Why pay off mortgage?

[mikehn]

I have 6 years left on our mortgage. As you know, when you get towards the final years of your mortgage, your balance is practically all principal, with very little interest. Most of the interest is paid in the earlier years of the mortgage. Therefore, at this point in the mortgage, I practically have an interest free loan and Im going to milk it.

 

[cari12]

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?

I don't think there is one answer. It really depends on your goals and situation. I would say the biggest plus would be to not have that payment every 2 weeks. It would free up a good chunk of disposable cash that could then be used for any other financial goals, college tuition, vacations etc. that you want to do.
Also, paying it down now makes sense with interest rates being so low so that once interest rates begin to rise again, you will have less to mortgage and will not have trouble making payments at a higher rate.

 

[sweetdana]

I spoke in depth to my financial planner about this, and his advise is don't pay it off and invest instead in municipal bond funds/stock funds ect. ...though he could give me no investments with higher returns, than the interest I was paying... Only that in 5 yrs I might get higher interest assuming there is still a risk with insured muni bonds/stock funds... . I asked my CPA and he said.. DAHHH he is on commission, he wants it invested elsewhere. Pay off your home.. end of story.

If you have 30K or 80K in credit card debt at 14% interest, of coarse don't pay off the 5% mortgage for 30K. .. AND if you have a 30K CD sitting around at 1.99% and a 30K mortgage at 5%.. You are not being smart sitting on a negative #. even getting 1/3rd of the interest back, (AND YOU PAY INCOME TAX ON THE INTEREST ANYWAY), it still is a negitive # for you.

This is only true if you do not need the possibly liquid assets.. IE do not drain yourself to no reserves. You should always have 6 months - 1 yrs reserves, depending on 1-2 people working in the family, how easy it would be to replace your job, other possible family issues coming up..

But over all there is no reason to not pay off your home, in this market there is no garentee on a higher rate of return interest.

 

[thomas998]

I spoke in depth to my financial planner about this, and his advise is don't pay it off and invest instead in municipal bond funds/stock funds ect. ...though he could give me no investments with higher returns, than the interest I was paying... Only that in 5 yrs I might get higher interest assuming there is still a risk with insured muni bonds/stock funds... . I asked my CPA and he said.. DAHHH he is on commission, he wants it invested elsewhere. Pay off your home.. end of story.

If you have 30K or 80K in credit card debt at 14% interest, of coarse don't pay off the 5% mortgage for 30K. .. AND if you have a 30K CD sitting around at 1.99% and a 30K mortgage at 5%.. You are not being smart sitting on a negative #. even getting 1/3rd of the interest back, (AND YOU PAY INCOME TAX ON THE INTEREST ANYWAY), it still is a negitive # for you.

This is only true if you do not need the possibly liquid assets.. IE do not drain yourself to no reserves. You should always have 6 months - 1 yrs reserves, depending on 1-2 people working in the family, how easy it would be to replace your job, other possible family issues coming up..

But over all there is no reason to not pay off your home, in this market there is no garentee on a higher rate of return interest.

a few years ago, when a municipal bond was pretty much risk free, that would have made sense.... but when you have a lot of towns and cities that are on the verge of bankruptcy, well I would fire that planner and find one that was keeping up with the reality we live in and not ignoring the fact that the economy of today is much riskier than it was 10 years ago.

 

[puffkin]

I spoke in depth to my financial planner about this, and his advise is don't pay it off and invest instead in municipal bond funds/stock funds ect. ...though he could give me no investments with higher returns, than the interest I was paying... Only that in 5 yrs I might get higher interest assuming there is still a risk with insured muni bonds/stock funds... . I asked my CPA and he said.. DAHHH he is on commission, he wants it invested elsewhere. Pay off your home.. end of story.

I understand where you are going with your point, but I think that point is irrellevant with most good/reputable financial planners. Because as a financial adviser, either way they would be getting your money. If you pay off your home, then you will have more disposable income to invest once the mortgage is gone. If you don't pay off your home, you will be investing that extra money with the advisor. So in either case they are getting your money to invest and therefore should be trying to do the best thing for your particular circumstances.

Your point is really only relevant for someone fresh off the street with a wad of cash (say an inheritance), a mortgage and no existing financial planning. I don't think anyone should consider paying off their home until they have some type of retirement contribution plan and cash reserve in place and that they are continuing to invest in that as they pay off the home. To start first with paying the home and then start worrying about retirement savings after that debt is gone is not a great plan.

 

[crisi]

I had a mortgage. I paid it off. I have one again.

So the reason I paid it off, and the reason I'm not happy about having one again, is cash flow. I had an extra $1000 a month when I didn't have a mortgage.

