The Mortgage Tax Deduction is a Consolation Prize at Best

Here's author Mary Hunt's take on one common argument for keeping a mortgage:

Bad Advice: Do not pay off your mortgage because you will lose a valuable tax deduction. Mortgage interest on your principal residence is a deductible expense on your federal tax return. Even if you can pay off your mortgage, don't do it. If you don't have a mortgage, get one so you can claim this tax advantage.

Good Advice: Deductibility is not a wonderful thing. It's a "consolation prize" to ease the pain of having to pay interest. If you pay $12,000 a year in mortgage interest and you are in the 22 percent tax bracket, you get to deduct $12,000 from your gross reportable income. That means a tax savings of $2,640 ($12,000 x 22 percent = $2,640). You pay $12,000 to get back $2,640. Does that sound great to you? If so, I'll give you a better offer. Send me $12,000 and I'll double it and give you back $5,280. Deal?

Ha! Just what I was thinking!!! I'll make that offer all day too!!!!

This is the argument for keeping a mortgage that I hear most often. I'm not sure if it's because people don't know the difference between a tax deduction and a tax credit or what, but I'll hear, see, and read the "I'm keeping my mortgage because it gives me a tax deduction" several times each year.

A related argument says that you can take the money you would be using to pay off your mortgage and invest it at a better rate than what you'd get by paying off your debt (after taxes). Of course, to actually get this better return you actually have to invest.

Now with today's low rates, once you factor in the tax "savings", it's not too much of a stretch to say that you could probably earn more money by not paying off the debt and instead investing the money. That's in theory. But the truth is, most people aren't that disciplined. So they'll make the argument, not pay off their mortgage, and instead of investing their money, they'll spend it. Yep, theory is one thing -- reality is often another.

Also remember that paying off debt is a GUARANTEED investment -- you "earn" by saving money you would have had to pay in interest. As we've all learned in the past few years, most other investments are far from guaranteed.

As most of you know, we paid off our mortgage a long time ago. Do I regret it? Not for one second. Could I have earned more? Maybe, maybe not. Looking at what the market has done (our most likely investment alternative) since we paid off the house and you could easily argue that paying off the debt was the best financial move possible. Plus, having no mortgage has given us a tremendous cash flow that has propelled our net worth to all-time highs.  It's true that paying off all debts, including a mortgage, isn't for everyone, but I think it is wise advice for most people.

That said, I will note that there is a best time to pay off your mortgage -- namely when you have other financial obligations taken care of and/or fully funded.

What's your take on the issue? Anyone out there without a mortgage? What do you like/not like about it? Or maybe someone working to pay off a mortgage. Why are you doing so? And I'm sure there are some out there who have made the conscious decision to NOT pay off their mortgage. Why is this and how's it working for you?

Comments

[JM]

We haven't bought a house or condo yet, so we don't have a mortgage. We plan on buying in the next year or so though as our rent keeps going up and we can get a house or condo around here for less with a mortgage. When we do end up getting something, we're putting down most of the substantial money I have in savings and keeping about $10-15k as an emergency fund. Then, we plan on putting half of our income into the mortgage to pay it off as fast as possible. My husband and I both hate debt. We don't have any, and when we get a mortgage, we want to get rid of it ASAP.

[Dan]

The biggest problem with paying off a mortgage too quickly is liquidity. What if you need money because you lost your job? Trying to get a new mortgage would be much harder than tapping into a much larger savings account funded by the money that you would have used to pay off the mortgage. Mortgage debt should be the last type of debt you pay off and should be delayed until after you have a lot of liquid assets because mortgages are very cheap debt. Mortages are cheap debt because they are secured debt with a low fixed interest rate and the tax deduction means that they have an even lower effective interest rate.

[billbill]

A financial planner spent some time trying to convince me that you should keep your mortgage as long as possible. His justification took a step beyond just the tax deduction. He basically said that when you are younger, you don't earn as much/have kids which puts you in a lower tax bracket based on the deductions. When you are older, you are making more money and as kids move out, you lose those credits. He said that mortgage tax deductions can keep you in a lower tax bracket.

I kind of see his point but don't think it is worth it to play that game. I am looking forward to the day when I don't have a house payment!

[Darin H]

It's even less of a benefit than that since you receive a standard deduction anyways.

[Ken]

I agree with JM's comment. That you want to make sure you have some liquid funds.

