Why pay off mortgage?

[Desnik]

I read on here all the time about people paying off their mortgage, how everyone should pay it off, etc..
But, DH and I have spoken to 3 different financial advisors and 2 accountants and ALL of them have told us not to pay it off. Is it an age thing, an income thing, a interest rate thing? I just don't really understand it. Why do so many say to pay it off and others say not to? Is there one right answer?

 

[Melrosgirl]

There are many answers.

Less debt is always nice, so many believe one less debt is a good thing. Can't argue with that.

Lately if you buy a house with cash, it's possible your house is not worth that much a few years down the road (since homes are no longer "investments.") So if you pay cash for the home, you have less to show for it when (if) you move. Had you financed the mortgage, you wouldn't be out "all of that cash." (granted, you still owe what you financed. You might be upside down in your loan bc the house isn't worth the much anymore.)

Interests rates are very low right now. When rates were double or more what they are now, it made more sense to pay off the mortgage.

We can still write off (deduct) interest, so financial advisors see that as a good thing. OTOH, paying interest is still paying interest.

Personally I believe in less debt. Of course, with rates so low for most things now (cars, homes), it's hard not to get caught up in the buy now, pay later motto. (That's also how a lot of people get themselves into trouble down the road.)

See lots of answers!

 

[jessica52877]

I think it is a personal choice. I see no reason to carry a mortgage if I don't have to. Taxes alone don't do it for me.

 

[luvmy2sams]

I agree that it's a personal choice.

Paying cash for our home has given us a feeling of security and freedom that I wouldn't trade for the interest write-off. We're beyond thankful that we were in a position to do so.

 

[scard192]

I got a small inheritance from my father that I used to pay off my mortgage. I own a condo and had 7 years more to pay on it. I don't derive any income tax benefits from the interest on the mortgage as the Standard Deduction is now higher than if I itemized. I am saving over $6,000 in interest by paying off the mortgage so the decision was a no brainer for me.

The money that was going to the mortage every month is now going into savings and my 401K.

 

[Desnik]

I got a small inheritance from my father that I used to pay off my mortgage. I own a condo and had 7 years more to pay on it. I don't derive any income tax benefits from the interest on the mortgage as the Standard Deduction is now higher than if I itemized. I am saving over $6,000 in interest by paying off the mortgage so the decision was a no brainer for me.

The money that was going to the mortage every month is now going into savings and my 401K.

OK, in your situation I can see how it was right for you to pay off your mortgage. That makes total sense to me.

For us, we were told that the tax deduction is good. But, am I wrong thinking that we should make extra payments to shorten the length? We have 24 years left, have a low interest rate & have no plans of moving. I am a SAHM & DH is 39 and won't retire for a long time.

 

[CAFarmerGirl]

Typically, you can take the money you would put into the mortgage and earn more investing the money (ie, house interest rate =5% and typical stock return over the years = 8%).

People that pay off their mortgage do it for peace of mind. I get that.

 

[smokeyblue]

The main reason would be liquidity. If you have more cash on had instead of having it tied up in equity you will be better prepared if you have to lay out cash on short notice.

 

[JaymeC]

Right now dh and I are hesistant to pay off our mortgage because we just took it out at 4.5%... And honestly we know that at some point over the 30 years our rates are going to go way, way up again (they always do!) and at that point the mortgage company is going to be desperate to get rid of our loan, and in the mean time our investments will be paying a lot more than 4.5%. So we putter along. We do make an extra payment or two/year, but nothing more than that. I will add, our mortgage payment is low. Less than $500/month. We'd have to be in very, very dire financial straights to not be able to meet our payment, so we're comfortable not paying it ahead very fast. We've been told a couple of times by people that our mortgage is less than their car payment, and I believe it.

 

[bellarella]

I agree with the answers above.

If you have a low interest rate you are paying very little for liquidity, especially if you get the tax deduction (which lowers the effective interest rate further).

I would much rather be in a situation where I owe $200,000 on my mortgage and pay only 4% (or less) on that loan and have $100,000 in the bank than owe $100,000 on my mortgage and have nothing in savings. If I were in a position where I needed the money, it would be much harder for me to continue to make mortgage payments on the $100,000 or to further borrow against my house.

Once I had enough money in savings to completely cover the mortgage and still have a substantial savings, then the analysis changes. Then I would look at the rate I was paying on the mortgage and compare it to the rate I was getting on savings/investments and think about the risk allocation.

 

[momto2girls]

The main reason would be liquidity. If you have more cash on had instead of having it tied up in equity you will be better prepared if you have to lay out cash on short notice.