The reason I have one now when I could pay it off is the interest differential. My current mortgage is at 4% - plus I get a tax deduction further lowing my effective interest rate. I'm getting 6-8% on dividends. I make more money with it invested.

If you would "just spend" the extra money, instead of investing it - paying interest on your mortgage if you COULD and HAVE A DESIRE to pay it off is a false economy. Your tax break on the interest is fractional, you still are paying interest even after the break. However, if you have the discipline to invest it, and your interest rate is low, AND you know what you are doing in terms of investing it, it isn't a bad idea to invest it instead (NOT MONEY NEEDED IN THE SHORT TERM. THE MARKET COULD CRASH TOMORROW AND TAKE THREE YEARS TO COME BACK!).

 

[TinkTock]

The reason I have one now when I could pay it off is the interest differential. My current mortgage is at 4% - plus I get a tax deduction further lowing my effective interest rate. I'm getting 6-8% on dividends. I make more money with it invested.

If you would "just spend" the extra money, instead of investing it - paying interest on your mortgage if you COULD and HAVE A DESIRE to pay it off is a false economy. Your tax break on the interest is fractional, you still are paying interest even after the break. However, if you have the discipline to invest it, and your interest rate is low, AND you know what you are doing in terms of investing it, it isn't a bad idea to invest it instead (NOT MONEY NEEDED IN THE SHORT TERM. THE MARKET COULD CRASH TOMORROW AND TAKE THREE YEARS TO COME BACK!).

This is not targeted specifically at you, but yours was the last post I saw, so I quoted it. I noticed that when people talk about paying off a mortgage vs. investing, they note the tax deduction they get on the mortgage interest, but they never seem to take the capital gains tax off what they're making on the stocks. And that's assuming you hold the stock long enough not to be taxed as income.

I totally agree with your second paragraph here. Making money by saving and investing rather than paying off a mortgage depends completely on your discipline. If you see the money sitting in the savings account and feel a need to go spend some, this won't work for you.

 

[Jeff_G]

I'm curious for those who favor a large emergency fund 2 to 3 years worth, what sorts of emergencies are you planning for? What kinds of expenses do you envision needing to cover? Other then a long term unemployment situation?

 

[Colleen27]

I'm curious for those who favor a large emergency fund 2 to 3 years worth, what sorts of emergencies are you planning for? What kinds of expenses do you envision needing to cover? Other then a long term unemployment situation?

That's the whole of it for us. DH is self-employed in an oversaturated profession and I've been a SAHM for 13 years, so it would be foolish to think either of us could just find work next week/month should the need arise.

 

[QVCshopper]

We paid ours off 5 years ago and have not regretted the decision once. First, it was during a time early in our children's lives when we both got large bonuses (those are now gone; I left the company and the economic downturn took away the rest). We did not use the bonuses for living expenses, trips, luxuries, etc., but rather to pay down the mortgage. We also got a small inheritance ($5K I think) when my DH's grandma passed.

We did it so I could stay home with the kids and we wouldn't stress about having one income. To me, that's worth everything... not stressing about money is such a blessing. My parents fought constantly about it (still do) and I didn't want to live like that. My mom had a mental breakdown over finances after my dad was out of work for 4 years. To me, peace of mind is far more valuable than the tax deduction.

Anyway, we have a large nest egg saved for retirement and college. Might not be enough to pay for 3 college educations, but we will try; retirement is our priority, we are in our mid-30s, so we have time. I think we save around 40-50% of our income; money that would otherwise go to the mortgage. We do not live lavishly; we are not into luxury cars, etc. so saving what would have been the mortgage payment is a non-issue. We also bought less of a house than we were approved for--although another bedroom would be nice.

 

[crisi]

This is not targeted specifically at you, but yours was the last post I saw, so I quoted it. I noticed that when people talk about paying off a mortgage vs. investing, they note the tax deduction they get on the mortgage interest, but they never seem to take the capital gains tax off what they're making on the stocks. And that's assuming you hold the stock long enough not to be taxed as income.

I totally agree with your second paragraph here. Making money by saving and investing rather than paying off a mortgage depends completely on your discipline. If you see the money sitting in the savings account and feel a need to go spend some, this won't work for you.

I still come out ahead - even after paying taxes on my gains. But you are right, the taxes paid on the income sort of wash out - especially with dividend income being taxes as ordinary income now. Because 8% is still bigger than 4%

 

[TinkTock]

I still come out ahead - even after paying taxes on my gains. But you are right, the taxes paid on the income sort of wash out - especially with dividend income being taxes as ordinary income now. Because 8% is still bigger than 4%

Oh definitely. I'd borrow at 4% to make 8% any day!