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Dave Ramsey: Pay Off Your Mortgage Early or Not

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Should You Pay Off Your Mortgage Early? This is an age-old question with no definitive answer. There are people who believe paying off mortgage as fast as possible is better, and there are people believe investing the difference is better. Dave Ramsey advocates paying off your home loan early in his book The Total Money Makeover. I believe this to be a great advice for his audience.

In general, if you are uncomfortable with investing, you’re better off prepaying your home mortgage. However, investing instead of prepaying could be a more financially rewarding option for many people.

Advantages and Disadvantages of Mortgage Prepayment

Since the right answer depends on so many factors, I cannot say that mortgage prepayment or investing is better. Instead, let’s examine the key factors that will help you make the final decision for yourself.

Prepay versus Invest

Advantages of Prepaying Your Mortgage

  • Interest payment savings — I believe this to be the most significant benefit of prepaying your mortgage. You’ll ended up saving a good amount of money on interest payments. The money saved is risk-free and guaranteed. Not to mention you’ll get out of a major debt obligation and own your home sooner.
  • Investment risk — Since you can’t beat prepaying with risk-free investments like certificates of deposit, money market and savings, you’ll have to utilize investments that provide higher returns, such as investing in the stock market. With prepaying, there’s no investment risk involved.
  • Investment gains are taxable — Your investments gains are taxed at your marginal tax rate for dividend and interest gains, and at the long-term capital gains tax rate. Therefore, you do not recognize the full value of your investment gains. For instance, if your investment gained $6,000 in value and you have to pay 18% on taxes (average), that’s only equivalent to $4,920 net gain.

Disadvantages of Prepaying Your Mortgage

  • Opportunity cost — Depending on your interest rate, investing could provide you with superior return on your investment. So it’s possible to come out financially behind if you prepay.
  • Lack of diversification — Your house could be a significant portion of your assets (it is for me). By prepaying, you are not increasing your real estate investment (it’s still the same, you are just lowering your debt). By opting to invest your money elsewhere instead of prepaying, you are increasing your investment in other asset classes, thus effectively reducing your real estate exposure and overall financial risk through diversification.
  • Tax deductionsYour interest payment could be a significant portion of your tax deductions (it is for me). If you prepay, you are also reducing the amount you could use for tax deductions. For example, if you saved $5,000 on interest and your marginal tax rate is 25%, you’ll lose $1,250 in tax deduction — therefore, your net saving is only $3,750. Since long-term capital gains is only 15%, to match the $3,750 savings, you’ll need an investment gain of about $4,412, i.e., $3,750 / (1 – 0.15). However, this factor also depends on how much you itemize because the IRS offers standard deduction — as such, your true deduction is only the difference between your itemized deductions minus the standard deduction.
  • Inflation — When you owe money and you pay back over the course of 30 years, inflation is your friend. Assuming an average 3.5% inflation rate, your $1,000 mortgage payment is only worth about $340 on the 30th year. If you prepay, you will lose this advantage, and it in fact, works against you.
  • Liquidity — Your mortgage is a secured loan.  Prepayment doesn’t earn you any favor with the bank. The bank still owns your house until you pay off that last penny. So if you hit some rough patches down the road and cannot make your payments, you could lose your home. By investing instead of prepaying, you maintain liquidity and give yourself a little insurance against potential financial hardship. Sure, you could sell your home to avoid foreclosure…but selling under pressure is not fun.

Swing Factors — It could go either way…

  • Mortgage type — There are many types of mortgage. That, and the prepayment clause, could play a major role in you prepaying versus investing decision.
  • Mortgage maturity — The age of your mortgage determines how much interest savings you will realize. Prepaying a newer mortgage is more beneficial than prepaying a mortgage that only has a few years left.
  • Mortgage Interest Rate — Obviously, it’s better to prepay (or refinance) a mortgage with high interest rate. Since the long-term return on investment for the stock market is about 8-10%, it’s most likely better to prepay if your mortgage interest rate is higher than about 6%. On the other hand, if your mortgage interest is lower, it’s probably better to invest.
  • Investing skill — The premise of this argument depends on your investing skill. If you can’t, and unwilling to hire someone to help, the point is moot and you’re better of prepaying.
  • Financial Stability — As mentioned earlier under liquidity, if your financial situation is unstable, it’s probably better to invest and stay liquid. This gives you some cushion against financial emergencies or losses.

Is it better to pay a house off or not?

To sum it up, there are many factors that affect your decision to prepay your mortgage or invest your money. In order to find the right answers, all of these factors must be considered carefully.

Personally, my mortgages have low interest rates (3.75% and 4.25%), I am in a high tax bracket, and I have long investment horizon; so here is what I do:

  1. Make sure I have plenty of emergency fund,
  2. Make sure I fully fund my retirement savings in tax-advantaged accounts, and
  3. Make small prepayments along with my normal mortgage payments.

Essentially, I chose not to make any commitment to one specific area and spread my money out.

Some additional readings about prepay versus invest

Other articles in the Dave Ramsey’s Baby Steps Series

The article was part of the M-Network series highlighting Dave Ramsey’s 7 Baby Steps for getting out of debt and getting your life on the right track financially. You can read about all of the steps over on Cash Money Life who kicked things off with a great introduction. As other members of the network add their articles, I’ll add them to the end of this post.

Read More

137 thoughts on “Dave Ramsey: Pay Off Your Mortgage Early or Not”

  1. Very good points for either decision.

    One other consideration is interest rate risk – if you have a mortgage that is variable or only locked in for a few years then at the end of the term you will have to renew at the current interest rate (at that time) which might be a lot higher than it is now. Reducing your mortgage helps mitigate this risk.

    Mike

  2. I’m not sure I consider losing the opportunity to get $2500 back in taxes after paying $10000 in interest much of a disadvantage. Seems like I come out $7500 better off with no mortgage and no tax deduction.

  3. Steve – I agree. In fact you just made me realized something and I will be adjusting my post.

    Basically, if you save $5,000 on interest and your marginal tax rate is 25%, you’ll lose $1,250 in tax deduction — therefore, your net saving is only $3,750. So my original statement about your investment gain must beat your interest savings is inaccurate because long-term capital gains is only 15%. For instance, to match the $3,750 savings, you’ll need about $4,412 = $3,750 / (1 – 0.15).

    Thank you for your comment.

  4. I echo the sentiment on the tax savings for mortgage interest. It is nice that the government encourages home ownership, but I don’t think it is a reason to buy a house or stay in a mortgage. It is a nice benefit why you are paying a mortgage, but not something to be tied too.

    If you pay $700 a month for a mortgage, say $500 goes towards interest you get a tax break of $6000 a year. If you didn’t have a mortgage and gave the full $700 to a charity of choice, you would receive an $8400 dollar tax break. You give others the benefit instead of banks, and you get a bigger tax break.

  5. @FourPillars – That’s a good clarification. I didn’t do a good job of elaborating on the “Mortgage Type” factor. Thank you.

  6. Look, Dave Ramsey is great and I’m all for SAVING (prepaying your house can be a great way to save … just compare the after-tax interest that you are SAVING against the after-tax ‘safe as houses’ return that you can get elsewhere e.g. CD’s, Bonds, possibly Index Funds IF you have a 30 year outlook).

    However, I’m also all for INVESTING: instead of REDUCING my mortgage, I would be REDUCING MY EQUITY in my own home to no more than 20% of my Net Worth … and investing the rest, taking full advantage by locking in historically low interest rates in BOTH my own home and on my INVESTMENTS.

    In 20 or 30 years, when I’m still/only paying a few $k a month on real-estate worth a few $m, I’ll be pretty happy … AJC.

  7. I have to think that the diversification of assets issue is a big one–particularly if you are not fully funding tax-protected retirement accounts such as a 401(k) or a Roth. If you’re making $50k a year and funding your 401(k) at $7500, you’re doing great. But if there’s $500 a month left to pay down the mortgage or invest, putting it in the 401(k) knocks down your tax costs, keeps the interest advantage of the mortgage, and STILL doesn’t hit your maximum contribution. And it’s going to be worth a lot more in 25 years at 10% than you would save on a 6% mortgage.

    You do have a $250,000-per-owner tax break on home appreciation, but your appreciation will stay the same whether it’s the bank holding the note or yours outright (the joys of leverage), so that’s not an argument to prepay.

    I believe Free Money Finance just had a post about a woman who has a valuable home but few other assets. What if you’re 45 and have no money but what’s in the house? In this market, if you sell, you may lose a lot of your investment. If the money’s stuck in a 401(k), you may be eligible for a hardship withdrawal that requires paying taxes but no penalties. Or you may be stuck with a 10% penalty. But remember, if you sell your home, your “penalty” includes realtor costs, seller-paid inspection costs, and the cost of actually finding somewhere else to live. If you’ve followed Ramsey’s other baby steps, you have some cushion against this happening, but I believe the woman FMF discussed was suffering from long-term disabilities, had a spouse who died young, and was looking at living off the house and her savings FOR THE REST OF HER LIFE. At the age of 54. That’s a mandatory, unplanned early retirement, and one in which she was basically living on Social Security disability checks and worrying about the future.

    In my mind, that’s a big argument for a more liquid asset base. And just about anything is more liquid than real estate.

  8. You just can’t discount the security factor in owning your home outright. Through a strange set of circumstances, I wound up with enough cash to pay off my home at the end of 2007. I did the math, and I think it would have been fiscally smarter to invest the money and keep the home mortgaged. But I paid the house off. Now, every time I hear the death-knell bells ringing about the economy, I take such great comfort in knowing that no matter what happens to the economy and my income, all I have to do to keep a roof over my family’s head is to pay the property taxes. We can stand in a soup line if we can’t afford food, huddle under a blanket if we can’t afford heat, and walk if we can’t gas up the car, but we will always have a roof over our head. It helps me to breathe every time I look at CNBC.

    Math counts, but it doesn’t always give you the straight answer.

  9. @Susannah – Thank you for bringing up 401k and Roth — I should have in my article although it’s already covered in step 4.

    If you’re not already taking advantage of 401k (with the potential company matching) and IRA, there’s no argument — invest in your retirement first!

    @Terry — Hey Terry! I am beginning to read your book. Great introduction. I think I am going to share it with my readers…very inspiring.

  10. Should also take into account how far along you are in your mortgage. If you’ve been making minimum payments for 20 years out of your 30, you’ve already paid the largest portion of your total interest costs, so the tax shield and interest savings are both diminishing as your mortgage reaches maturity.

    Another thing to take into account is whether you plan on living on that house as your primary residence. True, you never really know… but if you think you’re going to retire in that house and never sell it, it’s becomes less of an asset because you won’t realize it’s appreciation in value. All else equal, you want to own an appreciating asset as quickly as you can (ie prepay your mortgage). However, if you don’t plan on ever selling it, you can more or less take property appreciation out of the decision making process. Of course, this whole property appreciation thing we probably won’t be worrying about for the next few years…

  11. Yeah, I think DR is a little too crazed about paying off the mortgage. But I agree, if one isn’t very knowledgeable about investing and doesn’t have the stomach for it (beyond what’s already happening in Baby Step 4 and 5), then paying off the house is probably a better next step for the nervous nellies.