This is why we choose not to pay our mortgage off. With the economy the way it is, we feel that it is best to have as much cash saved up as possible, so that we are prepared to deal with any possible issues. When the economy does improve significantly (hopefully 6-10 years from now), we will then pay our mortgage off with our savings.

 

[Jeff_G]

With no other debt, you need to have an emergency fund of 3 to 6 months of expenses. Then you need to be contributing 15% towards retirement, then look into paying off your mortgage.

If you look at the tax deduction issue playing with round numbers, lets say your mortgage interest is $10,000, and you are in the 25% tax bracket. You are giving a bank $10,000 so you don't have to give the IRS $2,500. You can give $10,000 to a charity and receive the same deduction. So it doesn’t make sense to keep the mortgage from a tax deduction reason.

If you look at the invest your money and keep the mortgage its true over 20 or 30 years you should make more money in the market however paying down your mortgage is a guaranteed return vs the market is not. If my mortgage is 5% I should make more than that in the market. Its all about risk tolerance, the best guaranteed return ie treasury bonds is between %3 and 4 %.

If us it’s about reducing risk, I have the money now to pay off the house once its paid off if I were to lose my job I would still have a place to stay and not have to worry about foreclosure. When I goto retire I’m going to need a lot less income without a house payment. Once the house payment is gone you can take that payment and invest it.

 

[mrsklamc]

If you look at the tax deduction issue playing with round numbers, lets say your mortgage interest is $10,000, and you are in the 25% tax bracket. You are giving a bank $10,000 so you don't have to give the IRS $2,500. You can give $10,000 to a charity and receive the same deduction. So it doesn’t make sense to keep the mortgage from a tax deduction reason.

This, specifically.

 

[Desnik]

Very interesting, I am learning so much! Thank you for all the info!

DH & I do have 6 months emergency savings, & contribute to retirement 16%(401K and IRA, DH's job matches the first 6% in the 401K) DH will have a pension(hopefully ) and our only debt is the mortgage & car. I'm not sure what tax bracket we are in. How do I find that out?

 

[cats mom]

It's usually a matter of whether the money you would be using to pay off the mortgage could be put to better use elsewhere or not.

If you're free of other debt, insurance needs are met, retirement accounts are maxed out, and an adequate liquid emergency fund is built up, it may just come down to what you're most comfortable with.

I don't think there's really one correct answer for every person in every situation.

 

[Desnik]

It's usually a matter of whether the money you would be using to pay off the mortgage could be put to better use elsewhere or not.

If you're free of other debt, insurance needs are met, retirement accounts are maxed out, and an adequate liquid emergency fund is built up, it may just come down to what you're most comfortable with.

I don't think there's really one correct answer for every person in every situation.

We have life insurance policies(DH's is higher than mine, over $1million) and health insurance is paid 100% by DH's employer, meaning we don't pay anything to get it, just $15 copays for Dr visits.

I guess I just feel like maybe we aren't on the right track if we don't focus on paying off the house? I don't know maybe I should just stop looking at what everyone else here seems to be doing

 

[scbelleatheart]

We paid cash for our house. We had sold our old house that was paid off since 1995 for a nice profit. We fell in love with the new house and there were several offers on the table for way more than we offered but our bid was accepted because the bank had no risk in this housing market from us.
We ended up with just about everything we owed paid off All of our business real estate and a house free and clear. All that was still owed was a few corporate taxes but those aren't "really" ours. The corporation owes them.

 

[prncess674]

I would focus on paying off the car since none of that interest is deductable. I would also focus on getting a 9 to 12 month emergency fund before I start putting money into a house.

 

[DawnM]

Here is an explanation of tax brackets:

http://www.obliviousinvestor.com/2011-tax-brackets/

It is often very confusing and I hear people say, "Oh, I got a raise and now I am in a higher tax bracket so I am not making any more $$" without seeing that the higher tax bracket isn't for ALL of their $$.

Dawn

 

[Lisa loves Pooh]

I read on here all the time about people paying off their mortgage, how everyone should pay it off, etc..
But, DH and I have spoken to 3 different financial advisors and 2 accountants and ALL of them have told us not to pay it off. Is it an age thing, an income thing, a interest rate thing? I just don't really understand it. Why do so many say to pay it off and others say not to? Is there one right answer?

Depends on why they told you not to pay it off...

If you plan on moving--well, that doesn't make sense to apply all the funds on a place that will get paid off when you sell it...

If you get a tax deduction--well, that doesn't make sense either since you pay far more in interest than the benefit of the tax deduction. (Rough example: You are spending $100 to avoid paying $25 in taxes and losing $75 on the deal.) That often is the biggest reason I hear when someone says an "expert" told them not to pay off their home.

That said--we are quite a way from having to decide to pay off the house or not.