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Should You Prepay Your Mortgage In This Economy?

Should You Prepay Your Mortgage In This Economy?

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I wrote about Dave Ramsey’s Baby Step 6: Pay Off Home Early about a year ago, and I’d like to revisit the question of “Should you pay off your mortgage early?” in light of today’s economic crisis. In the Dave Ramsey article, I examined both the advantages and disadvantages of paying off your home loan early, but I didn’t give a definitive answer, because I believed, and still believe, that each person will have to decide on their own based on their unique situation.

Should You Prepay Your Mortgage In This Economy? 1

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Mortgage Prepayment Doesn’t Make Sense In Bad Economy

However, I can now say for certain that I am fully opposed the idea of prepaying your mortgage without paying it off completely because there are several related factors that make this a bad idea. In this discussion, I’ll assume that you’re relatively debt free; otherwise, prepaying your mortgage doesn’t make sense in the first place.

Another note, the point I am making in this article is specific to someone who has a fixed mortgage loan and has a large enough balance that they cannot pay off the loan in the short-term by prepaying — i.e., prepaying to reduce interest expenses. This is a clarification based on the first two comments below.

Unexpected Job Loss

I expect things to get worse over the next 12 months and unemployment rate will continue to rise — yes, despite the economic stimulus package that President Obama just signed into law. As such, I think any extra money that you may have should go toward your emergency fund as opposed to mortgage prepayment.

If you have 3 to 6 months worth of living expenses in your emergency fund before, now is the time to beef it up to 12 months.  Why such a big jump all of the sudden? I think the greater margin of safety is needed because it’s now much harder to get a decent job than it was a year ago. Even the most skilled workers could go unemployed in this economy for many months.

Although the interest rates continue to drop, I think high yield savings account is still the best place to keep your money due to liquidity and preservation of principal.

Great Time To Invest

If your emergency fund is already in good shape, then I think investing your extra money in the stock market right now will give you better result in the long-term. Sure the real estate market price is depressed, but the stock market is nearly 50% off its high. So if you are looking for a “buy low” opportunity, this is it. Aside from buying at a deeper discount, I also think that the stock market will recover faster than the real estate market.

I think a Vanguard Target Retirement Fund is a great way to catch the market rebound. It’s simple, low cost, and globally diversified.

Conclusion

There may be other reason why paying off your home mortgage right now doesn’t make sense, but I think these two reasons alone are enough to make a strong case for not doing so. Sure, some of you may say that paying off your mortgage early gives you the best return on investment right now, and that’s probably true. But remember this, prepaying doesn’t buy you any favor with your mortgage lender. If you found yourself unable to pay your mortgage one day, all the money you paid early won’t make any difference.

What’s your thought on paying off your mortgage early? Do you think it makes sense in this economy?

82 thoughts on “Should You Prepay Your Mortgage In This Economy?”

  1. I think I lean a bit more towards the completely debt-free end of the personal finance spectrum.

    My wife and I paid off our mortgage 8 months after we bought it. However, we only had to borrow 63K on a 85K house (a lovely former “old lady’s house” in the rural South) so it wasn’t as hard to do. We still have 45K in student loans at less than 2% interest. I figured, if we hit hard financial times, it’d be easier to put student loans on hardship deferral than worry about mortgage payments.

    Our 401k took a beating like everyone else but luckily we’re young enough that we didn’t have much in it yet. I do take solace in the fact that if we hadn’t been focused on our mortgage, we might have put the extra money in taxable mutual funds and today we would have a reduced portfolio instead of our paid-for house (with a soon-to-be red front door).

    We’re are in a higher income bracket which made all this possible, but regarding emergence funds, it’s comforting to me that without a house payment, we could probably survive (not considering health insurance) on probably a $1000/month which I could make in any number of ways through simple manual labor.

  2. Some of us have what’s called a revolving credit mortgage. Not all of it, but some of it. For example, 20% of my mortgage is in a revolving credit account therefore every single month I leave the extra from my account in there. This offsets the mortgage on which I pay interest (therefore pay less) and also doubly acts as my Emergency Fund.

    So you might be right, but under my circumstances, I probably won’t change anything in the current climate since my current situation is still right for me now.

    Interesting thoughts though 🙂

  3. Pinyo, I think you are right here. In fact I would take it a little further. In an uncertain economic environment, with interest rates so low, you can increase your liquidity by refinancing for a lower interest and longer term.

    This may not actually save you any money (if you have built up equity in your payment a longer term will increase the amount that goes to interest), but your ‘liquidity’ will increase because your payment will go down.

    The upside is that is provides some additional money to save/invest (presumably at a higher return) and gives you more flexibility in your cash flow.

  4. @Pharmboy and Andy – You both made good cases with different views. When I wrote this, I wasn’t thinking about someone who’s close to paying it off and could pay off the balance (as in Pharmboy’s case), or someone who has other types of mortgages than standard fixed mortgage (as in Andy’s case).

    The main point I am trying to make is that if you’re in a fixed mortgage situation and has large enough balance, then prepaying to save money on interest alone doesn’t make sense.

    Let me clarify that in the post.

  5. Agree. But, it’s still a good long term goal to pay off your home and now is a good time to stategies how and when you can pay off your home. If you find an investment right now – like Gold – that goes up over the next few years, then you can use the increase to once and for all pay off your mortgage. That is my plan.

  6. I think it would make sense to pay down your mortgage if you’ve gotten underwater though. In uncertain times, it’s best to be flexible and having the ability to refinance or sell if you needed/wanted to would add a lot of flexibility in your choices. Otherwise, I’d still say it depends on where you are and where you’re going with your life.

    As a side note, it sometimes makes sense to prepay a bit of other fixed loans like student or car loans if it pushes off your next due date. That way, if something happened, you have the option of not making that payment for a few months.