You should also take note of FMF heloc strategy. http://www.freemoneyfinance.com/2010/02/mortgage-free-in-five-to-seven-years.html

[Junker]

Few points:

1. If you pay 4% on the mortgage, the effective rate you are is only 3% (if you are in 25% tax bracket).
2. If you have a average amount of discipline you can invest the money from above very conservatively - you just need to beat 3%.
3. Liquidity - if you need the money, a house is not liquid. And god forbid, you have to sell quickly into a bad real estate market.
4. The mortgage tax break allows you to itemize, so you can add in stuff like charitable giving at tax time.
5. Step 4 can push you into lower tax bracket (for some folks).

Mortgage is a good kind of debt for many people. All other kinds are a big No-No!!

[JimL]

Very timely topic for our family. We just sold our home due to a job relocation. Not the best timing for us as we bought near the housing peak in 2006 and now are selling at a low point as we live in a market that has been hit. In total, we lost about $100K on this home. Regardless, we are sitting with $700K in cash/checking/ING. We could buy a house for $400K and pay cash, leaving $300K. At the same time, it would be nice to put down about $200K and leave $500K in savings. With the $200K in mortgage, we could probably pay that off in about 4 years....................but it would sure be nice not having the mortgage. As such, we are probably just going to pay cash and just build the cash back up.

[JoeTaxpayer]

I'd not keep a mortgage "for the deduction".

I would prioritize.
First make sure there's no CC debt that carries month to month. Yes, I've had people ask about paying mortgage off early, but owed 18% money on cards.
Build up the appropriate emergency fund. Five years left on a mortgage is no better than 20 if you're unemployed and can't make payments.
Get the 401(k) match. Some employers match up to dollar for dollar on the first 5 or 10% of the employee's deposits, this is free money and better than saving 5 or 6% on your mortgage.
Next is a tough choice between going at the mortgage with a vengeance, or to split the extra funds between the mortgage and retirement savings. We decide to save 25% of our income, and whatever is left goes to the mortgage. Others may say after the match, just put every extra cent to the mortgage, and I'd not argue against that route.

[BillV]

I hope for a lot of discussion on this. On another FMF post I heard really good points from a regular poster (sorry I don't remember who) that keeping the mortgage was a good idea because the bank was carrying the risk, not you. In my case, we could pay off the loan (5% rate) but and it's a big but, my bride prefers to keep" the cash. I even suggested that I would continue to "pay the monthly amount to her until the amount was recouped. She understood my math, agreed that it made sense and still said I'm not comfortable doing it.

We don't have to worry about losing jobs or income; she just likes having the cash. I'm not looking for answers here; just thought I would share the emotion part of finance. Crystal, any thoughts?

[Michael Goode]

@Junker

The rate of return needed to make investing a good idea vs. paying down the mortage is the mortgage rate (or slightly higher). You need to consider that you pay taxes on your investment returns too. Also, there is a big difference between expected rate of return on an investment and a guaranteed rate of return. It is not easy to find a no-risk investment that will yield you 5% annually.

[smartone]

FREEDOM! That is the reason not to have a mortgage! I paid mine off a year ago and I have had the opportunity to work a lot less hours and enjoy my life instead of working to pay the mortgage. I do invest the money that was going to the mortgage, but I have choices now that I didn't have before. I sleep better a night knowing that no one can take the house if I lose my job. When all are scared around me about their upside down mortgages, I breathe easy.

Owing anyone anything is giving up a little bit of your freedom!

[FMF]

Dan --

You certainly should have an adequate emergency fund. While we paid off our mortgage, we saved fully for retirement (put the max into my 401k). We also had a full year's expenses in an emergency fund.

But once that's accomplished, why not pay off the debt?

[Jdmitchbiketowork.blogspot.com]

hmm... I have a few thoughts on the various commenters:
1) Anyone talking about using the mortgage to move you into a lower tax bracket doesn't understand tax brackets. Tax brackets are marginal, moving from the 35% to the 25% tax bracket doesn't mean you saved 10% on all your taxes.

2) Yes, one needs liquid funds. Everyone needs an emergency fund. No one suggests paying off your mortgage if you haven't established this. However, beyond that point, liquidity is really a faux term for SECURITY. Once your emergency fund is established, cash flow is your most important security issues, not liquidity.