    I say let it run and increase investments instead. Perhaps have the house paid off by retirement, to lower expenses.

    Ric Edelman says keep the mortgage and stay fully invested, period. But he lives on the East Coast with plenty of high-paying jobs. If I owned a house and lost my high paying job where I live, there are no other high paying jobs. I’d have to move. Hopefully I wouldn’t lose the house before I could sell it!

    The risk of the house payment isn’t relieved until the house is paid off. Prepaying to me doesn’t seem to make sense unless you’ve piled up enough assets to pay it off outright. (Through inheritance, lottery winnings, winning a lawsuit, or saving and investing and piling it up.) If you haven’t paid it off outright, the risk of next month’s mortgage payment is always there, and the danger is losing your income for a long enough period to not be able to make the payment and then losing the house.

    I’m a happy permarenter and don’t need a house, and invest instead, so I should issue the disclaimer of taking my comments with a pound of salt because I’m not a mortgageowner. LOL

  12. One thing I think is missed is that people don’t take a long term look at savings. In other words, if people had $50k sitting in account, most people would spend it on something (finishing the basement, buying a new car, taking a nice vacation). I don’t think that people have the discipline to let that money grew for 30 years without touching it.

    And I think that’s the true issue. If you can honestly invest the money without touching it, then investing makes sense. If you would be tempted to spend that money, then paying off your mortgage is better.

    If you prepay your mortgage, that money is gone. It’s not tempting you to consume.

    I was actually looking at DR’s plan. I calculated that after I paid off my debt and saved for college and retirement, I could probably pay my 30 year mortgage in about 7-8 years.

    At that time, I would have set up a behavior of living well below what I make. So investing and being tempted would be less of a risk.

    Just a thought.

  13. @PT — Thank you. I am for keeping the difference for investing too.

    @Rob — Great point. That’s one thing I haven’t considered in my post. It definitely makes a difference.

    @Kentuckyliz — good add about your location. Another good point I haven’t considered.

    @Merch — Agreed. It takes a lot of discipline not to touch money that is sitting “out there.” Definitely something worth considering when making this type of decision.

  14. @Susannah–your example wouldn’t happen on Dave Ramsey’s plan, because the woman would have already been saving 15% of her gross income in retirement investing (not counting the employer contributions), been debt free, and had a 3-6 month emergency fund; and if she had college-bound kids, she would have funded their college investment program first. Even earlier than that, establishing her basic safety net, she would have had disability insurance; and her spouse would have had 10x his annual salary in term life insurance. In effect, she wouldn’t be in the pickle she is now. You can’t describe that case then say, see, Dave Ramsey’s plan doesn’t work…because she wasn’t following Dave Ramsey’s plan!

    Dave Ramsey puts the baby steps in that particular order, taking into account an accurate assessment of life risks, because it works. Especially for ordinary people.

  15. I see a lot of people talking about paying their mortgage off early as the safe thing to do. I respectfully disagree. If you have a rate of 6.5% or lower why on earth would you want to build extra equity? What does it buy you? You already own the house so why exchange the most liquid form of capital (cash) for one of the most illiquid forms (Home Equity) in the name of safety. Once this money is paid into your house the only way to get it back out if a need arises is to sell the house or refinance through a new mortgage or a home equity line. The better place to put your money is in a diversified mix of investments that you feel comfortable with.

    Let’s use this situation as an example. We have two people A & B. A overpays their mortgage in order to pay it off in 10 years instead of 30. B Takes the extra money and invests it in a conservative mix of stocks and bonds that earns 6.5%. Five years in both A & B loose their jobs and have no current income. Who would you rather be?

    A has spent all there money paying down their mortgage, but does the bank let them slide on any payments? No, as soon as the payments are missed A will be treated just like any other late payer. What are A’s options here? Slim and none. Even though A has a large amount of equity, A has no current income. Good luck getting a loan! A may be forced to sell under pressure in a market that may or may not be favorable!

    Now let’s look at B! 5 years in B has a large stash of liquid securities that he or she can sell to continue making payments and living on until he or she finds another job! B is still in complete control of his or her own destiny.

    What did it cost B for this insurance against disaster? Nothing! The money earned on the investments offset the interest paid on the loan. And 6.5% growth is a very conservative # here. You can achieve this without taking much risk at all. And once your liquid fund equals the amount owed on the mortgage you can pay it off if you like. Although at this point I doubt that you will because:
    * the psychological burden of the mortgage magically evaporates when you realize that you can pay it off at any time
    * the money is still better placed in liquid assets
    * And by this time you have figured out that you can safely get 7.5 to 8% off those investments.

    A lot of people say that paying a mortgage off early is the safe thing to do. It is safe; for the company holding your mortgage, not for you! Every extra dime you pay in lowers the risk that they will loose money if they foreclose on your house and sell it latter.

  16. @Tom — Great comment. That’s exactly how I feel with my 5.25% mortgage 🙂

    Now, I don’t know if I am going crazy, but I’ve been considering refinancing to take money OUT of my home so that I can do something with it.

  17. The problem with most of the analysis with this step is that you’ve forgotten all the previous steps that lead up to paying off the mortgage early. At this step you already have a healthy emergency fund in place (to the tune of 10s of thousands of dollars, 6 months of expenses) so the chance of you needing to invest the difference for liquidity reasons is pointless. Another point is that you can’t predict your return rates on unfixed investments. Stocks go up and down, at one point you may be paying more in interest to your mortgage company then the bank is paying you on your funds, CDs are a great example of this. Everytime it is wise to be completely debt free, house and all. There is no chance of foreclosure when your house is paid for! There is no chance of a repo when the asset is paid for! Giving to charitable organizations is a better way to recover from the tax break of interest paid on a mortgage.

  18. @Tom – Both examples you give would be a rough situation to be in. In your example of quickly needing liquidity, it seems that person B’s stocks haven’t also fallen in value. That isn’t a fair assumption, as the present market conditions can attest to. B would be in just as much of a pickle of he/she then had to sell thos “liquid” investments in a down market. These calculations never take risk into account, and that is statistically inaccurate.

  19. Back in 1978 my second wife and I were faced with buying a house due to having moved cross country. Her style was to spend any money that wasn’t absolutely dedicated to a bill due right now. In those days I didn’t have the benefit of blogs such as this one to help persuade her but I was desperately interested in getting into investment mode. Mortgage interest was very high: 9.75%! My solution was to get the shortest term loan for which we could handle the payments. This turned out to be 15 years, so over everyones objections I insisted on doing it. Not the same as paying early, but it was structured to be short.

    The point here is that I had a partner problem that overshadowed other considerations.

  20. @Elaine — I didn’t forget about the other steps, this was part of the series. You’re right about having emergency fund in place already; however, it wouldn’t be complete if I didn’t include all the factors.

    @Zeke — Excellent point about how marriage could overshadow any of these considerations.

  21. I would be interested to hear how everyone’s opinion has been shaped by the recent events. I am paying off my house in the next three months and have never felt better about this decision (I’m 35 years old).

    BOA – Thanks for the loan, but I’m going to keep the extra 200K in interest for my family. Safe, sound, and tucked away in our paid for – family owned home that we really enjoy and will continue to use as the center hub of our family for a long time.

  22. One more thing on this huge “tax savings”.

    If you want to get a reduction in taxes so bad – don’t send your bank 10,000.00 a year in interest to do it. Give 10,000.00 to your church, the boy scouts, your college, a needy family. The tax deduction is the same and honestly after what just happened in America who do you think is going to need it more?

    The “great mortgage tax break” is a total scam. Pay for what you bought, and THEN save huge amounts of money! House money is “play money”. Nobody really gets rich on real estate. If your home goes up in value 300,000 – big deal, every other house did as well and you got to live somewhere!

  23. I have a question for all of your expertise. I find myself in an unusual situation at an unusual time. I work overseas and make much more than I usually would. In the next month I will have 100k saved and I am glad I did not take the advice of a financial advisor and invest it in mutual funds after watching the market most recently. At first before research I was going to just pay off a house outright as soon as I have the cash and avoid any interest. I feel with the housing market as low as it is now that a house would be a better investment than it would normally be. Also I am worried about investing now because of the stock market. The other thing I am considering is once I pay off the house nearly my entire income will be available to invest even if it’s just in CDs until things stabilize. This is a huge decision for me and I would be very interested in anyone’s input. I have read similar discussions to this one all over the internet and I think this has been the best as far as everyone taking an unbiased look at both sides.
    I feel like if I want to have a mortgage I can pay off the first one and buy a second to rent out. Are mutual funds still safe? Also I hope to be able to return to college with my GI bill and hope that having a house paid off will make living affordable while I do so. I am lucky enough to be able to save about 8k a month and I would love to know what you all would do with that in this point of time.

  24. @Brock – Standard *I’m not a financial advisor* blurb. Mutual funds are based on stocks, so they’re suffering from current conditions as well. Ask yourself this question: If your house were paid off, would you take out a $100K mortgage to buy other investments or a rental house? If you don’t pay off your home with this windfall, that is, in effect, what you’re doing. If your house is paid off, and you’re debt-free, your best wealth-building tool (your income) is freed up, as you mentioned. Plus, you don’t run the risk of losing your income and the value of investments, leading you to possibly losing your home. Minus property taxes, once it’s yours, it’s yours. I would say pay off the house.

  25. Thank you for your input. After a lot of research, excel sheets and gut feelings I am planning to pay off the house out right and then slam all of my income into a 401k that my company will match. The matching will make it worth it. Sure, the house is not liquid but I will be able to invest my full income which will give me liquid funds quickly and if I lose my income at least I have a place to live. This will make the required size of my emergency fund considerably less giving me more money to invest. I am probably over paid in my job and I know that it will not last forever and this plays a big factor in my decision also. I think the housing market and financial markets make the “paying off the house” an argument that is very specific to time and also depends on location and career and both markets and it has to be based off of a group of carefully planned person specific scenarios. I think people need to take an extremely careful look at their current environment before making any decision this large. Any more advice or holes poked in my plans would be greatly appreciated. Thank you all for the discussion. One thing is for sure, once you pay off the house you never have to worry about this decision again, hopefully.

  26. @Brock — In the end you should do what you are most comfortable with. Your plan is not a bad one — i.e., pay off the house and free up cash flow for investing. It’s certainly less risky than investing the $100k now, understanding that you can’t beat up yourself if the stock doubles over the next few years.

    In any case, you won’t miss out completely with your plan to regularly invest into your 401k.