  7. I was prepaying my mortgage when it was 5.75% until I refinanced at 4.375%. I don’t think I’ll prepay at the rate I now have. Though I did see an advantage in the refinance because my payoff was less.

    There’s this interesting calculator Invest vs. Prepay where you can get a customizable answer to your situation:

    http://www.planningtips.com/cg....._invest.pl

  8. You seem to be equating paying down a mortgage with investing in real estate, and comparing that to investing in the stock market.

    Paying down a mortgage isn’t “investing in real estate” … you already made that investment when you bought the house.

    Paying down a mortgage is investing in a bond. A bond with a guaranteed rate of return equal to your mortgage rate, and investment safety better than even a US Treasury, and with a rate better than just about any fixed income investment out there … especially when safety is accounted for.

    When considering investing in a taxable stock market account versus paying down your mortgage with that same money, ask yourself if you’d be willing to take out a home equity loan to invest in the stock market … because you’re effectively doing the same thing when you choose to invest in a taxable stock market account with money that could be used to pre-pay a mortgage.

  9. I am a big proponent of paying extra towards the mortgage but I agree with you right now. If you don’t have a sufficient e-fund then that is #1 in this economy.

    Usually we send an extra $1,000 to the mortgage balance this time of year, but not this year. I’m keeping all the cash I can until the storm passes.

  10. If you’re deciding between paying extra on your mortgage principal and boosting your emergency fund, I would recommend the emergency fund. You never know when you might lose your job. If you’re deciding between paying extra on your mortgage principal and investing in the stock market, I would suggest the stock market route. The stock market is at an extreme discount. If you have a lump sum that would completely pay off your mortgage, I would go that route as it works like an emergency fund. Not having housing payments is awesome for if you get laid off. Or at least, that’s what I would do.

  11. I had been putting about 10% extra into our monthly mortgage until about a year ago and quit after reading a book on why this was not smart. I wish I could remember the book and author, but the reasoning did stick and I can really relate now. Lose your job and who is going to loan you money on your home, better yet what if your home is worth 20% less today than it was last year…If you have that extra in cash some where you sure are better able to weather the storm than with the cash in your home. I still have my job, house and about the same equity and value as last year (housing not as hard hit in Raleigh, NC). Now as for other debt, I can’t argue….Don’t won’t any of that. The house is enough.

  12. I think we would all sleep better at night if we didn’t have a mortgage payment, but it’s also tempting to put some money to work with the stock market at 6 year lows. What to do? I guess you could split the difference and put 50% towards principal and 50% in an index fund.

  13. I think the idea of beefing up your emergency fund is a good one, although getting to a year’s worth of income would be pretty tough, and perhaps not necessary if your job does not appear to be in jeopardy and you have two incomes in your household. The biggest advantage that I see from paying off your mortgage early is that it would require you to have less income in retirement, and so you will end up being in a lower tax bracket then. And given the huge amount of debt that our “esteemed” members of Congress have just put us in, and their endless desires to increase our tax rates, I think that may end up being a better investment than anything in the stock market.

  14. We paid off our mortgage in 2002. We have savings in the credit union that are sizable. We have paid cash for remodeling the home we own and a second professional degree for me. My earning capacity is high as is my partner’s.

    I won’t get into the debate of the financial wisdom of this but I will tell you that we sleep peacefully knowing that no bank or mortgage company’s melt-down can affect us. We are secure.

    Friends mocked us for saving in a conservative manner now we are sorry for them as they decry their disappearing retirement accounts.

    The “free-market” bubble has burst and many people are destroyed. Gratefully we are not one of them.

    • There are good argument from both sides here and thank you all for contributing your thought. I just want to clarify, based on some of the comments here, that I think it’s a good idea to pay off your mortgage early if you can completely pay it all off. However, I think it’s unwise to prepay your mortgage but not able to completely eliminate it. In this latter case, you have less of an emergency fund to support you in case anything goes wrong — i.e., losing your job due to the bad economy.

  15. Pinyo, I don’t know of any reasonable personal finance writer who advocates paying down a mortgage prior to saving a comfortable emergency fund. This is not even an argument that needs to be made.

    However, you made another argument in your original post, and others made it in the comments as well: that one should consider investing in stocks in a taxable account instead of paying down the mortgage.

    This is tantamount to borrowing on your house to invest in the stock market, and no matter what you think of the current market valuation levels, this is a very dubious idea.

    • @J – Thank you for the clarification, but I don’t think the issue is as cut and dry as you have stated. Please take a look at my article about mortgage prepayment versus investing and let me know what you think.

      Just to sum it up quick, I don’t think the decision can be made wholesale and you have to carefully consider all the factors and implications on an individual basis. And I still believe that in this current economy and stock market condition, the pendulum has swung to favor building emergency/investing over prepaying your mortgage.

  16. It’s simple: over the long-term, any reasonable asset that you can purchase will appreciate in value at a greater rate than inflation; you want to have as large a pool of assets as you can afford the holding costs on (income less expenses, including interest).

    Therefore, you should be INCREASING your holdings by borrowing more, rather than DECREASING by borrowing less.

    Carve the current 5 years economic period out (simply by holding a 20+ year horizon) and you will find that this is the timeless ‘secret’ to wealth … I don’t know anybody who has become richer over the long-term because they have paid off their mortgage early … do you?

    AJC.

  17. Pinyo and AJC,

    So, you guys are maxing out your available Home Equity loans to invest in the stock market? Or perhaps you are refinancing your full home value at current low rates and pulling out equity and investing it in the stock market?

    Because when you have money that could go toward paying down your mortgage, and you instead invest it in stock in a taxable account … you are essentially doing the same thing.