3) Note, INVESTMENTS (stocks & funds) are not LIQUID (at least not from a security stand point). They are too volatile in the short term to use as liquid assests. The time you are most likely to need them (when you get laid off) is also the time they are likely to be somewhat devalued, at least in the short term (when the economy is down). Long term, yes, investments can easily beat mortgage, but if you're using terms like liquidity and security, you're talking short term.

4) Liquid / Secure assets are ones with guaranteed positive ROI (note, I didn't say garaunteed rates, they're just guaranteed to not devalue) - CDs, Bonds, Savings Accounts, etc. Very rarely will the after-tax return on these beat the return on paying off your mortgage.

Presuming one has an adequate emergency fund established (in a liquid / secure asset) one can rank various vehicles that one might put your money in via descending order of "short term" ROI:
1) Company Match on 401K (50-100%)
2) Paying more than minimum on Credit Cards (18-??%)
3) Paying more than minimum on other consumer debt (10-??%)
4) Paying more than minimum on mortgage / student loans (4% after tax)
5) "Investing" in liquid / secure assets (+20%)

Alternately, on can focus on potential of decreasing outgoing / increasing incoming cash flow impact per $ of added payments in an emergency (aka, liquidity / security):
1) Fully paid off mortgage
2) Fully OR Partially paid off CCs or other consumer debt (early payments decrease future minimum payments)
3) "Investing" in liquid / secure assets - interest isn't much, but one can "safely" live off the capital
4) Partially paid off mortgage (doesn't impact for years unless you re-mortgage... but your unlikely to get that when you need it, aka, when you're laid off - unless you've really knocked it down)
5) Company Match on 401K - you CAN get to this if an emergency, and your emergency fund is tapped out, though it's better than stocks because of the company match
6) Investing in stocks / funds (again, losses can pummel this, but living off the capital is possible)
7) Additional payments to student loans (getting this temporarily suspended is a simple as a phone call)

For most people, the BEST mix of ROI and liquidity / security impact is a fully paid off mortgage. Even a partially paid off mortgage is better than pretty much anything but paying off consumer debt.

Please note, I do allow for exceptions. For example, my wife and I have a 0.125% fixed (NOT APR) 30 year mortgage (yes, through an actual bank, not through relatives, we were able to buy our interest rate down - NACA.com). Even your average savings account (even as poor as they are doing right now) beats that in terms ROI and liquidity. So, we won't ever pre-pay it. However, our situation is very atypical.

No matter how you slice it, the standard rules work best:
1) Establish some minimum emergency fund (1-3K)
2) Pay minimums on loans
3) invest to get company match
4) Accelerate consumer debt payments (take your pick of strategies)
5) Establish your preferred emergency fund (6-24 months expenses)
6 / 7 / 8) Pre-pay mortgage OR max out IRA or 401K (aka, some sort of tax advantaged retirement account) OR Invest in diversifying your incoming cash flows (IF you're comfortable with going into business for yourself)
9) THEN Invest in lont-term wealth (stocks / funds) outside of tax advantaged retirement account.

[Jdmitchbiketowork.blogspot.com]

Oh, and one thing I forgot to mention. Unless you are ALREADY beyond standard deduction with your other deductions... you'll miss out on some of the tax deductibility of your mortgage interest anyway...

[MonkeyMonk]

I'm somewhere on the middle of this issue. My family has a fairly sizable mortgage on our house but we've got a nice annual rate of only 4.5%. I'm a very disciplined investor (index funds pretty much inline with FMF) so I feel somewhat confident that over the next 20 years or so I'll beat that on an average return. The tax benefits are just gravy on top of that and don't really enter into my equation. But . . .

. . . I still can't resist accelerating my mortgage payments each year. For the past few years I've been keeping pace with a 15-year mortgage. I'm not sure why I keep doing this with the exception that the guaranteed 4.5 return (actual a little lower) on investment seems like a safe thing to do.

I'll need to think about this some more. :)

[John @ TheChristianDollar.com]

Tax deductions are nice, but no reason to keep a debt! I totally agree! Thank you for pointing the math out in your article!

[Daron]

The mortgage interest deductibility argument is a loser in almost every way. It subsidizes the rich (or at least those with "rich" houses) with outsized tax deductions, it only BEGINS to return tax dollars once the standard deduction is met, and if one doesn't have a large mortgage and does not have large charitable contributions it just doesn't make financial sense as the sole driver of possessing a mortgage.