  27. I’ve heard that Ric Edelman & some other experts are big fans of keeping a mortgage for the tax break. I’m more a fan of DR view of pay the damn thing off either on time or early if possible. Then take what use to be the mortgage payment & put it into a CD or something safe. The key to this scenario is doing something constructive with the old mortgage payment. I haven’t done the math but I’m almost positive that for most of the people in this country they willl end up with more money in their pocket even if they have to pay taxes on their investment than they will by getting a tax deduction.

  28. It amazes me that people can be so led off course with this question. The fact of the matter is very simple. It is never better to pay off your mortgage early. You can analyze any aspect of it. At the end of the day, paying off your mortgage does not increase the value of your home. You are simply transferring money from one side of your balance sheet (liquid assets) to the other side (non liquid).

    Even if you saved the money by putting it under the mattress (0% return), you will have created more wealth by NOT paying down your mortgage. If you have a 30 yr mortgage, at the end of the 30 years, your homes value is not impacted by your loan pay off schedule. So a house that grows in value at 3% for 30 years, starting at $300,000 is worth roughly $728,000 at the end of the 30 years. It doesn’t matter when or how you paid the mortgage. And, what ever you saved is worth what it is worth at the end of 30 years. Add the two together and you’ll always be better off paying as little as possible on your home. Financially, you are always better off not paying down the loan. The only argument that favors paying off the loan early is the catastrophic argument that if the world’s financial system collapses or you loose your job and never get a new one…at least you have your home paid off.

  29. The fact is, you must have shelter. I can think of nothing better security wise than to own you own shelter outright…then in the worst of times you simply need to come up with HO insurance and property taxes, bills and food. The Ramsey plan does diversify in that 15% of your savings are going into mutual funds through retirement…it isnt really liquid but that is what the emergency fund is for. This plans assumes you have good disability and life in case of disaster and that otherwise you plan to work until you can access retirement. It also assumes you pay these things off as fast as possible and then invest as fast as possible to make up for lost time…doesnt leave a lot of room for fun!

  30. @Matt – Interesting thought. I personally don’t prepay my mortgage, but I think the argument for prepaying is the money you save by paying less interest.

  31. Pinyo – I understand the argument and understand why people get confused on the isssue. AT the end of the day though, the argument that you are saving interest doesn’t hold any water if people are analyzing things correctly. You have to take money from some place else on your balance sheet or cash flow and invest it in an illiquid investment and there is no gain in the growth of that investment when you make that decision. The whole point in even having this discussion or any like it, is to grow your wealth in the most efficient manner. Except for some strange situations, pre paying the mortgage will not increase your wealth down the road more than the alternatives. Unfortunately, as a financial planner for 17 yrs, I spend way too much of my time explaining this concept to clients because of all of the misinformation that is out there. You have a nice forum here, keep up the good work! – Good luck

  32. larry- look i saved 60000 by pre paying .I work 32 hrs week 14 hr im 42yrs old. and as you know the gov will be my retirment 2500 mo. and growing with this president . i will be payed off in 3 yrs. with 70000 eq. i dont want to work when i am 50 but i live very small.

  33. should i get a c card w/ 0% intrest intro. and pay it off . or i can get a loan for 15000 at 3% that i wood only use for e.fund. im debt free now but little savings. and a unstable job- econome

  34. There are calculators out there that show you the return on your investment if you pay off your mortgage. For example, my loan $165,000 over 15 years at 5.375% interest shows a 48% annual return if I pay $1000 extra a month on my mortgage. The idea is that I saved myself roughly $42,000 in interest changes over 15 years by paying it off in 8 years. That 48% annual return on my $1000 a month investment is guaranteed and tax-free is it not? It would be crazy to think you could do better than that investing in the risky stock market right?

  35. Here is a question for everyone. I currently live in MA and my wife and I are planning on moving to Florida as soon as we can find jobs down there. I am a CPA and she has an MBA. So while jobs are hard to come by in every state I think eventually we will be able to find something. I bought a condo years ago in MA which we will be selling and through some inheritance, savings and proceeds from the sale of the condo in MA we could buy a home outright in Florida for $300K, still have over $100K in liquid assets (cash and CDs) and aprox $230K in our retirement funds. We are 34 and 32 years old respectively. I am very seriously considering buying a home outright when we move. We will still have plent of liquid assets as well as money in the market from our retirement funds. We have no kids currently, but paln on having 1, maybe 2 someday. What do others think about this plan?

  36. The idea of a tax deduction benefit might not even be a consideration for some people given today low rates. I am unable to itemize for this reason. My family is a strong Dave Ramsey supporter but I disagree with him on some points and this is one.

    The strategy we have decided on is a combination of paying the mortgage off early and saving the rest in bonds, stocks, and CDs at about 75% in safer investments and 25% in stocks. We put about 30% towards paying the house off early and 70% into savings.

    If at some point we end up with 2+ years worth of living expenses in liquid savings we might then consider making our mortgage our #1 priority.

  37. Couple things… have a home and have saved enough to pay it off. Today’s economy and the way government seems to be acting, Bernacke, etc… and the amount of friends and family that watched their investments, 401k’s, etc… drop out of sight over night….

    I will pay off the home! Bird in hand… is worth?

    Like OneCheapChick said, if all else fails, we can just pay the taxes and still have shelter.

  38. OK after reading all this I am still a bit confused, here is my situation I have enough to pay off my mortgage, and still have over a years worth of money in a CD/savings/money market not including my other investments. now if I pay it off. and no longer have a mortgage and then place the money i normally would have been paying to the bank on a monthly basis wouldn’t it better off for me? to own my home and only have to make the payment of gas/electric/HO insurance/ property taxes? I have a duplex and rent it so it is a income earning asset at the same time and I would also be earning the monthly interest. and I have 8 years left on a 15 year mortgage and a good job with great security right now.

  39. @Michael — If you can pay it off fully and still have money left for emergencies, then yes, you’re almost always better off.

  40. Here’s another simplified way I look at it (full disclosure – I am a Ramsey fan)

    Assume a 6% mortgage. If I pay extra on my home, there is an automatic 6% return, minus any tax deductions. Those strictly into the math of this will quickly shred that statement…..but…. Add in the security of a paid for home and no longer being a slave to the mortgage lender anymore… What is that worth to a person? It’s a personal question that math can’t answer. I had a paid for home 6 years ago before we decided to move. When your home is paid for, some of the stress of life diminishes. We were able to let my Wife be a stay at home Mom. What kind of price tag for that? Now I have another Mortgage and long for the day it is paid for as well. If you have a paid for home, you will never be in an “underwater” mortgage again….

  41. Not to take this rabbit down a different hole, but I have a similar question on mortgage prepayment that involves a rental property. A little background on my situation. I am 35 years old and six years away from my military retirement. I am looking for my rental property to generate some additional income when I retire (it is zero sum right now, breaking even between rent income and mortgage payment), so I am considering paying it off in the next six years. To do this, I will have to stop my IRA and other retirement contributions. Is it worth it? Once it is paid off, I could start with the retirement contributions again, but I am not thrilled with the idea I can’t touch my retirement investments until I am 59 1/2. A paid off rental property is in effect a retirement savings that I would immediately reap the benefits of once it was paid off. I know my ROI drops with every dollar I pay into the property, but I think I am more concerned with cash flow than ROI. The cash flow from the property couple with my retirement would make a decent living in the area I want to retire in.

  42. @p3keith I’m in a very similar situation as you. I have a rental property that is zero sum as well… breaking even between rental income and everything i owe on the house monthly. I’m considering paying off the property so i can pocket the income (minus taxes and homeowner fees). Taking everything discussed here into account – if one can pay off the mortgage on a property that in turn generates income immediately, the decision is heavily weighted towards paying it off. For instance, I owe 100K left on the rent house – and I have about 110K in mutual funds that are liquid – if i pay off the rent house it not only immediately saves me 5.8% in interest but generates a net profit of 1000 a month – which is which is a 1% a month gain on the “investment” of paying off the mortgage. (the rent is actually 1400 but 400 is spoken for via taxes, homeowner fee, insurance). Does anybody have any input for us when it comes to paying off a home that currently has renters? I can’t see any additional drawbacks, but I do see an extra 10% on an “investment” in my mortgage being paid off… (PS I’m military also and have very secure employment – 10 years away from full retirement if I stay in…) I also have 50K in a ROTH IRA and max the contributions every year, so that 110K in mutual funds isn’t my only retirement fundage.

  43. I’m a Dave Ramsey fan with both a home and 3 rental properties. A few years ago we decided to pay off our first house that had become a rental property. Our accountant sort of advised us not to but we did it mainly for peace of mind. The economy was tanking and people were losing their homes so we decided to save like crazy and just pay it off. The interest rate was 5.75% and it generates $1295 per month in rent, minus property taxes and insurance it’s about $1,000 cash flow now. (We manage our own properties.) It feels great to have that paid off! We also have another property that we paid cash for using my IRA in a self-directed IRA. That rents for $850/mo, minus prop. taxes & HOA dues nets us about $650/mo on an investment of $73,000. The rent goes into my ROTH IRA which grows tax free but we can’t touch it.

    We have another small unit we have always had as a rental but that interest rate is so low at 3.75% that we are not pre-paying that yet, beside, the tenant’s rent more than covers the mortgage, etc.

    Lastly we have our primary residence at 5.5%. We put 25% down so the mortgage isn’t very high. We recently decided to put the $1,000 cash flow from the other rental into it to pay it off quicker.

    We have other investments like mutual funds and CDs but we are not very good at choosing investments–they go up, they go down but in the end after 10 years they have pretty much have stayed the same.

    Our goal is to use the income from our rentals to support our life in a quasi-retirement when we’re 65. We are considering using a chunk of our savings to pay off the 5.5% mortgage,which would save us $125k in interest and then we’ll just use our income to beef up savings again.

    Anyway, it feels great to have at least one property free & clear!

  44. just pay minimum payment while saving money until you have enough to pay the house off. reap the benefits of paying it off with money saved for 10-15 years. and mean while be investing in 401 k as well so when you retire you can use 401 k to enjoy life and not have to use it all to pay for house.

  45. Charging higher-than-market rent on a lease option is a good business decision and is legally and ethically justified (subject to some local variations) if the excess money is credited as option money. Some sellers opt to charge just the fair rental value so that only the initial option money is credited toward the purchase. Still another variation is to charge fair rental value and credit a portion of this toward the option. This is a great deal for the buyer, but can lead to complications with financing later, so you should check with your real estate agent or loan officer for details.

  46. Paying off a mortgage IS an investment that pays at the rate of the note. For example, if you have a 5% mortgage, ever dollar you pay extra, accumulates interest at 5% from the day you send it in, until the mortgage is paid in full. That extra dollar will compound and help reduce the term of the loan. An extra dollar paid in the first month of a 30 year 5% loan, accumulates to saving you $3.45 in interest payments. Some say there is no “payout” for paying extra. To that, I say wait until it’s paid off and you’re not sending a check anymore. The payoff becomes blatantly obvious.