  18. @J – I can’t speak for AJC. I am too conservative to pull equity out of my home to reinvest; however I don’t prepay my mortgage preferring to use that money to build up emergency fund and investing in retirement plans. I think it’s a bit extreme to equate the two as being the same thing because they aren’t.

  19. For those who have a stable income, and some day would like to be mortgage free, a 15 year fixed rate mortgage can at least provide a realistic goal, while saving thousands on interest payments, compared to a 30 year loan.

  20. Last year I invested $ 400K in annuities and mutual funds. I now have about half that amount of money. (I have another $ 400K in a company pension fund, plus social security) Five years away from retirement with a stable job, I decided to pull most of the money that’s left in those investments and pay off my mortgage. Over the next five years we will put what we had been paying on the mortgage in CDs. Even at 2% interest, that will give us almost 7.5% growth on our money, if you figure the mortgage interest we’re not paying. I asked my financial counselor if he could guarantee that five years from now my annuities and mutual funds would have grown $ 100K plus 7.5% interest, and that my house would be paid for. He’s betting the market will more than recover by then: I don’t believe it. Five years from now I’ll have my pension and social security (if I don’t, I wouldn’t have the mutual funds and annuities, either), and I can live frugally on those and not have to make house payments. If I were 30 years younger, it would be a different story: I’d ride it out. At 57, I’m not willing to take that gamble and lose any more money.

  21. So, I have a question for all of you – we bought our house in 2007. Too bad, because the market fell so badly after we bought our house, which we shopped and shopped for the best deal for. Our mortgage is at 5.6%. We had the opportunity through our lender to refinance at 4.75% (with closing costs) and decided to take it. But, they did an assessment of the property value and determined that our home has lost 20k (from 385k) in value since we bought it. Our lender said in order to continue to qualify for the 4.75% rate, we’d have to either a/pay PMI until we were back up to 20% equity, or b/pay towards the loan by another 15k to get our equity back to 20%. We’re tempted to do this, we have significantly more cash than this in savings accounts. But, I’m unemployed, and looking for work, we’re keeping our “burn rate” really really low, but the “what if’s” plague us… On the other hand, the rate adjustment along with the reduced principal, would lower our monthly expenses by about $500 – which would help us tremendously with our monthly cash flow.
    so i’m confused! What should we do?

    • @Debbie – Interesting scenario. I think it would depend on your current cash flow — is it positive or negative? Also, if you spend the $15,000, how much would you have left in your emergency fund.

      If you spend the $15,000 and still have decent size emergency fund left, and the $500 less in mortgage payment put you into a lightly negative or positive cash flow territory, then go for it!

  22. I am wrestling with this a bit myself. I know I will get a long term higher return if I invested in the stock market, but to help improve our cash flow I am looking to reduce some of our mortgage payments – cash flow is a little tight right now.

  23. How about this:

    You’re young and healthy and buy a house.
    You also take out a par whole life policy for the amount you owe.
    You dump in extra money into the policy as you have it, buying paid up additional insurance.
    Dividends accrue within the policy tax-free.
    Depending on the interaction of the dividend scale and the amortization table, some time around year 15-20, you”d have the cash value sufficient to pay off the house completely if you want to.

    Maybe you don’t want to, though… if your policy is accruing tax free, and your mortgage interest is tax-deductible, you might not want to.

    Meanwhile, if you lose your job, you can borrow against your policy to make mortgage payments, with no underwriting and next to no paperwork.

    You can move with no hassle. Your equity is in the policy, not in your house.

    You get a tax free death benefit to your family if you die.

    If you become disabled, the insurance company will continue to pay your premiums. And you can use those dividends and premium payments to keep up house payments when you need them.

  24. I can see the logic in what you’re saying, but for me (someone who has no debt other than a small mortgage), paying off the mortgage in an accelerated fashion is part of my long-range goals, and if i invest the money rather than prepay, I’m just deferring that aspect of my plan. I can’t retire until I pay off the mortgage, and i plan to have it paid off in just 7 more years.

  25. My numbers, by the way, are as follows: balance on my mortgage, $65,000 at 6%. I would rather continue prepaying (with an extra $425 monthly) than shell out $4,000 or so on closing costs to refinance at a lower rate.

    My emergency fund has 3 months worth of living expenses, and i’m adding to it with an extra $700 monthly while i still prepay the mortgage AND fully fund my IRA and 401k.

    If i had to, i could pay off the full balance of my mortgage now with taxable invested savings (but wouldn’t want to)

  26. Fern,

    Was in a similar situation at the end of last year. When our mortgage balance dropped under 50k, we paid it off by borrowing the balance from our prime+0% (apparently a rare animal these days) home equity line of credit – swapped in the old interest rate for 3.25%. Check around and you may be able to get a no closing costs, prime + 1% HELOC if you try.

    Be aware that this is a variable rate. If you’re going to accelerate your payments enough to pay it off in a year or two, you should come out ahead. However, if you’re still planning to take 7 years to pay off, this might well be too risky.

  27. Thanks for your thoughts, Pedro.

    As a matter of fact the woman at the bank that holds my mortgage suggested i pay off the mortgage by taking out a HELOC. I didn’t like that idea at the time, but maybe i should rethink this.

    i guess the possiblity of my selling the house within the next 5 years really has no bearing on whether i do a HELOC, right, cus there’s no closing costs.

  28. Actually prepayment makes a lot of sense if your job is secure. Paying the house off is saving 5-6% on the loan. CDs, money market and bond funds are paying 2% or less. Instead of financing the income side of your investment portfolio, pay down the mortgage. It’s a no brainer.

  29. Fern,
    Minus: it’s a variable rate.

    Plusses:
    1) lower interest rate right now.