It is a canard for the smaller mortgage holders who are susceptible to "common knowledge" that just isn't so.

And regarding whether I have a mortgage: no, but I have taken out a small HELOC to help pay for a vacation home. I had no debt at all for about five months, and I am eager to get back to that point around August this year. Being debt-free was a great feeling.

[Bernard]

I vote for not paying off your mortgage. Here's why...

1. Yes, the mortgage interest is deductible. Take that difference and put it in a safe, liquid, and interest earning vehicle like whole life insurance. People say, "But people won't invest it, they'll spend it." If so, there is no flaw with the strategy, it is with the individual.

2. It's safer. The more equity you lock away into your home, the riskier it gets. It doesn't matter if you've paid 15 years in advance; the next mortgage payment is always due. If you miss a payment, your equity is at risk. People are experiencing this in the recent foreclosure crisis. Plus, who do you think the banks would go after first...home with equity or homes with none. That's why I'm an advocate of interest only loans. Separate that equity away from your home.

3. Equity in your home is tempting to litigators. If you get sued, which is not highly uncommon in our litigious society, home equity is at risk. If you have that equity separate, creditors are more willing to shy away. If they take your home, they take any liability attached to it (i.e. a mortgage).

4. Home equity is illiquid. In order to get the equity, you have to either sell the home or refinance. Here's a scenario: you were let go from your employer and you need money. A bank will not let you access your home equity in the form of a loan because you have no means to repay it. You can't access your own money.

5. Equity earns 0% rate of return. If a guy down the street owns a $100,000 and I have the same home with a $90,000 mortgage. They appreciate to 30%, both at $130,000. The homes appreciated, the equity had nothing to do with it. But who's better off? Remember, I had only $10,000 locked into the property.

6. Look at the big picture. Many people are fighting tooth and nail to pay off their mortgage. This is getting rid of their tax savings. However, many of these same people are investing 401k plans, hoping they'll experience tax savings later. These people are splitting strategies. It's like having one foot on the brake and the other on the pedal.

I say do your homework before putting all the effort into paying off your home. Some say it's the greatest. You might realize it's the riskiest.

[FMF]

Bernard --

Unfortunately, personal finance decisions are made by individuals, and most individuals won't invest it, they'll spend it. I hate it too, but in my experience counselling scores of people, that's the reality for the vast majority.

[chris]

I saw a few other folks mention the standard deduction. It's a much, much smaller deduction when you take this into account.

So if you have a $12,000 tax deduction, are single and decide to itemize over taking the standard deduction of $5,700 already provided then you have only saved an additional $1,386 and if you are married you saved only $132 since you could have taken the standard at $11,400.

Not so hot on the tax deduction side...not to mention you get most of the tax benefit at the beginning of your mortgage and barely any at the end.

[Josh Stein]

If you're someone, though, that's already donating a lot of money (like many on here do), and you've got some state and local income/sales taxes to add to the party, then you may be taking all of the mortgage interest as a *federal* (and some states) deduction.

It really depends on each individual situation as to the usefulness of this strategy.

[MikeS]

@BillV - It was Troy who discussed the idea of risk in prepaying the mortgage.

http://www.freemoneyfinance.com/2010/02/help-a-reader-saving-versus-mortgage.html#comments

He made a lot of sense. For me, I have to decide how much it is worth (interest savings) to transfer that risk to the mortgage company. I don't have to worry about it till I buy the next house in 2011, but I will have to think about it.

[Troy]

FMF:

Benard makes great points. The Interest deduction is worthless to many, but a great option for many others.

I am all about risk, and he illuminates nice aspects of equity and payments and extra payments transfers risk from the bank to yourself.

And another point, people are not paying off their loan, they are paying it down. I know it seems like a small point, but it has major consequenses. You can only pay off your loan in singular. Once. At one point in time.

Everything else is paying it down. Reducing the balance, while nice and feeling good, does not limit the liability of future payments, and actually offers a false sense of security and accomplishment. It increases the borrowers risk of their own ever increasing capital, not the opposite as most think.

And while it may be true that most people would not save the difference if they were to take advantage of the interest deduction, it is those same people who would blow through their newfound increased cash flow if the home were paid off and no interest deduction existed.

So if they are not going to be discliplined with the interest tax savings, they likely wouldn't be discliplined with the no more house payment we can spend however money. These people are going to spend their house payment money on something. Whether it is a payment, mortgage interest, a boat, clothes, whatever. Either they are discliplined investors and savers or they are not.