    Some say you shouldn’t put your liquid cash into an illiquid investment such as a home. Speaking from experience having paid my home off at age 35, I wouldn’t have it any other way. I now have the liquidity each month to decide how to invest my $1000 that I’m not sending to the mortgage company. Sure, I’ll buy stocks & bonds & real estate, etc. The only difference is I’m not using the roof over my kids heads as a bartering chip at the poker table. Yes, mathematically it can be easily shown that you end up with a bit more cash over 30 years using tax advantaged mortgage arbitrage to invest or speculate in various markets. If you do well, you’ll end up ahead. There is no question there. If you do poorly like so many have, you’ll move your kids back in with grandma & grandpa.

    Case and point. My elementary school daughter went to play at a girl’s house in her class. When she got back she said, “My friend is rich! She lives in a mansion.” We just chuckled. Yes, her friend lives in a McMansion in a fancy neighborhood. About 3 months later, my daughters friend had to move to her grandparents basement because of financial difficulties. Our home isn’t a McMansion or a GarageMahal, but it’s paid for and my kids will never have to move to grandma’s basement be cause I bet the farm on GE or Apple.

    Paying your house off early is a great investment, but you have to make sure that you have the discipline to INVEST the cash flow that it frees up when the mortgage is paid off. You can’t pay extra for 10 years and stop investing and expect to end up with the same retirement opportunities that someone else would have who invested for 30 years.

  47. I read most the posts here but not all. From what I read, nothing was mentioned about the home owners age. I think how old you are, is very important as well. The poster above, makes a solid point which is the way I see it. Pay off your house. You don’t know what the next moment will bring. If you’re not rolling in dough but you accumulate the dough to pay off your house, by all means do it. I don’t care if you do have only 3 years left to pay it off. Pay it off NOW if you can. Then, if you want to invest, use the funds you were making your house payment with to invest. I paid off my house and there is a lot to be said for peace of mind/mine. Too many people are trying to get rich and it’s not working. Instead, foreclosures on every corner and people living in the streets or in someone’s basement. I don’t have the fanciest place either, but it’s mine.

  48. Good post. I recorded a short video about this topic (specifically Dave Ramsey’s recent $5 million home) for a guy I know who heads up another blog site. Dave Ramsey is mathematically challenged when it comes to mortgages. His advice makes money for ONE party…the banks! This isn’t theory or opinion but mathematical fact.

    I’ll link to your blog post here in my upcoming series that I just started about the truths behind mortgages (Owning A Home: The Most Misunderstood American Dream – http://www.bethebank.wordpress.com). I do think you’d find this quick video about Ramsey’s purchase and math behind it interesting.

    Here’s the link: http://www.screencast.com/t/BRsxcC6Tz

    Kelly O’Connor
    Financial Hero #2

  49. Great stuff, but I would much rather pay off my mortgage sooner, to save on the interest and to get my home sooner… Plus be out of debt.

  50. If investing my money in the stock market was such a great deal then why is the bank wasting their money investing in my property when they could be making more money on the stock market?

    The fact is they know that they are going to make more money off me. So I wouldn’t be so quick to say investing is better – the real brains behind the loan are not putting their money in the stock market!

    Never forget the banks are doing what’s smart for them, not us homeowners.

    Also remember any tax savings is limited by the effect of the standard deduction. Everyone get’s the standard deduction your other deductions need to exceed the standard deduction before you can realize the full tax benefit of mortgage interest and even then, like the gentleman above stated, that’s only going to be a relatively small percentage of what I paid in interest at best.

  51. @Michael

    Please understand that I truly do not mean to be disrespectful…I want to make sure I say that since you can only read my response and not hear it.

    Truly, you first need to understand how banks make money and your statements above clearly show that you are not familiar in this particular topic. Which is fine, most are not which is a large part of the problem. What you did get right was “never forget the banks are doing what’s smart for them, not us homeowners.” RIGHT ON THE MONEY. If you truly believe this then you MUST be willing to ask yourself, which strategy makes them the most money? The answer is NOT the 30 year mortgage. The answer is short-term deals and accelerated payments. Remember, they do not have your best interests at heart.

    Here’s a short video on this: http://www.youtube.com/watch?v=OqXpVayXWM4

    Second, who said anything about investing in the stock market? I didn’t. You don’t have to invest in the market to win the spread game. I win it in a guaranteed and predictable environment day in and day out. Let the speculators play the stocks.

  52. I will be 62 in 6 years I will be receiving a large sum of money in the near future. It will be more than enough to pay off my home and have enough left to infest for retirement, Or do I infest all of it or most of it and keep making house payments which I have about 9 or 10 years left to pay on. I do have other retirement investments stokes, bonds, 401k etc. thanks

  53. @Mark

    The financial world is like a bunch of golf club salesmen. Each one has the better club and each one promises to be the one to improve your game. Unfortunately, it may be your swing that needs adjustment first.

    I believe it’s more important to avoid the losses than it is to picking the winners; however, it is impossible to “tell” you what to do based upon the information above. I’d highly recommend you seek out professionals who understand “transferred dollars” (money you’re losing unknowingly and unnecessarily) and then the golf clubs will define themselves.

    My two cents.

    Kelly O’

  54. Thanks Kelly,

    I was responding to the folks who say that you should invest your money instead of paying down your mortgage. Stock Market was just an example.

    I just think it’s very important to realize that the bank is investing in my property to make a profit for them and they must think it’s a pretty good investment otherwise they’d likely put that same money elsewhere.

    In the end like any creditor you must remember they only make money if you owe them. So they are motivated to keep you in debt. They will sell you on ideas (eg: borrow for your house and car so that you can keep cash to invest). But, these ideas are only true in the right circumstances and you need to evaluate your circustances frequently to be sure you are doing what’s best for you.

    For me, I should have spent my energy on paying off the house a long time ago. Now just to break even on the total actual amount I’ve paid versus what the house is actually worth I need to pay it off ASAP, Otherwise I’ve put more into that it’s worth.

    I will pay it off in the next 3 to 5 months. Others aren’t so lucky. And those starting out should be made more aware of exactly what’s invovled.

    I think these forums are great so that others may learn from those of us who’ve been around this mulberry bush.

    Thanks again.

  55. Well I took your advice back in march of 2010 and boy am I glad I did not only do I already have almost 1/4 of the money back in my account but I also no longer have a mortgage! If I ever lose my job or something happens I am sure I would be able to make my insurance and Property Tax payments along with any gas or water bills! I saved over 19,000 in interest alone and now this will be the first year I do not claim a full year of Interest paid on a loan. many thanks for the advice but I can see it might not be fore everyone.

    PS: I am the michael that posted on march 6th of 2010 and just a moment ago

  56. I only have 3000 dollars in credit card debt no car payments and i put 5000.00 on my princple would like it to be paid off in 3 years how much would i have to paid on the princple rate is 7.5 I own 131,336.00 20 years what is the best way too do this help please credit cards will be paid off in march will be able to put more money down thanks

  57. I am 34 and my wife and I just paid off our mortgage in 13 months, saving over $201K in interest. We still maintain $200K in investments and $26K in savings. There is something to be said for having no debt thanks to living significantly below our means for the last decade. Now we can ramp up our investments even more and, hopefully, be able to retire early, by the time I am 45.

  58. Five years ago after taking the Financial Freedom course at our church we decided to get debt free. We have paid off all our debt except for our house mortgage. We owe $150,000 on a home appraised at $320,000. Our current interest rate is only 4.5% and we have the cash to pay the house off. Should we pay off the house or invest the money in something else and keep the tax deduction for the mortgage interest?

  59. I owe 84k on my house. I have just the right amount of cash to pay it off. However, I am afraid to put all of my money in my house. My husband and I are retired and on a fixed income. LAPD retirement and Social Security. Both are at risk for going away and leaving us with no income. I have about 30k in precious metals ( gold and silver). I have no other debt. We have Long term care insurance and life ( term) insurance also. This is my thought…I think I should pay down my house to 40k and keep the rest for liquidity in case of emergency. My mortgage is 6.5% interest only for another 5 years, then it jumps to 8%. I need help making a decision on this.

  60. @Carol Cavanaugh (my first response had a mistake in the link – the one below is correct)

    What you need is a detailed analysis…not someone’s opinion. Let math help you decide. I have no idea what you should do and neither does anyone else but numbers don’t lie. I’ve provided a link below that allows you to simply put in the numbers (no personal data) which will allow you to receive a report with your dollar amounts…no fancy marketing or ad campaigns. This comes from my company and that’s it.

    It’s very simple, it’s secured and nothing is passed. It’s so important that people understand the financial transfers that occur with their mortgages. The mortgage is the largest transfer of wealth next to taxes. Please know that we are NOT in the mortgage business and we do not provide loans so there is no bias.

    Create a quick email on Yahoo for us to send it to you if you want for this, doesn’t matter. If you feel it assisted you in making this decision then great. Here’s the link (notice the “https” -it is a secured site):

    http://www.mortgagesuccesssource.com/bsa/index.php

    Kelly O’Connor

  61. How stupid is this topic? Just look at a 30 year amortization schedule. That will exactly pinpoint how ridiculous it is to spend 30 years donating a great portion of your income to a mortgage holder. Pay it off… pay it off… pay… it… off…

    A debtor is in business to keep you in debt for one reason. Because it’s profitable for them to keep you in debt.

    Always remember… a bird in the hand is worth two in the bush.

  62. We made extra payments on our home and for my 38th birthday we got full title to our house. It was a great decision and would do it over again. Since then we have been methodical on socking half the previous payment in various forms of savings. The other half, I will admit, has been spent on goodies: A new car (paid cash for it), some nice vacations, and some toys I have coveted for years but not bought…It was tough those years…working extra jobs and dumping the money into our house…but now I feel free and have “extra cash” too boot…I recommend biting the bullet early…it really does pay off…

  63. Wow, have I seen a lot of misinformation in here. The notion that one is never better off to pay off his/her house early is downright absurd. Here are the arguments that have been marshaled in favor of keeping the mortgage:

    1) “You lose the interest deduction” – this may or may not be valuable, or at least not as valuable as you think. The standard deduction when filing your taxes is $11,400 when married, filing jointly. If your total itemizations (mortgage interest, property taxes, charitable giving, etc) do not exceed $11,400 there is ZERO tax benefit to carrying a mortgage. If your itemizations exceed $11,400, you only realize the benefit of the excess over $11,400.

    2) “You’ll make more money in the stock market” – While this is entirely possible, it is far from a sure thing. Let’s say you are at a 5.5% mortgage and are wondering if you should pay your mortgage off early. If you get minimal tax benefit from carrying a mortgage as you are at, under, or just slightly above the standard deduction, you’d need to average roughly 8-9% in the stock market to equal the benefit of paying off the mortgage. The 8-9% return would be taxed and you would likely end up with 5-6% after tax. Even if you average 8-9% in the stock market, the potential of a huge loss should be enough to deter you from selecting this option. Now if you’re at a very low interest rate and have a very large mortgage payment, it may very well benefit you to keep the mortgage.