    2) should be able to do without closing costs

    3) should have a lower minimum payment. Your minimum mortgage payment is your mortgage payment, no matter how much you pay ahead. The minimum for a HELOC will be a function of your balance – interest only, 1.5% of the balance, etc. You want to find out what the minimum monthly payment is before you start.

    4) better payment crediting – mortgage payments are credited once a month, on the due date. HELOCs typically compute interest using your “Average Daily Balance” – if you get paid semimonthly, your midmonth payment will reduce your interest cost slightly. Even at the same rate, the Average Daily Balance calculation will save you a little money on interest.

  30. I’m having the toughest time trying to figure this out for my own situation. I’m buying a house that costs just a tad under what I have in savings. My interest rate is very low (less than student loans that I will start owing interest on and paying in ~ 3 years). Since I am currently in graduate school in the sciences, my income is quite low. I need to lower the amount I have in savings, otherwise I will not be able to claim earned income credit on my taxes. I would appreciate any advice or comments. How much do I actually need in an emergency fund, especially with a house? I’m very frugal and financially conservative, and I love how the total interest I’ve paid over the life of the loan goes down considerably by adding money to mortgage pre-payment. Thanks!

  31. @Michelle – I hate to pay down low interest loan, but given your circumstance you may want to consult a tax professional would could do some calculations on your behalf to see which route is better.

    In your case, paying down mortgage and getting earned income credit may be the best bet since it’s “guaranteed money” in both instances.

    The rule regarding emergency fund doesn’t change 3-6 months depending on your comfort level. If you think the job market is tight and it might be tough to find a replacement income, then build up a larger emergency fund.

  32. Pinyo,

    Due to the economy my twenty year business is all but finished. I am 58 and my health isnt that great. So now, i basically have no income and I dont look forward to working at Wendys if you know what i mean.
    So,

    My original mortgage was 60k, i only have 4 years left. So, I have about 100k in the bank. I am thinking of paying off the mortgage which is about 20k.I should do this right? Is there any reason for me to keep paying my mortgage especially in my circumstance?

    Thanks

  33. @Peter – This is just an opinion and you should consult a pro. I think it depends on what you are paying in interest versus principal (and the resulting interest rate). Since you’re at the tail end, I assume most of your payment goes toward the principal. If it was me, I would hold on to my cash and just make the monthly for the next 4 years. However, your actual circumstances and other variables may invalidate this.

  34. I have a question about early pay off on my farm. Actually I own 2 farms, one with my primary residence, and the other is across the road from where I live. Estimating low dollar value, both are worth at least $600K. I owe 98K on my primary residence, and I’m not willing to give it up for the other property. I currently have 325K in my IRA. I am currently employeed but I’m really worried about the possibility of being unemployed. Therefore my plan is to withdraw probably 65% of my IRA to pay off my debt and own both properties free and clear. I can then start to contribute 15% to my IRA, which I have unable to do, with a shrinking cash flow savings near 2K. I realize the 10% penalty, and taxes must be paid. But I think it would be worth it in the long run. A REAL STRESS RELIEF. My age is 53, my wife is a school teacher, so her job is more secure than mine. All I read on the internet is what a horrible thing to do, to even consider paying off a mortgage, look what the stock market will do for you in the next 10-15 years. THATS A BUNCH OF HYPOTHETICAL CRAP. If I let things ride like it is, the stock market dives to 6500-7000 like we’ve seen it do, then I loose my job, look what mess that would be. In years to come when I decide to retire, I can sell the farm across the road if needed to supplement my retirement income. Back to my question, does anyone think this is such a bad idea? Oh, I probably didn’t explain the shrinking cash flow, I have my youngest child, which is in her junior year in college, apartment rent and her living expenses takes a chunk out of my paycheck. We didn’t save for our childrens education like we should have. This will end in about a year, but what I’m really concerned about is the possibility of being unemployed.

  35. I’m surprised that no one mentioned that when you owe money, you are a ‘slave’ to the lender. That applies to all debt, including mortgages. I paid off my house early because I don’t want to be a slave.

    Some other thoughts,

    – there is only one way to have a forclosure proof home – have no debt.
    – you can always go back into debt if you don’t like it.
    – in a bad economy, job losses are a big concern. I loose my job.. I won’t have to fret like everyone else about how will I be able to pay my mortgage.

  36. There is not a single “right” answer for everyone. It, of course, depends on your individual financial situation and comfort with debt.

    I think pre-paying a portion of the mortgage or paying it off entirely only makes sense for most people after all other consumer debt is paid off and there is a very substantial emergency fund in place (8-12 months or more).

    I decided to split the difference. I used some of my non-emergency cash to pay down the mortgage, and the other half to invest. As others have mentioned, paying off, even a portion, of your mortgage principal is the equivalent of purchasing a bond with a yield equal to your mortgage interest rate. This is not a bad deal.

    I pre-paid about 30% of the principal on my mortgage. Now, each monthly payment pays down the principal balance by a couple hundred dollars more than before. Even without additional principal payments, the mortgage will be paid off in about 15 years, instead of 26. It will save tens of thousands in interest.

    Again, this only makes sense if you have a fairly stable job/ profession, don’t plan to move in the near future, and have a significant emergency fund.

    The peace of mind of owning your own home is worth something as well.