Encourageing those undiscliplined people to pay off their loan to avoid the interest deduction simply allows them more cash flow to be undiscliplined with.

I'm all for no debt, but the appeal of a 4% fixed loan with inflation looming, and that loan being deductible is very tempting.

[J in FL]

Bernard,

You make it seem like a person would "save" *so much* with the tax deduction. Do we need to go through the math again?

If you want tax savings, why don't you just donate your money to a charitable organization? You're telling me that you rather send out 10k to get 2.5k (average example) back?

You're trading a buck for a quarter!

If that's the case, I know of some excellent investment opportunities for you with the Honorable Esteemed Umaru Egwuatu, Prince of Nigeria. :)

[Speed Weasel]

I have been screaming this (have no mortgage) to anyone that will listen for years!

1. The idea of getting a tax deduction on the interest is a band-aid. As was detailed quite well in the posting, why pay a bank a dollar to get a quarter back from the government (that is going to give another dollar to the bank anyways)?

1b. As was mentioned in an earlier comment, without the mortgage interest deduction you can still get a portion of the deduction from the standard deduction.

2. Imagine the freedom and the ease of living without a mortgage, what is likely a household's largest monthly outflow? Lose your job? Suddenly not as big of a deal. Want to quit to start your own business or take a job with less stress or responsibility to be with your family more? Don't have the large mortgage hanging over your head each month! Without a mortgage, your risk profile is reduced substantially! That opens doors and opportunities to do things that you may have never thought possible...

3. Paying the mortgage has its place and order, as is detailed out in many earlier posts. Take advantage of 401k matches (free money), have an emergency fund, etc. But ultimately, place it on the list and knock it out.

4. Have Quicken? Run a report on the interest that you have paid out over the years. Now, compose a list of what you could have done with that money had it not gone to the bank? Who could you have helped? What could you have afforded? How would your family tree be different?

[Wise Finish]

The borrower is slave to the lender. When you are in debt to another, you enter into a slave/master relationship with your creditor. (Proverbs 22:7)

One very good reason to pay it off...right away

[BillV]

@MikeS
Thanks and thanks Troy.

I have never been sold (pun intended) on buying a house solely for the tax DEduction. But one aspect in these discussions that is being overlooked is the emotional/psychological aspect even when it is more costly.

We could pay off our mortgage but my bride prefers having the cash. Yes I explained how we ould be better off. I even told her I would continue paying the same payment to her until her account was fully replenished. The cash is hers not ours due to circumstances that would bore folks here. But. Again. Due to circumstances and the fact that we plan on selling in 3 to 5 years stops her in her tracks. Now mind, she's a smart person and she even acknowledges my evaluation is correct but she doesn't want to give up the cash. Btw, neither of us needs worry about losing a job so that is not part of the equation.

If there is a point to this, it just that everyone's situation is different.

[Budgeting in the Fun Stuff (aka Crystal)]

BillV, I agree strongly with Joe Taxpayer and even included my list of priorities as my third blog post - I started it this weekend, yay! But it's kind of boring right now since I just started...lol.

We've overpaid our mortgage by $160 ($900 instead of $740) since we got it in 2007 - we knew we wanted to pay it off early and simply by overpaying that much, we cut a 15 year mortgage down to an 11.33 year mortgage and save $11,224 in interest.

We haven't put any more than that monthly extra into it yet since we also wanted to get full matching on my 401k, max out a Roth IRA, and pay for graduate school. Once my husband graduates this summer, we'll be fully funding another Roth IRA and putting the rest into a "financial opportunity" account. We'll use that to buy a rent house or to pay off our mortgage depending on our circumstances in the next 2-4 years.

I would never keep a mortgage for a tax deduction...our $11,900 standard deduction is way higher since we only pay $3000-$4000 a year in mortgage interest anyway.

[BillV]

@crystal
Went to your blog. good for you. thought the black backing is intense. I wasn't sure however, if I put my e mail address and name do both show up on screen. I like the beginnings.

[Budgeting in the Fun Stuff (aka Crystal)]

Bernard, all of your points have another side too:

1. "Yes, the mortgage interest is deductible. Take that difference and put it in a safe, liquid, and interest earning vehicle like whole life insurance. People say, "But people won't invest it, they'll spend it." If so, there is no flaw with the strategy, it is with the individual."