    3) “If the economy turns south you could lose your house and all the equity in it” – While this is theoretically true, it is unlikely to happen. If your house is worth more than you owe, you could either a) sell the home and pocket the profits or b) take out a home equity loan to cover your living expenses between jobs or c) refinance to lower your payment. This assumes one is not “upside down” on their mortgage. One should not be prepaying their mortgage without ample cash reserves, so we can eliminate the false choice between paying off the house early (no security) and investing instead of paying off the mortgage early (security). Ultimately, your security comes from your cash reserves which sustain you until you find income to replace a lost job. Once you secure substantial cash reserves, you’ll have to decide what to do next.

    For most people, paying off their mortgage allows them to retire earlier, lower their expenses, and have more peace of mind. Assuming your future retirement plans hinge on the stock market, why would you also want your “extra” money to be as well? Talk about putting all your eggs in the same basket. Since your IRA’s/401k’s are invested with an unknown return, doesn’t it make sense to ensure that you are getting a guaranteed rate of return by paying off your mortgage early? Seems like a reasonable balance to me.

  64. Dwayne, you made a lot of good points. However, I don’t believe what I said is materially different from what you said. And the article certainly did not imply that you should NEVER pay off mortgage early — the article is about making your own decision based on your own situation.

    But let me address some of your point:

    1. You made a good point about total savings vs marginal savings. This was not in my original and I added a note to reflect this comment.

    2. No disagreement here.

    3. Except when the economy went south last time and a lot of people depleted their emergency savings and could NOT sell their home nor take out a HELOC (remember the housing and credit crisis?).

    Overall, I think we agree that if you can either (1) payoff the entire loan or (2) have sizable emergency fund, then prepaying is prudent if all other factors are favorable. Otherwise, investing is a real alternative to prepaying.

  65. Pinyo-

    I should apologize. When I said there was a lot of misinformation in “here”, I meant in the responses, NOT the original article. I now see how you could have taken that as a criticism of the article, but in fact it was very well written. I agree with you on point number 3. I overstated the refinance or selling possibilities in a bad market. I was working under the assumption that one would have positive equity in the home by virtue of having paid off a chunk of the mortgage, but that cannot safely be assumed, especially with 30%-50% drops in home values. Thanks for taking the time to correct me on this.

  66. What? Wrong! Let’s do the math. If you have a home with a payment of $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction. If, instead, you have a debt-free home, you would in fact lose the tax deduction, so the myth says keep your home mortgaged because of tax advantages. If you don’t have a $10,000 tax deduction and you’re in a 30% tax bracket, you will have to pay $3,000 in taxes on that $10,000. According to the math, we should send $10,000 in interest to the bank so we don’t have to send $3,000 in taxes to the IRS. Personally, I think I will live debt-free and not make a $10,000 trade for $3,000.

  67. It is better to pay off your mortgage than to invest. With stocks you have to pay corporate income tax which is 35%, capital gains tax and dividend tax which diminishes your return rate.

    You don’t have to pay any capital gains tax on your house if your profit is less than quarter of a million dollars.

    The stock market is unpredictable, there are no guarantees that you will make 10% a year on your money. In 2008 the S&P 500 return rate was -37.22 which we still haven’t recovered from yet.

    Once you pay off the money you borrowed from the bank, then your mortgage or rent will be $0 per month times 12 = $0 per year, every year. You would never have to worry about a mortgage or rent payment. The debtor wont be a slave to the lender.

  68. @Tony – there’s one piece of the puzzle that you need to understand. On the surface what you say seems to make sense: “why would I spend $10,000 a year so that I can save $3,000”. That seems perfectly logical but unfortunately it doesn’t go deep enough.

    If we use your example, we can take a $150,000 mortgage at 6% to get a payment of $900 per month. Using the 30% tax bracket as you mentioned not only reduces the amount you “effectively” pay (which is where your position starts and ends) but it also lowers your effective interest rate as well. At 6% your net-cost-of-borrowing is actually 4.2%. Now, if I could put my money in a position that does not have risk (as others have claimed in this post), so no stocks or mutual funds, but instead in a position with guarantees and predictability that exceeds this net-cost-of-borrowing then wouldn’t I be in a winning position? Wouldn’t I be in a position to leverage my money and beat the bank? Since equity has no rate of return and is not accessible (at least not easily and certainly not without fees) then can’t I weather the storm better?

    Mortgage rates are SO low today and taxes are only going up which makes the net-cost-of-borrowing ridiculously low. The best part, you CAN receive the guarantees and predictability to ensure you NEVER lose in this transaction. The higher your income, the higher your tax bracket and the higher your deduction which just makes your net-cost-of-borrowing even lower…that’s why wealthy people virtually always have mortgages. Are they willing to pay $10,000 to save $3,000? Of course not. Are they willing to pay a net amount of $7,000 in interest in order to earn $10,000? Yep, all day long.

  69. Kelly-

    I appreciate your analysis in the March 25th post, but I’m afraid I don’t understand your logic. In your last paragraph, you state that wealthy people would be willing to pay $7k net to gain $10k. On what basis can we say this is what’s happening? “Earning” $10k assumes the home is increasing in value, correct? Otherwise, you are “saving” $3k in taxes, not “earning” anything. You’re basically paying $7k net (due to the taxes saved). I’m not sure we can look much deeper than that, unless we make an assumption that houses are always increasing in value.

    Also, since we’ve already established the only real tax benefit to carrying a mortgage is the amount in excess of the standard deduction, it’s very unlikely that 30% would be the actual tax rate savings. In fact, it’s entirely possible in many cases there would be little to no tax benefit.

    Also, you mention that the cost of borrowing is ridiculously low. I agree, it’s historically low, there’s no denying that. However, not everyone is at these low rates and many are unable to refinance due to an equity shortage in their mortgage (LTV>80%). So maybe the better question is “at what mortgage rate would it make no sense to pay towards the principal on your mortgage”? For a younger person who is very comfortable with risk, they would scoff at the notion of paying additional towards a 6% mortgage, confident that they could get double digit stock market returns. This may be appropriate as they can bear a large amount of risk. For a 55 year old who is risk averse and on the verge of retirement, getting a guaranteed return of 5.5% paying additional principal on their mortgage would be an easy decision, especially in the current environment where CD rates are 2-3%.

    There are too many people saying “always” or “never” without any consideration of a person’s tax bracket, risk tolerance, or a host of other factors that determine the right course of action.

  70. I know this thread is old, but very imformative.

    @ Tom-

    That is a great analysis, & sounds exactly the method of Ric Edleman, in the “Truth About Money.” It’s a great Book. I have it. But I guess like Susannah stated early in the thread, if Dave Ramsey’s steps are followed in the right order, and Homeowner A looses his job, before paying his house off completely, then he would be fine either way, because he would have at least 3-6 months or perhaps more (“A fully Funded Emergency Fund).” and would never need to worry about selling his home or pulling out equity.

    If his looses his job prior to the mortgage being paid in full, then while he’s looking for a new job, he lives off his cash savings, then once back in the workforce, he goes back to replenishing his emergency fund again, then once that is complete, continue on paying off the home entirely.

    So, I guess this is only an issue, if (A) you don’t have enough emergency savings, and until your home is free and clear. After that you’re good to go if times get hard.

    Just my 2 cents.

    Thanks to all for the great views – Come on……. Baby step 3. Getting closer to ya each day 🙂

    What Are the Dave Ramsey Baby Steps?

    1. 1,000 to start an Emergency Fund
    2. Pay off all debt using the Debt Snowball
    3. 3 to 6 months of expenses in savings
    4. Invest 15% of household income into Roth IRAs and
    pre-tax retirement
    5. College funding for children
    6. Pay off home early
    7. Build wealth and give! Invest in mutual funds and
    real estate.

  71. @ Chris

    You don’t need an emergency fund or 3 months of expenses in cash because if you lose your job then you can use your credit card 14% or home equity 6%.

    You don’t need college funding if you use protection, condoms.

  72. Well lemme start of by saying to those who say you won’t get a tax reduction at the end of the year if you pay off your mortgage early, I say big deal. It’s not like you’re getting the full amount of interest back that you just paid anyhow. I’m 35 years old, with a 200k loan on a house that’s worth less than half what I paid 5 years ago. The banks are not in business to lose money and they will take your money all day long if you’re willing to keep paying those high interest payments. Who says you have to risk investing your money in the stock market if you pay off your mortgage? I say if you pay it off and stick in under a mattress, because you’re saving more money than if you’re paying those interest payments. Maybe back in the day when houses went up in value every year, having a mortgage might not be as bad, but now a days, houses are depreciating every year. I’m working my butt off to pay it off early so I can retire by 50. Some people might like working till their 80, to each his own. Bottom line, pay it off!! Peace of mind and the extra money saved can go towards your retirement.

  73. The answer to whether prepaying or investing with excess money depends only and only on the rate of the mortgage and the rate of the investment.

    I calculated that when the rate of investment is equal to the mortgage rate, then they are both benefit neutral.
    Let’s assume that you have $8K per year that you can allocate to either prepaying the mortgage or investing. Assume that the tax benefits in the mortgage are rolled back into prepaying the mortgage.

    In the case of investing, you will put the extra money into a bond where you will have to pay taxes each year on the interest earned that year(the tax rate will be at your marginal tax bracket, but so is the tax deduction on your interest paid).

    In the case of prepaying, you will put the extra money into your mortgage where you will reduce the principle of the loan.

    1) Calculate the number of periods it takes to pay off your loan if you were to prepay $8K per year.
    2) Lookup where your principle would be if you only made payments up to the number of periods calculated in step 1.
    3) Finally, back-calculate to find the savings interest rate required to end up with principle amount(in step 2) in the number of periods (calculated in step 1.)

    The answer is the same as your mortgage rate.

    The conclusion is that if your investment interest rate is higher than your mortgage interest rate, then invest, otherwise, prepay.

    If the investment is volatile, the average annual rate of return over the life of the mortgage has to be higher than the mortgage rate in order for it to make sense to invest.

    I am assuming that any mortgage interest paid is marginally above the standard deduction. Also, you can obviously do better if you invest in stock appreciation since the long term capital gains tax is better than the dividend/interest rates.

    So, if you think you can do better than the 4.375% mortgage that you have, go for it. You have the life of the loan to beat it.

  74. I think Dave Ramsey’s advice is great. So many people waste away their money and don’t even notice it.
    His plan keeps you focused.
    Right now, I am on step 6, trying to pay off my $86,000 mortage by age 30, less than 5 years after I got it.
    And yes, I am also in the stock market.
    It’s a tough challenge, but blogging about it has helped me stay focused!

  75. @Dwayne Dean

    “On what basis can we say this is what’s happening? “Earning” $10k assumes the home is increasing in value, correct? Otherwise, you are “saving” $3k in taxes, not “earning” anything. You’re basically paying $7k net (due to the taxes saved). I’m not sure we can look much deeper than that, unless we make an assumption that houses are always increasing in value.”