  37. I have a quick question.. How about paying off all or most of your mortgage payment from the HELOC. I have a 15 yr 5.375 fixed mortgage. I have 12 years left. Right now my payment goes 50% to principal and 50% to interest. I also have a HELOC which is below prime (2.75%, 20 year, 10 year draw). If I pay off all or most of my mortgage from the HELOC, my monthly payment goes down a lot and also total amount paid goes down. Should I do it? I am worried if my FICO score is going to be ruined. Also, I plan to get new mortgage to buy a place since I got married recently. My goal is to reduce monthly payment and prepare for a new mortgage. Is debt in mortgage vs HELOC treated differently by FICO? Any suggestion will be great help. Thanks in advance … DB

  38. @DB – I don’t immediately see anything negative for doing this, but you should probably consult a tax advisor. You may be giving up tax deduction on the interest paid to HELOC when you do this, but comparing to the amount saved, it sounds like a win. As far as your FICO, I think it’s a wash, but I am not 100% certain.

  39. I admire and enjoy all the knowledge shared in this site but none applies to our particular case. At our age, we are extra careful and afraid of any missteps. And so I will value to hear your opinion on whether we should or not pay off our entire mortgage.

    My wife and I are both retired from employment, now 65 yrs old & healthy on medicare, and no dependents. We don’t want to get employed anymore because we feel we have just enough saved to support us throughout our lives, hopefully.

    We’re living on our combined $22,000 per year SS retirement benefits and $8,000 per year interests income from $550,000 CDs (1.5%pa) and $50,000 emergency cash to cover our annual cash shortage. We’ll start drawing $30,000 per year for 5 years from IRA starting yr 2010. We are debt free except for our home mortgage balance of 275,000 30 yrs 5.875% fixed. We also have equity stocks worth $100,000 and will not anymore risk investing any of the $500,000 CDs.

    Our annual household expense is $60,000 which already includes $20,000 annual mortgage payment for principal & interest.

    Should we pay off the entire mortgage?

  40. @Robert, your CD’s are paying you 1.5% while you are paying the bank 5.875% for the mortgage. I would pay off the mortgage. By paying that off, you will reduce your yearly expenses by $20,000.

  41. should i pay cash or finance? i’m 35 and have $60000 cash. no bills and first time buyer. there’s 2 condo one for $60k and other $83k(i would finance this one). which is smarter to do. condo $500/mo and i make $38000/yr.

  42. Rob,

    I was in a situation similar to yours. I’m 40 and had about as much cash on hand as you did. I make about 14K less than you a year, so it usually doesn’t make sense for me to itemize my deductions. I bought a house last June for $67K. I put 20% down and got a traditional mortgage. After moving in and getting some things taken care of (had to get a new boiler, etc.) and seeing the money situation, I’ve been paying the mortgage down in large chunks (including putting the first time home buyers money back into the house). When I first got the mortgage, every month well over $200 went to interest payments. I’ve gotten to the point where the interest is only about $30 a month, I only owe about 8K on the mortgage. Even if I just continue to pay what’s left on the mortgage every month (no extra), I’ve saved well over $44K on interest over the life of the mortgage. This has worked out very well for me, and I didn’t blow the nest egg in one chunk before figuring out how my expenses would be as a new home owner. Good luck!

    Michelle

  43. so you’re saying take morgage for 83k over paying for the other condo all cash 60k? Closing cost is 25k, yes i also will be able to get 8k for first-time homebuyer but thats all to fix condo. Also if i pay cash, do i quality for the 8k?

  44. I am actually in the process of purchasing a home and now have to look at the mortgages that are good for me. For someone who is looking to pay-off his mortgage earlier, would it be cost-effective and safer to get a 20 year mortgage at 4.65%, which would make your monthly payments higher, but you will pay-off the house in 20 years. Or get a 30 year mortgage at 4.85%. The difference per month between each scenario is $500.00. The mortgage companies I have looked into so far do not penalized paying off your mortgage earlier.

    My thought process would be to get the 30 year mortgage and try to pay off the house in under 25 years. Having a 30 year mortgage at a good rate of 4.85% gives me the flexibility to save some money one month to put towards personal use/repairs on the home, pay more to the principal/interest and/or invest. Even though it sounds great to pay-off the home in 20 years, I would be worried that my monthly payments would be high resulting me in some months maybe just making it since I have to consider every day life expenses such as gas, car, food, etc. And by having some extra flexibility, it can help me is repairs are needed to my car and also to my home. Roofs, Heaters, A/C, etc don’t come cheap and if you want to get the most out of your home, maintenance is crucial.

    So, here is my thought..I wonder if most would agree

  45. Vin,

    If your goal is to own your hours outright in 20yrs. then take a 20yr. mortgage. Speaking from personal experience, as well as others I talk with…30 yr. mortgages almost never pay off early. Reason being, when life hits or you decide you “NEED” something, the paying extra is the 1st thing to go. Personally, I’d try and go for a 15 yr. mortgage. There’s nothing magical about 30, 20, or 15. You can get whatever terms you want.. if you want a 22 yr. mortgage, tell the bank you want 22 years. 30, 20, 15 are kind of standard, but it’s not a requirement.

    Good that you are thinking ahead wrt. to maintenance etc. If you’re concerned you can’t make the payments and save for maintenance items.. then you are better off looking into a less expensive house.

    It’s fun not to have a mortgage. It’s freeing knowing that you can’t be foreclosed regardless of what happens to the economy and people look at you like you have a 3rd eye because having a paid for house is sort of an oddity.

  46. Greg,

    Although I agree with you to pay it off quicker and sometimes the mind-set of paying extra goes out the window first, if one is dedicated to paying off their home at a certain time, then it can be done, but with determination.

    I will look into different lengths rather than the traditional 15, 20 and 30 years. Although 20 years sounds great, the worry of the economy, job loss, medical issues, etc. will always be in play.

    And while you have basis on looking for a less expensive house, the age of the house must always come into play as well. One can agree that a house built in 1990 will require less work/maintenance than a house built in 1970. And one who has been shopping in the greater NYC Metro area can tell you that the newer the house the higher the price. Therefore, one off-set the other in that you can buy a cheaper home, but more money is needed for repair or you can buy a higher priced home, and less money will be needed for repair.

