heavily once you start buying rentals. If you can save the cash and leave the debt on your primary residence and buy the rentals with cash or large percentages of cash you are way better off than having your primary residence paid for and debt on the rentals.

Yes, the argument can be made that if you can pay the bills better to lose the rentals than your primary residence. I agree. If you are taking risks that make that possible then you need to go back to listening to Ramsey and Orman. If you are remotely responsible you should not be putting yourself into that situation. And if you are responsible about it then its way better to leave the debt on your primary and put as much cash into the more expensive financing for the rentals.

Now if you are not sure you are going to do rentals or you may wait a long time to do it then that might be different. But if you have a good rate on your primary (and if you don't then you missed the opportunity to get one in the last 3 months), then you will never be able to get anything close to that rate on properties you would get in the next 5-10 years. Every experience investor I know believes mortgages will head back to 8% in the next 5-10 years. And when it does, the 5% you could have kept on your primary will look like an amazing gift.

Keep the debt, save the cash for the next property.

Would you borrow against your house in order to invest? Of course not. Take the sure thing and pay off the mortgage. That will free up tons of cash to still invest.


Almost everyone with a mortgage has borrowed to invest.

If you have a mortgage and a brokerage account you have borrowed to invest. If you have a 401-k and a mortgage you have borrowed to invest (yes there is the free money with the match issue but if you contribute any more than the minimum necessary to get the match and have a mortgage then you have borrowed to invest funds).

It doesn't matter if you take money out of the house to invest or just put less money into the house to invest. The end result is the same regardless of how you got there.

Mortgage and rental property? Mortgage and side business that needs working capital? Mortgage and CDs or other fixed income instruments that exceed emergency fund? Mortgage and whole life insurance or annuities used to build wealth in excess of insurance needs?

All of those are borrowing to invest.

I doubt you could find 10% of people with a mortgage who aren't borrowing to invest. If you have a mortgage, I would bet you are likely borrowing to invest.

My suggestion is to pay off the mortgage and become debt free as soon as possible.
1)What if you lose your job? not having a mortgage payment(debt)
while looking for employment is one major factor not to worry about.
2) If you need a tax deduction because you do not have mortgage interest then give to your local charity and get the tax deduction as well as help others.
3) Peace of mind knowing that you are "Debt Free" including your mortgage
4) Once you a Debt Free---start a very aggresive savings and investment program so that you could help others with your proceeds

The answer is not cut and dry like a lot of people above are making it out to be. Is your interest rate 4.5% or 7%. If its 4.5%, it makes a lot of sense to just invest the money. At 7%, it makes a good amount of sense to just pay it off, a guaranteed 7% ROI. Are you 26 or 56? If your 26, you have time on your side, another point for investing. If your 56, you dont have as much time on your side, another point for paying off the mortgage early.

Question to Mark C. Who's in worse shape - the "fools" in San Francisco who have been forced to move and lose all the equity they just built up, or the smart people who paid the minimum on their mortgage and are now forced to short sale or face forclosure?

Answer to Nick B: The people who paid the minimum and are now forced to to short sale will come out ahead. The rules favor those "fools" who have gotten in over their heads, not the "fools" who paid down their mortgage thinking they'd never lose money.

No one's arguing about age, we're talking 30-year mortgage versus the same time investing. If you're getting 4.5% return investments, you're still better off not paying off the mortgage too quickly.

As with all things, I'm not absolute. I think a moderate view would be to always maintain a 25% equity in a home, reflecting present market value. That way, if you need to sell, you can lower your price relative to your comps. Even if you take a loss, it's better than foreclosure. This is what I do.

To the reader,
Simply put, paying down your mortgage is a risk-free investment yielding whatever your rate is (minus tax-benefit). You can put that money elsewhere, and if you get a higher return, you're better off there. The deciding factors for any investment are (1) risk, (2) return, and (3) liquidity.

By paying off your mortgage you get a riskless return while sacrificing liquidity and a potential higher payout. Personally, I look at things like potential 401(k) matching (riskless and possibly 100% return) and 529 plans (in my state a 20% immediate, riskless return via tax breaks).

Your question as to how long you'll be in the house and whether or not you'll rent really shouldn't change the above factors too much. You still get the same ROI right now whether you rent it or not. If anything, by paying down now, you create a bigger difference between the mortgage payment and your rental income later. It always goes back to risk, return, and liquidity.

The upside of paying off your mortgage early is that you are getting a guaranteed return on that money - whatever the after-tax cost of your mortgage is (for most people, probably in the 4% to 5% range). Not a bad guaranteed after tax return - better than you will get from other guaranteed investments like CD's and money market accounts right now.

The downsides are twofold. One, you turn a liquid asset (cash) into a non-liquid asset (home equity), and there is risk to doing that. Secondly, you lose the tax benefit from the mortgage interest, although I already adjusted for that implicitly in the upside analysis above by using after-tax figures.

Some commenters is speaking as if the tax break should definitely be discounted. Only the amount that pushes you over the standard deduction should be discounted.

@Nick B.

Actually if you have enough interest to push you over the standard deduction, you probably have enough state income tax and property tax alone to push you over the standard so all of the interest is actually deductible. If you make any reasonable sized charitable contributions that pushes you over too. When I add those 4 things together I exceed the standard by 3 fold.