Most won't invest it AND even if they do, there aren't many ways to GUARANTEE the rate of return of paying off a mortgage early - in our case, 5.375%.

2. "It's safer. The more equity you lock away into your home, the riskier it gets. It doesn't matter if you've paid 15 years in advance; the next mortgage payment is always due. If you miss a payment, your equity is at risk. People are experiencing this in the recent foreclosure crisis. Plus, who do you think the banks would go after first...home with equity or homes with none. That's why I'm an advocate of interest only loans. Separate that equity away from your home."

If a person builds up an emergency fund before overpaying their mortgage, this is a moot point and gives up tens of thousands in unnecessary interest.

3. "Equity in your home is tempting to litigators. If you get sued, which is not highly uncommon in our litigious society, home equity is at risk. If you have that equity separate, creditors are more willing to shy away. If they take your home, they take any liability attached to it (i.e. a mortgage)."

Get sufficient insurance and stop being scared of being sued. I much rather own my home than be scared off by the idea of litigation. If it is that big of a worry for you, why own a home at all?

4. "Home equity is illiquid. In order to get the equity, you have to either sell the home or refinance. Here's a scenario: you were let go from your employer and you need money. A bank will not let you access your home equity in the form of a loan because you have no means to repay it. You can't access your own money."

In that scenario, you sell your house or use some of your emergency fund. You are just setting up scenarios to scare people.

5. "Equity earns 0% rate of return. If a guy down the street owns a $100,000 and I have the same home with a $90,000 mortgage. They appreciate to 30%, both at $130,000. The homes appreciated, the equity had nothing to do with it. But who's better off? Remember, I had only $10,000 locked into the property."

You aren't taking into account the interest savings. The guy that paid his house off early will have spent less on buying the home than the guy that still owes $90,000. In your own comment above, he could have invested that interest savings and have much more cash on hand than the guy with the $90,000 mortgage. Who knows with the info you gave?

6. "Look at the big picture. Many people are fighting tooth and nail to pay off their mortgage. This is getting rid of their tax savings. However, many of these same people are investing 401k plans, hoping they'll experience tax savings later. These people are splitting strategies. It's like having one foot on the brake and the other on the pedal."

Diversity if a wonderful quality personally and financially. We have a 401k and a Roth IRA. Why? Because I'm getting a 100% on the 6% I put into my 401k - free money. I also think my taxes will be higher in 25 years, so I'm a big fan of the Roth IRA.

I really liked Jdmitchbiketowork.blogspot.com's comment above.

Thanks BillV for looking. The black with white is nice on my eyes, but I'll think about it. I'll look into the email address and name display as soon as possible...I can't access Blog Spot from work, but I'll take a look as soon as I get home.

[Bernard]

J in FL-
I'll pass on The Honorable Esteemed Umaru Egwuatu, Prince of Nigeria =). I'm not advocating going into debt merely for a tax deduction. However, take advantage of it when you're buying a home. I'd send out 10k to get 2.5k back rather than sending out 12k to get 2.5 back.

Troy-
You make a good point about inflation. What many forget to realize is with an interest only mortgage, you pay the principal with inflated dollars.

It's all about transferring the risk to the bank and control back to you. But if you really want to own your home, I consider doing this. Do it in one payment. Don't use an amortized loan. Use an interest only mortgage, separate the equity and put it into a bucket that's safe, liquid, and earning interest. Then, when you have enough to pay the entire thing, do it in one payment.

[FMF]

Crystal --

Congrats on getting a blog. Let me know when you've been at it for three months and I'll add you to my blogroll.

[Budgeting in the Fun Stuff (aka Crystal)]

Thanks FMF! That'll give me enough time to tweak it and build up a nice supply of posts. :-)

I never realized how much work went into a simple blog...I can't imagine how much goes into yours! Just so you know, you are very much appreciated!

[MC]

Very interesting post. I do agree that all consumer debt should be paid off first (& also probably student loans) & one should have a substantial E fund.

Bernard talks very well, but he fails to take into account that most people are not excited about "leverage" their own home as part of their investment strategy. Just like most people don't want to walk away if they're underwater even if it does make the most financial "sense".

People buy homes so they can live in them, not just as an investment.

[Beastlike]

I agree with Darin H.....

"It's even less of a benefit than that since you receive a standard deduction anyways."