    And while you have basis on looking for a less expensive house, the age of the house must always come into play as well. One can agree that a house built in 1990 will require less work/maintenace than a house built in 1970. And one who has been shopping in the greater NYC Metro area can tell you that the newer the house the higher the price. Therefore, one off-set the other in that you can buy a cheaper home, but more money is needed for repair or you can buy a higher priced home, and less money will be needed for repair.

  47. Pinyo,
    While I respect your views- I have to disagree. If you can pay off your mortgage, you should…period! I don’t care what your financial situation is!

    You said that unexpected job loss is one reason why you shouldnt…Duh!!!! You will lose your house if you loose your job! Pay it off, and no one will be able to take it( unless you don’t pay your taxes). Taxes, are much easier to pay than a mortgage. Also, you said now is a good time to invest…mmmmh have you been paying attention to the economy and what is REALLY going on around us? Home ownership with a mortgage is simply an illusion…While not everyone will be able to pre-pay it, that should be our ultimate goal…after all the “House is an investment” instead of shelter and a safe haven is what got us in this MESS in the first place.

  48. Yes, prepayment is not that bad. Think of it this way, you can invest the money, and at todays interest rates you will be lucky to get .5% (1 half of 1 percent) in a CD or any other safe instrument. Assuming that you already maxed your employer matching 401k contribution, best thing to do is prepay the mortgage because it will save you 4-5% down the road. No investment instrument these days will earn you (read: taxable interest earnings) 4-5% (again, assuming you maxed out your 401k contributions to your maximum employer matching level)

    By paying early in effect you are saving future payments. Look at this wash scenario:
    Individual A does pays minimum mortgage, invests extra cash into something, earns 4-5%.
    Individual B invests the same excess amount of cash into prepayment of mortgage and saves 4-5% in the future. Both are a wash. The variables are a) interest income is taxable, b) people love to talk about the mortgage interest deduction but fail to realize that you can either take the standard deduction or itemized deduction NOT both!! If you take the standard, I believe its $5,700. Suppose you have $5,700 in mortgage interest and you itemize it and write it off. Now that becomes redundant because even if you didnt have a mortgage, you could have taken a standard deduction. The tax write off most of the time is a non-factorable issue.

    Here are the counterarguments:
    The way inflation will hit us, it will devalue your mortgage obligations. ie: think of people who took out 30 year mortgages back in say 1985 at 1985 housing prices, if it was a 30 year fixed mortgage, they are probably paying pennies in relative comparison to todays housing prices (ie: $300/month mortgage for a $50,000 house bought in 1985 at 1985 prices. Just let inflation take care of your debt obligations.

    It also depends how far in the game you are and far much you have left. If you are at the beginning of the mortgage and only put down 20%, you should have more funds for contingency purposes. Play around with mortgage amortization calculators online to see exactly how much interest you are paying. Most people do not understand the compounding nature of the interest part of the mortgage and how paying the minimums only shaves off a very small fraction of the balance in the early stages.

  49. If you’re independently wealthy and have a few million then sure it’s fine to pay off your mortgage. I am not being flippant but there are people out there who are not dependent on a 9-5 job and have wealth, either from investing, business success or whatever. In that case I don’t see a problem.

  50. I think you’re an idiot if you can but still do not pay your house off asap. This country is on the brink of financial collapse. I don’t care what the guys on wallstreet say. The market has supposedly rebounded, but you have to remember that our Federal Reserve has more than doubled the money supply since ’08. More money printed means the dollar is weaker. Soon enough, much of what we earn is going to be used just to put food in our childrens’ mouths. And no, wages do not keep up with inflation. I have a doctorate and my raise for the year was a pathetic 1.1%! Use your heads and pay your large bills off if you can. In the least, you’ll be able to sleep at night. It’s all about financial freedom and security!!!

  51. @S — I totally agree.

    When you look at the people who are truly rich, they are paying cash for their homes.
    They are caught up with some tax deduction.
    Having a fully paid for house can provide security in very uncertain times.
    And I believe we are far away from a true recovery.
    I’m blogging about my goal to pay off my mortgage by age 30, if you’re interested.
    It’s .

  52. @S and @Michael: Playing devil’s advocate here, but if inflation kicks in wouldn’t having a mortgage balance be beneficial? Let’s say your rate is 5% on the house, but inflation kicks up and you could earn 6% on your savings. What would you do then?

  53. @Kevin Mulligan — Great question and I’m glad you asked it. BTW, your website is very impressive.

    I don’t think I would be embarking on this goal if interest rates on savings accounts were 6%. I actually blogged about that very topic a few days ago.

    A few years back when I was making 5% with EmigrantDirect.com, I was saving everything I could! Then the rate dropped. I locked in CD’s at 2%, knowing it would only go lower. Now it’s down to .80%. I do not think we will see those 5% rates back before I pay off the mortgage *fingers crossed* in 2015.

    So to answer your question, if savings rates were at 6%, I would probably still pay down the mortgage ahead of time, but not nearly as aggressive as I am now. I’m in a position where I’ve gotten out of debt, I’m funding my retirement, and now I have this extra cash. My choices were — more investments — mostly long-term — or paying off my mortgage– something I can benefit from in the short-term. That’s why I’m paying down my mortgage in 5 years or less. It’s to set myself up for life changes in the short-term, not retirement, 40 years away.

    The thought of it taking 15 or 30 years to truly own a home just doesn’t sit well with me. I guess that’s the impatient part of my personality.