    That is not correct. It has absolutely nothing to do with the value of the home. It has everything to do with leverage. Those who understand leverage win and those who don’t simply pay interest.

    “So maybe the better question is ‘at what mortgage rate would it make no sense to pay towards the principal on your mortgage’?”

    As long as you are earning in a guaranteed and predictable environment a rate that is equal to or greater than your net-cost-of-borrowing then you win the leverage game.

    “For a younger person who is very comfortable with risk, they would scoff at the notion of paying additional towards a 6% mortgage, confident that they could get double digit stock market returns.”

    You need to watch this video: http://www.youtube.com/watch?v.....e=youtu.be

    “For a 55 year old who is risk averse and on the verge of retirement, getting a guaranteed return of 5.5% paying additional principal on their mortgage would be an easy decision…”

    There is NO guaranteed return by paying down your principle. It seems that the math is in your favor but you’re only looking at one side of the coin. You must be willing to see the other side of the coin because you are not correct.

  76. A penny saved is a penny earned!Bottom line.Learned that in kindergarten from Ben Franklin.Less Debt= Less stress=more productivity= Mo Money.Not everything is tangible or can be touched let alone reach a conclusion, with rudimentary mathematics wrought from feeble human minds.

  77. @Mikey P has it right.

    People get so into the math, but with the stock market, there is so much uncertainty.
    Hello— the lost decade!
    I think the best approach is to invest in the stock market and pay down the mortgage.
    You don’t want to be retired and paying a mortgage.

  78. Having low investment knowledge or a low risk tolorance has nothing to do with paying off your house. Everyone should always pay their house off as quick as possible so that you can invest like crazy with what used to be your house payment.

    If your house payment was $2,000, well guess what, you have $2,000 extra to invest every month. That’s $240,000 in decade you can invest because you have a paid off house.

  79. OH my… This is so fascinating to read from 2008 until now….. Everybody bought into Ricks philosophy and not pay the mortgage… I remember hearing this from this guy in 2006 and thought he was nuts. Dave is the man… Guess what folks? If i listened to Rick I would still have a large mortgage. This month I just paid off my morgage and nowright. What do you think the money would have done in the market. Unless you are connected on wall street, chances are you are in a deep whole. I did two great things: 1) heavily invest in my Thrift Savings Plan (401K) and 2) pay down my mor.. Depending on when you invested but I can assure I would have been in the hole…. Go davey go…

  80. Sorry folks.. Having trouble with this website… it sent the last message too soon.. Again, invest in your 401K heavy and pay down your mortgage. I am in my 40s and have done very well as a result of this…… The rest of my investments did OK but not great.. Good luck to all….

  81. @Robert, congrats to you. Reading your story makes me feel as though I’m on the right track.
    I’m doing the same, funding 401K + IRA, then paying down the mortgage.
    I think a lot of people get caught up in the simplicity of Dave Ramsey’s program. But, your home is paid off because of your self discipline and everyone else is just ‘hoping’ their investments come back. Yes Dave’s plan is simple, but it works.

  82. @Kelly — I put 10% of my income in the 401K. The employer matches 7%. That’s as high as they go.
    So that’s 17% in 401K. I personally fund the ROTH IRA.
    I also use that ROTH IRA as a secondary emergency savings account.
    Contributions can be withdrawn, penalty free.

  83. @Robert @Michael @Kelly: Great conversation. I think it all comes down to balance. Committing to either end of the spectrum (all in on stocks or all in on paying off the house) is pretty risky. I like the idea of doing a little bit of both to even things out.

  84. @michael – two things: again I ask, how much of your 401k is yours? And second, did you know that every dollar you contribute over match brings your rate-of-return down? It’s true and it can be proven with simple math. A 7% match is very rare today and is hard to pass up but you’re hurting yourself by contributing more. That money should go somewhere else where it won’t hurt.

    Also, @kevin mulligan – not sure why people continue to miss this point but it has nothing to do with investing in stocks or anything that takes risk. It is never wise to use money that could be applied to the mortgage and put it at risk. If your net-cost-to-borrow is in the high 3’s and you can get a GUARANTEED 5% on that money instead then wouldn’t make sense? Of course it would.

  85. Your interest deduction isn’t the same as your tax rate. Even with $0 interest you still get the standard deduction. So actually it’s only the difference between itemizing with that interest deduction and the standard deduction, which is probably a lot less than your tax rate.

  86. I tend to agree with the author, I actually came up with the same idea on my own and googled a phrase that brought me to this site, and confirmed my idea. My Mortgage interest rate is 5%, my tax bracket is 30%, 100 dollars in paying off my mortgage, instead of taking that money and putting it into my company pre-tax 401k account I would actually loose, 30 dollar in tax advantage by having a mortgage deduction, and 30 dollars that I would have saved by putting that money into a Pre-tax 401k. Some of you may argue that it only adds up to 60 dollars while I put away 100, well that 100 is still yours to keep later on when you retire at that time you may pay 15% income tax on the withdrawals, however you are still 45 dollars ahead. Assuming you made no money or lost no money in investments, AND the biggest thing of all in my plan is that you have to be able to payoff your mortgage by the time you retire. The appreciation on the house value is neglected because the appreciation is there one way or the other. So that is at least my plan.

  87. Why would the opposing lawyer call mine and say “she is off the mortgage note”.

    Background: Trying to enforce marriage settlement agreement.

    (1) She wants me to sell the house (at a loss of 50%).
    (2) I want her to pay (Appendix A) the funds due to me. (the money to be used to refiance the house).

    Clearly, her father, a real estate agent for over 20 years, knows that while you can remove a name from the mortgage, you cannot remove a name from the promisary note without refinancing.

    So what game is her lawyer up to?

  88. @Matt who said:

    It amazes me that people can be so led off course with this question. The fact of the matter is very simple. It is never better to pay off your mortgage early. You can analyze any aspect of it. At the end of the day, paying off your mortgage does not increase the value of your home. You are simply transferring money from one side of your balance sheet (liquid assets) to the other side (non liquid).

    Even if you saved the money by putting it under the mattress (0% return), you will have created more wealth by NOT paying down your mortgage. If you have a 30 yr mortgage, at the end of the 30 years, your homes value is not impacted by your loan pay off schedule. So a house that grows in value at 3% for 30 years, starting at $300,000 is worth roughly $728,000 at the end of the 30 years. It doesn’t matter when or how you paid the mortgage. And, what ever you saved is worth what it is worth at the end of 30 years. Add the two together and you’ll always be better off paying as little as possible on your home. Financially, you are always better off not paying down the loan. The only argument that favors paying off the loan early is the catastrophic argument that if the world’s financial system collapses or you loose your job and never get a new one…at least you have your home paid off.

    I completely disagree. What Matt forgets here is that over the time that the homeowner had that 30 year mortgage, he could have put several hundred thousand dollars worth of interest into the pocket of his banker. Isn’t that money that could have been put to better use investing and saving? Wouldn’t it be good for the homeowner to have as much of that wealth in his pocket as possible instead of sending it to his banker?

    Matt almost sounds like extra payments on the mortgage are lost forever when they are not. Every extra payment goes to building equity in the home, which builds the net worth of the homeowner. What IS lost, however, is all that interest that is sent to the mortgage lender.

  89. @MortgagesByMark I agree, Matt is an idiot. When you have no mortgage payment, you have power. While the average sheep is paying $1,500 – $2,500/month toward a mortgage, I’m putting that money in mutual funds. Within a decade, I have enough money in those mutual fund to buy 2 – 3 houses with cash if I want.

  90. @Mark Can’t you see that if you pay off your home then your mortgage will be $0 per month times 12 months = $0 per year times 10 = $0 every decade

  91. Interesting how the responses differ from year to year thru the crisis. At one time, I would have said invest the max into retirement for a couple of reasons. IRA/401K are not bankruptable, meaning a forclosure, huge medical bill, or some other legal issue will not wipe out a lifetime of savings. I’m currently looking for a balanced approach, to coincide with retirement in 12-15 years. With no incentive to stockpile cash past a 6 month Emergency Fund, non retirement savings options are limited. Paying down my 4.5% mortgage is the best risk free return I can find… after I contribute 15% into retirement. If your time horizon is a decade or more, and you fear the stock market, then riding out the housing debacle and reducung debt is a no brainer.

  92. We just bought a $287.500 1BD CoOp and put down 20% ($57.500.00) fir which I used $28,750.00 in cash savings and took a $29.000.00 401K loan. We got a 4.25% fixed mortgage rate on the $230.000.00. Are we better off making addtl mortgage payments or, investing surplus in mutual funds? I am 51 and suppose I’ll be working for 20 yrs. more to pay mortgage. Also, I have 15 years to pay for the 401K loan which scares me more if I ever lose my job. There are no penalties for paying either mortgage or 401k loan sooner.

    Thanks Alfie

  93. @ alfredo better to pay off your loan than to invest in mutual funds because you have to pay capital gains taxes, dividend taxes, commission and fund fees which would diminish your return. Stocks have a lot of risk involved, In 2008 the S&P 500 lost -37.22% which will take many years to recover from. Better to get a guaranteed return on your money by paying off your home than to trust the stock market.

  94. I think paying your mortgage off early is a valid point. However, i am taking a different approach. About 2 years ago, i took out money from my primary house and invested in a condo. It yielded a 8.5% net income on the total price and cost of the condo. Now I am earning 9.5% because of rent increase. Because my new loan is spread out to 30 years i end up paying only 1K for my house each month. I also have a lot of emergency money in case i lose my job. I even have enough money to buy a second property 1 year ago. because i am renting the 2nd property to my in-laws i am just breaking even. However, they are paying off the loan for me and are taking great care of my property. 20 years from now i will have a lot of equity in my houses and my chose to pay it off but right now i dont have to. I am putting a lot of money into 401K and roth IRA. Investing in real estate is just another way to diversify my portfolio. I would never use my home equity to buy stocks. just too risky. Overall, i am very happy with my investments so far.

  95. Am I missing something? I’ve been searching all over trying to find clarification on this… regardless of how long you have a mortgage, or how much the home depreciates in value, a loan is a loan and has to be paid back, right?

    I still owe about $90,000 on my home and am about 6 years into a 30 year mortgage. I will probably not be living there the full 30 years. Maybe I’ll try to sell in more like 5-10 years.

    I have plenty of backup money for any kind of large emergency that would come up, so that isn’t a factor. I do once in awhile accumulate an extra thousand or two beyond that large backup “cushion” of money. For example, I currently have about 1-2 thousand that I was considering putting down on my mortgage as an extra principal payment.

    I’m seeing all these comments about why that’s not a good idea if I plan to move. But I have this $90,000 loan and that has to get paid back regardless. So doesn’t it make sense to pay off that part as quickly as I can, regardless of whether I stay or move, and then in the process my monthly payment each month will be paying off more principal and less interest?