We are on our way to paying off our 1st home in a total of 6.5 years while fully funding both Roth IRA's, investing 5% to get the company's 401k match and having an emergency fund. Our plan will then be to put way more in the 401k thus lowering our tax liability while we are making more......

In the past 8 years that I have been working and investing in stocks, I have barely made a 3% return, so paying off the house is even more of a no brainer!

[Budgeting in the Fun Stuff (aka Crystal)]

MC has a good point...a house is an emotional investment too.

BillV, your email won't show up as well (Mike S's didn't and neither did the other commenter). My posting name is my email address, maybe that looked confusing?

[MasterPo]

"Saving" and "Earning" are NOT the same thing!

Reducing a future cost is NOT an investment!

Simple example: Today you put $100 to paying down a debt or $100 into a mutual fund. Tomorrow with the mutual fund you have the $100 plus some income or growth. Even if the market tanks you still can get something back. But with paying down the debt that $100 is gone. The only way to get it back is to take out more debt.

Don't fall for the smoke&mirrors of saving=earning.

Earning is earning.
Saving is saving
Cost reduction is cost reduction.

It's that simple.

[J in FL]

Bernard,

Point well taken. Of course, when time comes for me to buy a house, I will def take advantage of that (if it's still around!)... but it won't be a major reason for me to buy a house.

My only point about sending money out was that there's an incentive for me to send money to a non-profit rather to the bank, because, yes, I get a tax deduction but it's also something I can feel good about/care about/inline with my values/ect..

[Mark]

I have paid off several mortgages in the past, and I also prefered semi-adjustable rates for those - they always worked in my favor at the time. (3/1 ARMs, etc.)

In December I bought a house with an interest rate locked at 4.625% for 30 years, and I intend to make the minimum payments for the entire period.

All the other factors people have mentioned are valid (except the ridiculous "deduction benefit"), and were exactly how I though in the past.

The difference now is my outlook on future inflation and interest rates. Several posters have mentioned that you cannot get a guaranteed 5% right now on anyyhing. Absolutely true, but as the economy recovers (which it will), interest rates will rise and 5% will not be so difficult to achieve. If the economy never recovers (because the US is in a doomsday scenario of some sort), then the dollar will devalue significantly (inflation) and my payments will only be the price of a loaf of bread.

I do not buy any scenario in which rates do not rise significantly in the next 10 years or so.

[FatDaddy]

I guess I'm late to the party, so this comment may not get read. But I just wanted to chime in and say I agree with the other posters who point out that paying *down* a mortgage is not the same as paying *off* a mortgage. You could spend years throwing every spare dollar at the mortgage, pay it down to say 25% of the original balance, and then lose your job or suffer some type of long-term financial calamity. That monthly mortgage payment is still due, at the same amount. And you can't tap into all that extra money you threw at the mortgage over the years without either selling the house, or possibly taking out a HELOC or cash-out refi.

I'm all for the idea of living mortgage-free, and hope to be there myself sometime within the next 5 or 10 years. But I'm not pre-paying my mortgage. I'll just pay it off early in one fell swoop once I have enough money saved outside my retirement accounts. I don't even get caught up with worrying about if I'm making more or less money by saving versus pre-paying the mortgage.

Good luck to you all. I love this blog.

[Georgia]

FMF - I too am incredibly late. But I do have a question if you see this. Every one is talking about paying ahead, losing your job and the next payment is still due. I am about 24 years away from when I ran a local S&L and so, I know things have changed.

However, when we made mortgage loans, if you made extra payments, they could be applied to principal only. (Most places required 2 checks, but our company had the computer set up so that all extra money on your payment went to principal only. That way, if you were paid way ahead and lost your job, your monthly payments could be taken out of your principal only money. Is this no longer the case? I really must talk to some banking friends again. It never pays to lose the information you already have.

[Account Deleted]

Point well taken. Of course, when time comes for me to buy a house, I will def take advantage of that (if it's still around!)... but it won't be a major reason for me to buy a house.

My only point about sending money out was that there's an incentive for me to send money to a non-profit rather to the bank, because, yes, I get a tax deduction but it's also something I can feel good about/care about/inline with my values/ect..

[Account Deleted]

Commercial Mortgage

My only point about sending money out was that there's an incentive for me to send money to a non-profit rather to the bank, because, yes, I get a tax deduction but it's also something I can feel good about/care about/inline with my values/ect..