  54. @Michael: Yea, I miss the good old days of 5% savings account and CD rates. To be there again…

  55. Ok, I need a little help here. I refinanced 60,000 at 4.7% for 15 yrs, making extra payments and would have it paid off in 7yrs. I’m 46 yrs old, annual income 65,000 with fairly stable profession as a RN. I have 3 month emergency fund saved up, invest in 401k,403B employer matches 3%, IRA. My debt is fairly low insurances and mortgage. Not sure if I should stop paying extra on mortgage about 250.00/mos and save this as cash on hand?

  56. @Betsy — You’re in a good financial situation based on what you described. Personally, I don’t think it’s a bad idea to pay a bit toward your mortgage to pay it off sooner. I am in a very similar situation as yours and I spread the extra money across different savings, 401k, and extra payment on the mortgage.

  57. My wife and I recently came into an “early” inheritance (we are still in our early 30’s).

    The sum is enough to: a) completely pay off our mortgage (current rate of 6.375% on 196k; home value $425k + or – 15k), b) invest for our children’s college education funds, c) save an additional sum (approx. 100k) and invest it for retirement (wouldn’t plan to touch it for 30 years and would add to it with cash savings from mortgage pay off).

    We have no other debt (credit cards = 0, car payments = 0)

    My wife and I feel this represents the best plan and a guaranteed return – given the mortgage pay off. We have considered refinancing to a lower rate but we both own our own businesses and do not have the kind of tax returns that makes it a slam dunk to refinance in this new lending environment.

    Paying off the mortgage entirely will also have a psychological effect that will be difficult to quantify but tangible nonetheless.

    Thoughts? Comments?

  58. Do it. Having your house paid off provides tremendous peace of mind in this crazy economy. You could suffer a downturn and not have to worry about being foreclosed. Use what you were paying in mortgage to build up your investments and increase your charitable giving.

    As Dave Ramsey likes to say…if you find out you don’t like being debt free, you can always go back into debt :-).

  59. @Grasshopper – Your mortgage rate is “very” hight. If you cannot refinance it, I’d pay off your mortgage completely (that’s what I would do in your position). This will free up your cash flow to let you save for your retirement and children’s college (in that order).

  60. Yes, pay the mortgage off. Only people that would advise otherwise are brokers,etc. They play the theoretical numbers game, that way they can conjure up more business for themselves.

  61. Joe.. you don’t get anything back per se…but you do save 20 years of interest payments and you get back peace of mind.

  62. @Joe, You get to use your money that would have gone into the mortgage payment for other things, such as savings or investing or traveling. I don’t know how much your mortgage payment was but for most, it’s a big chunk of their paycheck. So having that money free is a dream to many homeowners.

  63. I grossly underbought on a grossly overpriced condo in ’06. I’ll use real numbers. I’m 28 now and single. It was $125k and I financed 100% at 6.375%. Today, similar units in my building, between the market collapse and the building issues (developer lawsuit!) are not selling for $75k.

    I want out in the next few years: its way too small and noisy. My total monthly cost on this place is $1100/mo plus $250 condo fee which is everything but electricity. Similar rentals may be $900/mo. I’m also not too keen on being a landlord.

    I have about 8 months expenses banked in savings and save about 10% in my 401k.

    By my math, hiding my non-retirement savings rate ($1000/mo) in a mattress and then selling the condo at a loss in 5 years ends up being worse than keeping my emergency fund as is, contributing the same to my retirement, and prepaying my mortgage with the $1000 – even accounting for the tax writeoffs from mortgage interest. Provided I keep my reasonably stable job in a field where work isn’t too hard to find.

    Most advice I’ve read says paying early on an underwater mortgage is just dumb, but since I want out of this mortgage ASAP and can afford a good amount more, is it totally stupid in my situation?

  64. Ok, I have a really sticky situation. My husband lost his job over 2yrs ago and is looking and not finding. We owe 48K on our home with a mo pmt of $1230.00 including taxes. Unemployment ran out about 5 months ago. We have been able to sustain our monthly expenses with our savings and some assistance from my ederly mother. But, we only have about 5 months of savings left. Its been a very very difficult time. I work part time as a waitress, housecleaner, and garderner and anything that generates a $ and leave me with a flexible schedule. I am unable to work full time because I also have to tend to my ederly mother (hence why she helps out financially. We also have a 12yr old child. I am 52 my husband is 49. I have about 82K that was a 401K from my previous employer it was rolled into Northwest Mutual in a fixed rate acct. My husband still has his in a 401K acct with his previous employer that is about 102K. Based on the fact that as of right now we have no job perspectives yet I have considered looking into taking the hit and liquidating some of these monies to pay off our mortgage. In a few months we will not be able to make the payment if my hubby doesnt get a job and based on everything Im scared. We need somewhere to live no matter what. I thought that if I took my fund out even with penalties and taxes I would be able to pay the mortgage off, but, I dont know if thats a good thing to do or not. So any and all info or suggestions would be greatly appreciated. We have owned our home for 14 yrs, Its probably worth between 180k-200k if we could sell it in this lousy mkt upstate NY. Thank You.

  65. For Kathie B….If I were you I would take the hit and save the house. You are still young and will just have to work harder and longer to recover from it. To cover the penalty and tax and the 48K mortgage payoff you might need to withdraw about 60K from your husband’s 401K. Doing this you will have peace of mind, less stress for all, and a more relaxed cash flow.

  66. For Kathie B,

    Sorry to hear about your situation. If I were you, I would save the house. Make sure you talk to someone who knows about taxation as you might be able to claim your early withdrawal as a hardship withdrawal, which includes withdrawal in order to avoid eviction or foreclosure from primary residence. If that’s the case, you won’t have to pay penalty.

    Plus you might be able to strategically withdraw your money to minimize tax impact. I’m just guessing, but if you withdraw half the money you need now (before year end), and the other half in 2012. You only have $24k taxable income this year and $24k in 2012, which puts you in a lower tax bracket.