Well I guess I'm just poor and selfish, because my wife and I would not be over the standard deduction if it was not for the mortgage interest deduction.


Your just twisting the point. Regardless of the intended investment objective, you are basically borrowing against your house for the purposes of investing.

Pay off the mortgage and you will have plenty of money for investing.


You are correct. And I pointed out all the ways most people already do exactly that. Thanks for responding and not addressing how any of those are not doing exactly the same thing.

One question I've never seen answered is what does paying off a mortgage do to someone's credit rating. I've got an under $50k mortgage at 4.5% (amortized over 30, due in 7). The balloon payment is due this October. To me, it hardly seems worth refinancing for such a small amount; and my cash is earning less than 1%. I've owned the house just over 20 years, and refinanced for lower interest and payments along the way. I haven't a clue if I'll stay here much longer, but I do know that it is not my "forever" house.

So, what's the current thinking about what my prospects might be for getting another mortgage in the future (on this house or any other)? Will my credit rating be lower with no debt other than monthly-paid-in-full credit cards?

It will lower your debt load, so I would imagine it would raise your credit score. However, I am definitely not an expert.

@Apex: There is no question that you should not put all money besides just enough for an emergency fund into your mortgage. However, there are different grades of investments.

401(k) up to match
IRA or Roth IRA
401(k) past match
taxable investment account
Paying Down Mortgage

The question is, where do you rank paying off your mortgage in that group. I have a 6.5% Mortgage, but I am planning on being out of the house in 2 years. I would like to build up equity so that I will need less money when I buy my next house. Since, I plan on being gone in less than 2 years, it did not make sense to refinance. I think the 401(k) up to match and the Roth IRA are no brainers for me. (Im young, and time will work for me.) But nothing can give me a guaranteed 6.5% ROI, and the mortgage is the highest interest rate loan I have. I only make enough money to be in the 15% Tax Bracket. (I'm married.) So even if all the interest goes toward my deduction, thats an effInterest rate of 5.525%. Since no other investment right now can guarantee that return over the next two years, I choose to pay down the mortgage, after investing up to the company match in the 401(k) and funding my Roth IRA.

Kasey --

Not sure about the answer to your question, but I've been debt free for over a decade and my credit score is about as high as it can get.

@Nick B.

Your response is about the most sensible one on here and I agree with it completely. Sounds like you balanced your choices well.

@Kasey, et al.

We faced a similar question as the Reader, regardless of all the debate about the numbers, we were simply more comfortable with commiting to pay down our mortgage. Fall 2008 showed us nothing can be discounted in this economy and if the worst happened, we just want to own our house and not feel like that too belongs to somebody else. So all the numbers aside, we decided to do what would make us happier overall. But since you can't put a number to that it is hard to bring it into this lively debate :)

I can put a number on the credit issue though: My wife and I both have a FICO score in the low 800's. We both have seven years of history and we both carry two Credit cards. The only difference is the mortgage is only in my name. But who knows how they calculate these things?

In a few years we will also be debt free like FMF, my net worth might not be as high as everybody that takes on the additional leverage, but it will be high enough for us, and that is all that matters.

First I would want to know what you are investing for: retirement? vacations? new car? dream home? Pay off the mortgage if you're investing for fun. However, if you're investments are for retirement needs or something equally as important, figure out what it would take to retire comfortably and add a little to the figure if you need to to feel secure. Then live within your means on what's left.

To us, retirement comes first so there should never be a question of not fully funding retirement. If you are not fully funding your retirement because you bought too much house, you are living beyond your means so by all means fund retirement first if that's what is meant by "investing".

However, think of a 3rd alternative (which admittedly doesn't apply if you live in an outrageously expensive area like the Silicone Valley where cops and firefighters don't qualify for basic housing). If the house you're in isn't your dream home and you're already thinking of moving, you can move into a home (condo, townhome, house, etc.) that you can afford to easily pay off in 3-5 years. Once it's paid off, you can save up to pay cash for a slightly bigger home or at least put enough down to pay off that bigger home in 3 or so years. Then you can sell the smaller home to help pay off the new one or rent it out without stress.

I sold my 2BR condo to pay cash for a 1BR before I got married. Then we bought a bigger 1BR condo when we got married. We'll have our 1 BR condo paid off in 2.5 years next summer. then by christmas we'll have enough for a 20% downpayment for a 2 br, which we plan to live in for 5 years. we hope to have a kid next year and i am 40 and he is 36. so you don't have to be that young or kid-free to do this. At the end of the 5 years we will have enough to pay cash for a house. Then the rentals we have (small 1BR, bigger 1BR, and 2BR) will pay off the 2 br in about 1.5 years.

So the third option is to sell your current house now and use the equity to buy a cheaper place so you can both max out your investments and pay off the mortgage in no time. So I guess you have to decide what's makes you happier? bigger/nicer place now and mortgage free later or the other way around? I don't think either one is right or wrong, it's just your preference.

Psy off the mortgage. If you don't like living debt free, and change your mind later, you can always borrow against your home again.

My bet is once its paid off and you have NO MORE PAYMENTS you will never borrow money again and will have so much freedom financially that you will pile up huge sums of money

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