    This seems like a no-brainer to me but I am afraid I’m missing something big. Any replies would be appreciated. Thank you!!

  96. Hi, Lindsay. I think in most cases it is better to pay off your house, but if you will be selling your house soon you may not get the price you want. For me this is not a good time to try to pay off my loan because my job is not secure (my work may only last 2-3 years). What i am trying to do now is get my monthly payment to be as low as possible. Rates will be low for awhile, I am taking advantage of this situation by paying down my principle when i can refinance with the same rate or less. This way i keep my monthly mortgage as low as possible as i am also paying my loan off early. By the way, i have been putting in an extra $500 each month anyway because i have good amount of cushion money, but i will pay down another $20K when i refinance my house sometime soon in the next few months.

  97. I’m confused how people can completely look over inflation.

    Yes, paying off your home early probably isn’t a bad idea just because of the peace of mind it leaves you with. However, there is more to it than that.

    For just a moment let’s aside all of these side discussions about how risky the stock market it and whether or not the standard deduction will be more than your itemized deduction including interest and just look at the rate of inflation.

    Over the last ~100 years the average rate of inflation has been about 3.4%. Of course year to year things do change, but I don’t think we have to worry much about long term deflation. So lets assume a $400,000 mortgage at 4.5% over 30 years and an average inflation rate of 3%. Entering this into a simple mortgage calculator shows that by the end of the mortgage, you are only effectively paying about $800/mo (versus the ~$2000 it was to start). Your $400k loan when you don’t account for inflation will cost you $730k, but adjusted for inflation is only $480k. So you effectively paid $80k (or $2600 a year) for that $400k loan. You could even go further and account for a conservative 2% annual pay raise and you end up even further ahead.

    Also, while homes may not be appreciating much now, over the long term a well-maintained home in a decent neighborhood will appreciate at least enough to match inflation over the long term. So you also have that to think about.

    I guess this wouldn’t apply as much for someone in their 40’s or 50’s right now, but for the younger crowd, I don’t quite understand how anyone could think paying off a mortgage early is a good idea for ANYTHING other than simple peace of mind (which I’ll admit can be very valuable sometimes).

    Just my $0.02, but my $0.02 have made me a fairly wealthy man on an only slightly above average income ($65k/year post-tax)

  98. Also, just to further clarify, I said you effectively pay $2600 a year to have that loan. While this may seem like a lot, making up that $80k over 30 years is pretty much guaranteed and then some. Even if you find an investment that does nothing more than keep up with inflation at 3%, you are still making more than that $80k you spent.

    So instead of paying that one extra payment every year, take that $2000 and put it into a very low-risk, low-yield investment that makes about 3% a year (there are plenty out there). After 30 years you’ve got just over $100k. There, you just made up your $80k spent in interest with a very low risk investment.

    Why don’t people understand this?

    Disclaimer: I’m not a financial adviser, I don’t hold a degree in finance, I’m not pretending to be an expert, I’m just a simple military medical officer who likes to make my salary work for me.

  99. MY EXTREME MEASURE: I cashed out my 401(K)!

    I realize that my decision was extreme, and I do not recommend it to most people, especially to those who would pay off their mortgage and just waste the extra money every month.

    But only in the self-destructive economy of debt people think it’s ok to buy one house and pay for two. If you don’t think that a culture of debt is self destructive, you have not followed international news. One word, Greece.

    For me, paying off my mortgage was my dream. I am now 47. I TOOK AN EXTREME measure to pay off my mortgage in May/June; I cashed out my 401(K) in May (2011) and did it. I was driven by the dream of living mortgage free. To me, it was more than just doing the math. Historic returns tell us that keeping money in the stock market will outperform our mortgage rates, especially my 3.75% fixed rate; however, even Warren Buffet has said that investors can expect returns of 4% this CENTURY. 4%, not the historic 7%.

    I am paying (they withdrew 20% automatically) income taxes on the money that I took out of my 401(K) to pay off my mortgage, but I know that I am taxed at a lower rate now than I will be in the future with the way federal spending is going. I didn’t feel that it was not worth keeping a huge financial obligation just to get a tax deduction.

    I took a 10% penalty to cash out my 401(K) to finally make my mortgage-free dream come true. I know I will never regret my decision. It wasn’t an easy decision, and I lost several nights and almost developed ulcers thinking about it. The economy looked shaky, and I feared that the stock market could tank, and that it could potentially take years to recover.

    Since I made the decision to take a 10% penalty to pay off my mortgage, the stock has gone down 16% as of yesterday’s closing price. I took all my 401(K) money out of of the stock market on 05/24/2011. The S&P 500 closed at $1,316.28 that day. Yesterday, 10/04/2001, it closed at $1,099.23. That’s a 16% drop. My 10% penalty looks small at the moment.

    I know the stock market will turn around, but its performance in the past decade is nothing to brag about. I am not interested in how the stock market or any other investment vehicle has performed in the past couple of years. Let’s look at a decade. Here’s the dreadful reality of the past decade: If you had started investing in the stock market with $5,000 on 01/01/2001, and if you had contributed $500 every month until 07/01/2011, you would have contributed a total of $68,000 in the past decade. Your account balance would have been $79,295.98 on July 1st, 2011. That’s a total return of 16.6% in 10 years. Total INFLATION was 27%. After inflation, that’s a net LOSS of 10%. You would have been much better off investing in your mortgage!!!!

    When I paid off my mortgage in June, I instantly developed a savings habit. Every two weeks, I invest $1,000. I am investing in CDs at the moment, but I will be maxing a ROTH IRA starting in the spring. I am also looking at other investment vehicles, such as peer-to-peer lending, commodities, etc. Getting rid of my mortgage will create more investment opportunities for me.

    I need a lot less to survive without a mortgage, and I sleep so much better at night. I have zero debt now. I have no car loans, no credit card debt and no consumer debt of any type. My debt to income ratio is 0% for the first time. The smile on my face would need to be surgically removed.

    I opened an online savings account to manage my own escrow. It will pay ME a little bit of interest, as opposed to the 0% I was getting by letting my mortgage company manage it for me.

    “The borrower is servant to the lender.”

    Charlie.

  100. I certainly understand the value of paying off the mortgage from an emotonal standpoint. Cashing out and paying taxes on the the retirement money is not something I would have done. However, you would have paid that money in interest anyway,so you might call it a wash. As an earlier post mentioned, inflation is a huge factor. I have reconsidered paying extra, because inflation would mean paying it off with ever cheaper dollars in the future, so it is better to be invested in the market. But I’m self employed and see a bright future. Still have a ways to go to max out every retirement vehicle. There is really no right or wrong answer. If it has conditioned you to save, then this will be a long term positive. Savers always prosper and sleep easier in troubled times.

  101. This is wrong: “Lack of diversification — Your house could be a significant portion of your assets (it is for me). By prepaying, you are adding to your real estate asset class, which could result in too much investment in real estate. By opting to invest your money instead of prepaying, you are reducing your overall financial risk through diversification.”

    This is wrong because I own the same house whether I pay off my mortgage or not. I still am exposed to the same real estate risk. However, percentage wise, I am less exposed to real estate risk by borrowing and investing in other assets. The actual dollar value of the exposure is the same, but I have borrowed to invest in other assets, which decreases the percentage of my portfolio in real estate. The offset to this, of course, is that leverage brings its own risk and volatility.

    But the real estate risk is identical with our without the mortgage.

  102. @Jason – I am with you 100% about inflation. If your mortgage rate is low enough, buying TIPS instead of prepaying might be the safest arbitrage yet.

    @Charlie – Congratulation. I don’t think there’s a right or wrong decision that applies equally to everyone. If what you did make you feel better, I think it’s a good thing.

    @Roy – You are correct and that is what I am trying to explain. Prepaying doesn’t change your real estate exposure, but using that money to invest in something else reduces your overall real estate exposure. I will tweak my sentences to clarify that.

    @CharlieBoy – There are plenty of people who buy too much house or sink too much money into a house. Why is that not a reality when we see this happening all the time? I have a neighbor who spent too much on renovation and ended up losing both money and the house.

  103. I don’t care how much a house is worth, it’s not like one has invested $1M in real estate by prepaying one’s house. Besides, in the long run, real estate comes out ahead of other investments, especially the stock market.

  104. @CharlieBoy – “Besides, in the long run, real estate comes out ahead of other investments, especially the stock market.”

    That’s inaccurate real estate usually keeps up with inflation in the long-term and may change up/down depending on the condition of the market and the neighborhood (e.g., growing or declining); whereas the stock market are tied to real businesses with the common aim of increasing profitability. The past 10 years may not be representative, but in the long-long-term, real estate cannot keep up with stocks.

  105. @ Jason by paying off your mortgage you get a guaranteed tax free return of 5% or more. The S&P 500 return was zero from 2000 to 2010 so stocks have a lot of risk involved. Getting a guaranteed tax free 5% return from your mortgage beats yours 1 yr 1% CD after taxes.

  106. I bought my last house in January 1998 for $174,000. I sold it in 2008 for $325,000. The housing boom did it.

    It doesn’t matter anyway because I would rather invest in the stock market and not have with tenants. Been there, done that. But a commercial property is not out of question. The main thing now that my mortgage is gone is to invest the same amount. Maxing out a ROTH is my top priority.

    As for the stock market return, here’s a little table:
    YEAR: % RETURN:
    2010 14.32
    2009 27.11
    2008 -37.22
    2007 5.46
    2006 15.74
    2005 4.79
    2004 10.82
    2003 28.72
    2002 -22.27
    2001 -11.98
    2000 -9.11
    1999 21.11

    Terrible!!! I took all these things into consideration when I decided to cash out my 401(K) at the top and pay off my house.

    Charlie.

  107. Blaming the Index for your troubles is short sighted. Lerarn to invest (this is not the sam as trading) in individual stocks. Most people get rich in the stock market in two ways. Years of contibuting/saving and reinvesting the dividends. Time overcomes stupidity and market flucuations. Secondly, Owning a single stock (ie… the 30 year company employee) and reinvesting. Again time is the key factor. Have you ever wondered why a mutual fund may tout itself as a growth fund or value fund yet have 100% portfolio turnover? Something of an oxymoron. Learn to value and invest inindividual companies. Own the stock, don’t rent it for short term gain. Read the Buffett Paradox and interesting report on Mutual funds in comparison to Buffett. I beat the Index by an average of 5 points because I know how top value, employ patience, and maximize gains by concentrating on a handful of stocks thatI know very well and follow closely. Why water down the few good investments with dozens of subpar investments and call it a mutual fund?

  108. RobSC, I have been investing in the stock market since the 90’s, and I learned my painful lessons the hard way. Back in the late 90’s, I sold everything and invested 100% in a single stock because I was “sure” that it was going to be a winner. Well, putting all my eggs into a single nest turned out to be an expensive lesson, but I learned.