    Check with a tax expert though because I’m not sure if that’s how it works.

  67. Kathie B.

    Pay the mortgage off now with money within your 401K. I have a 401K and IRA with Fidelity. I called them with my intentions on paying my mortgage off with IRA funds, and they were very helpful in determining how much to withdraw. A little hard to believe, but they thought it was a smart thing to do also. You’re odds are like being in Vegas, by holding on to that mortgage, thinking everything is going to get better. You can loose it all. What is your 401K or IRA worth if the stock market crashes tomorrow? $0….You also no longer own your home.

  68. Thanks.. Ive had an accountant do my taxes in the past. Do you think that would be the person to ask. I also wondered how do you know what the tax rate would be? is there a standard number or does it go by state etc? I will give her a call Monday. Thanks just needed someone to bounce this off of, once I find out details I post results for anyone else that may be in this boat. I sure hope not, I dont wish this situation on anyone! Thank you for your support…
    God Bless

  69. Kathie,
    You’ll have to guess at your 2011 income. Not easy but you can get probably within 5K of it, with only 2 more months to go. Your tax rate is based upon your adjusted gross income. I just noticed another post recommending to do half now and half in 2012. Not a bad idea if the market stays up. I would withdraw 62k, payoff the 48K mortgage. Keep the 14K, for when tax time comes. If you only need 10 or 12K for taxes, you can reinvest the 2-4k overage or just keep it in a savings account for emergency funds. I’d rather take out slightly a little more than less, just to be prepared. Look at your last years tax return, to get an idea on your taxes paid. Consulting a tax advisor or tax accountant would probably help as well, stay headstrong and tell them you are paying off your mortgage, you know you have to pay the taxes and penalty, just have them give you a ball park number of what you need to withdraw from your 401K or IRA. Do it now, you’ll be happier when it’s done.

  70. OK we are self-employed, transportation. Our business is going down quickly.
    We are considering, protection avenue?
    Our question is, we have a mortgage paid off on one house we do not live in, and the one we love and have always paid down on for this particular reasons is down to 60K give or take. If we were to pay off the house we live in so as we could be secure in at least having a place to live do you think the court or debtors would take this home from us anyway?

  71. Not sure what you mean by this. I’m thinking you might be talking about property taxes, home maintenance, etc. Seem to be a little short for details on your financial situation, so its hard to say, with the limited information you share.

  72. My wife and I are currently blessed to be employed. We are 37 and 35 and owe $168K on our 3000 sq ft home and 15 acres. I am in the process of liquidating my IRA of $240K(previoulsy $400K). After meeting with my CPA, I am pulling half this year and half in January. Watch out for quarterly taxes for this year. You might want to pre-pay. By doing this, we can save $30K( mortgage + monthly savings after employee match) a year. I know that is a huge tax hit, but I am not a slave to the lender anymore. In 4 years I will have 120K afer tax, that is as good as $240K in an IRA or 401K before 59 1/2.
    My reasons:
    -Peace of mind
    -I have the time to build savings up again
    -I am the bank now
    The market and jobs can do what they want to do.
    I don’t have government “charge” me 10% to get to MY money before I am 59 1/2. How has our society allowed this way of thinking to go on in this country?

    The Cons:
    Time value of money..ya..ya that is before tax speculation. I don’t care what the market does, nobody can guarantee anything. Like, what the market will do or what taxes will do. Do you think taxes are going down?

    15 Trillion and counting…I am going to go with the fact taxes are going up. Don’t put it pass congress to raise the age without penalty. Think about all the money in IRAs that Uncle Sam could use if they raise the tax rates when folks retire. Sure IRAs grow tax free, but they don’t come out that way. Does anybody really believe that Washington has our best interest in mind? No matter who is office, the debt has to be paid off.
    I am a person that likes things to be certain. Really tired of the brokers( men with pretty hair) thinking they have the answers. Hell, they are just trying to save their own job.

    If you owe, you are a slave. I don’t want to explain to our children why the banker man is putting a sign in our yard.

  73. My family and I recently became debt free except the mortgage paying off over $90,000 of consumer debt in under 2 years using the debt snowball technique. It was by far the best thing we’ve ever done as a family! We are now attacking our mortgage with litereally everthing we have (including the revenue from my personal finance blog) to get rid of our mortgage as quickly as we can. Currently, we have about 3 years left before we truly are COMPLETELY debt free!

  74. I only owe $65,000 on my mortgage. I’m 45, solid job, good health and 6 month emergency fund. My only other debt aside from monthly bills is a (small) boat payment. (mid-life crisis) I have enough company stock that I can sell, pay off the house in one lump sum and still have some left over. My thinking is this.
    1. I would have a place to live, no matter what. (barring an act of God, health issues, etc.)
    2. I could use the money from the mortgage and my car note to increase my emergency fund by several months.
    3. Then I could use the majority of my monthly income to aggressively fund my 401k.
    4. If I do decide to move, it’s becoming a rental heavy area. I could then rent the place out and let this house pay for most of the note in a better area or apartment rent if I’m relocated.

  75. Matt – If you can sell your stocks and don’t have to pay too much taxes or penalty, I think your idea is reasonable. However, I don’t know how many years you have left on your mortgage or your interest rate, so you might not be saving all that much money on the interest.

  76. My 401k mutual funds performance last year was 3%, my pension fund which is a single life annuity was 6%. I did withdraw funds from my IRA a couple of years ago, paid my mortgage off, and I do not regret it. Peace of mind, and I am not stressed out in my daily job at work. Calculate all you want, but it the same in the stock market as anything else, no one has a crystal ball that can tell what the future has in store for us.

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