    Unfortunately, in our 401(K)s, we don’t have the option to invest in individual stocks, or I would be doing it. But I will NOT invest in any index fund or mutual funds in my ROTH IRA. But my 401(K) did well for me mostly because I actually moved almost everything out of my mutual funds and into a money market near the top, and again back into mutual funds a couple of years ago. And I switched to ROTH 401(K), which helped when I cashed it out (at the top) to pay off my house.

    Now I am getting ready to invest in individual stocks only, except for the 5% that will be invested in my 401(k) at work.

    Now, having said that, I may open a separate ROTH IRA and invest a little in peer-to-peer lending because that too can be diversified and return much better results than the stock market.

    Most people claiming to be “expert” investors are unable to beat the S&P 500, and a lot of those people are some of the highly-paid managers in our 401(K) funds. It’s pathetic!

  109. The way things are going, I say, sell your home and use the mortgage payment money to buy gold, make a big hole in your backyard or some place known only to you and bury it. Just make sure to let your responsible children know where it is before you die.

  110. I was just told that if I pay my mortgage off that I would have to pay a penalty of in interest and a recording fee. I only owe 17,920.10 (seventeen thousand nine hundred twenty Dollars and twenty cents) why am I being charged these fees?

    • @Ralph – It sounds like your lender doesn’t allow pre-payment and charges a pre-payment penalty. You should ask for a manager and see if they would waive the penalty.

  111. Ralph, it sounds like your mortgage terms do not allow for early pre-payment without a penalty. The recording fee is probably about $15 though. Ask them how much the penalty is for you to pay it off. I would carefully read my original mortgage papers to see if what it says about pre-payment penalties. I don’t trust mortgage companies! You may have to wait, but $17,920.10 means you are almost there regardless.

  112. I forgot to say why I don’t trust banks, but it’s because of Wells Fargo. Last year, I called them to refinance my mortgage. They told me that I could lower the interest rate IF I paid off my HELOC. No big deal, I said, it has a low balance anyway. BUT they failed to tell me that I had to pay it off prior to starting the refinancing process. Weeks later, I called them to ask when the closing date was, and I was astonished to find out that they had cancelled it without telling me BECAUSE I didn’t pay off my HELOC first, which I didn’t know I had to do. It’s a corrupt bank!

  113. I mentioned concentrating one’s portfolio. A single stock is pretty extreme, but the company man who knows the company would be the sole example of that type of investing. My advice would be to consider the an approach with a focus on value. Low P/E stocks are available. Screen them for consistent sales/revenue growth, consistent dividend growth, consistent earning growth. Many pass this test, and some barely missed a step in 2008-09. For me personally, 10 stocks is about right for diversity. 15 to 20 start to overwhelm the senses. The Dividend Aristocrats Index is a good place to start mining. Do a search defining entry into this Index. Pretty impressive hurdles. A larger group of stock called the Dividend Achievers Index.

  114. I have paid attention to dividend stocks, especially ETFs; however, I will focus on individual stocks for a couple of years in order to test an investment system that I have developed. We’ll see what happens.

    I do LOVE dividends and interest payments. For the first time in my LIFE, I am proud (amazed, astonished) to say that I am receiving more money from dividends and interest than paying. That’s thanks to paying off my mortgage.

    I will soon be receiving some type of interest or dividend every day of the week. That’s all compounded, I never actually see a penny of that money, but I see it in the accounts (CDs, savings, etc).

  115. Is there any benefit to paying off mortgage on house early. I have the money however I cannot work b/c of medical reasons and was wondering if paying off the house would effect any chances of getting any type of loan in the future (not sure if i could get one anyway). Right now excellent credit and pay mortgage on time. Mortgage left is around $50000 on 12 yrs. I do not do itemized tax so I dont get any interest back. Dont know much about mortgages

  116. No NO NO! You can refinance your home on a 10,15, or 20 (20 not recommended) at a pretax rate of about 3.5-3.6% fixed for the life of the loan. Avoid adjustable rate notes like the flu. Instead invest the money in 2 or 3 quality blue chip dividend paying stocks ie AT&T (T) 5.8% dividend, Kinder Morgan Partner 5.5% dividend (KMP) and Bristol Meyers (BMY) 3.8% dividend yield. We have a Fed chairman that is printed money like newspapers and inflation is setting in. Short term interest Rates have started to rise and longer term rates will follow. The large cap quality stocks that pay you a good dividend to own them will more than pay the interest on your note @ 3.5%. Never get anything longer than a 15 year mortgage as the first 15 years are pretty much interest with minimal principal. The last 15 years are when you start amortizing the principal (amount of note). Run the numbers of how much more interest you pay on a 30 tear note as opposed to a 15 or 20 year. It will amaze you and help you save tens of thousands of dollars. A quality blue chip stock raises its dividend and the market is deeply oversold as measured by divided yields and P/E ratios. You will be paid dividends in excess of the amount of the mortgage interest. In addition quality stocks will average you a 8-10% annual return including dividends. The dividends are taxed as ordinary income but the inter you pay on your mortgage can offset this dollar for dollar if you itemize. Last thing if you are starting a family NEVER get a note over 15 years as this will result in your OWNING your home OUTRIGHT before the kids got to college.

    This note is prepared only for the use of honest, hard working Americans as you are the pillars of the greatest country in the world.

    Scott

  117. For those of you deciding whether or not to pay off your mortgage early. I just spent a long time reading through these post. It speaks volumes that for those that did pay off their homes early, not one them regreted it. That should tell us something. For example, scroll up an read the post by “Bill” on March 9, 2011…. He sounds pretty set for the rest of his life.

  118. Good article and I like the fact you acknowledge the things you missed as people bring them up.

    My mortgages started in 1977, along with the car payment, the credit card bills and other debts. Looking back there are so many times where they all could have been paid off. Now approaching retirement even though it looks like there will be enough for my wife and I to retire comfortably we still have a mortgage.

    In the last 7 years my car payments went away, my toy payments disappeared and credit cards are paid each month with no interest charged. The freedom of mind not having those debts hanging over our head is tremendous.

    There have also been a number of young workers that have reported to me in the last 20 years. All of them made very good money. The biggest issues they have had in their families have been debt. Unfortunately often leading to a divorce.

    Although there were always other issues as well in more then 70% of the cases debt and more money were an issue. I even suspect in many of the ‘Other reasons for divorce’ that the prospects of a better financial life played a big part.

    I know in my own personal divorce several years ago finances was also a big issue even though we were better off debt wise then a lot of others around us.

    Due to the ‘freedom of the mind’ and not having a large committment over our heads we are considering paying off the mortgage way early. We LOVE not having to worry about a car payment, how much to pay on the credit cards this month or ‘gosh that stupid camper, boat, motorcycle…’ just sits there for 6 months and we are making payments on it!!!

    Right now it makes all the sense in the world to make house payments at 4.25% especially considering there are 2 fully vested retirement accounts, two 401K plans and our investmenst have paid back over 50% in the last 7 years. Currently most of our money pays dividends at the rate of 6% avg. and investments are doing fairly solid 4-8% growth.

    But what is ‘Peace of Mind’ really worth. I will post later on whether we decided to pay our mortgage off and why. Still trying to justify it one way or another.

    Thanks for the great article and all the great comments.

  119. I just retired at age 62 after teaching for 33 years. As a single mom I always struggled to make ends meet and always had to work two jobs. It wasn’t until the last few years of my career that I made enough money to actually be able to save a little money from each paycheck…not a lot but enough to say “Wow…I finally have a savings account!”. But, because my age was creeping up on me and I was tired, I retired and am now living on a pension. It’s a good pension but I have a mortgage payment that is eating it up. Here’s my dilemma: My mortgage allows me to have a tax deduction…without it I would probably have to pay the government on April 15th every year. But on the other hand, I would be able to hold on to most of my pension check each month and even continue to save a little each month. Finally, I would like to have something to leave my children when I’m gone….which is better, a house or a savings account? Any help you can offer is greatly appreciated. I always had to take care of my own finances…never had any help. Now I’m paying the price! Thanks.

  120. @Maureen – I don’t think leaving something for your children should be a priority. You’ve worked hard to get this point and you should be thinking about yourself. I don’t think it should be about owning a house or having a bigger savings either — it should be about what is best for your finances. Unfortunately, there’s really not enough information here to go by. I think it’s worthwhile to consult someone that can really go over your finances. Does your school system offer any access to free (or discounted) financial advisor?

  121. It depends on what you are going to gain in controlling the money. For instance if you let the money sit in the bank at 4% intrest then no, it would be better to not pay 6.25 on the principal amount that money sitting in the bank is then costing you 2.25%. However if you invest the money in a venture that is gaining more than you are paying in intrest for a mortgage then it is very benificial to keep control of the money. In any case where you have your money is just a matter of assets and liabilities. PMI isn’t neccesarily a bad thing as the PMI payments are also now deductable as well. Rember there are only two ways to get equity in property out and have acces to the money. 1) Sell the property, 2) Pay someone to take it out Equity Line or Mortgage.

  122. Too many variables to consider. Will food double again in the next 2 years? Will cancer rates continue to rise? Will a new car cost $100k in 20 years? Go for the disposable income, don’t pay extra on the mortgage, live now and know your life expectancy based on your habits. Owning in my opinion is cheaper than renting. But i’d rather give my my money to a dirty banker now @ 4% than pay a dirty politician 40%, 20 years from now on a 401k. Work hard get nothing. We’re going down.

  123. Our bank considers our primary home a “2nd home” mainly cause my mail is sent to my former home which I had prior to my marriage in July. The condo which we are trying to refin is where my husband works so he is there 24/7. I’m there 3-4 days a week.
    Frankly I’m sick of dealing with BofA and we are thinking of taking out a loan to pay off the condo (if interest rates are low)
    Does this make sense? anything better we can do?

    • @Linda – personally, I dislike BofA (poor service in my opinion). That said, I would approach this mathematically. Does the 2nd home status cause the interest rate to be higher? If yes, does it make sense for you to pay all the closing costs to secure a possibly lower interest rate? If not, does the 2nd home status affect you in any other way? It shouldn’t affect you tax-wise because loan type has no impact on how you actually use the home (talk to your CPA).

  124. In my publication “Bubba’s Financial Planner”, regarding mortgages and early payoff, twice monthly payments and buying a home you can afford as well as trying to get a 15 or 20 year mortgage are all good ideas. However, I oppose making additional principal payments and suggest you invest that extra money in investments that will grow over time. First your money is growing. Secondly, bad things financially happen to good people, and you may need this nest egg for health reasons, or you may lose your job in a downturn. If, God forbid, such a disaster happens to your family, see if the banker will return any of those extra payments to you! Sure,as a second lien assuming you are still able to work! If you lose your house, you lose it all! Use those invested funds if and when you decide to pay off your house. You have control of your money during the entire period.
    Think about it!
    Jim Compton, RPh

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