Should I Payoff the Mortgage Early?
photo by Oracio Alvarado
One of the most controversial subjects around the family finances is the decision to payoff the mortgage early. Some say you should keep the mortgage around as long as possible, citing low interest rates and tax deductions as opportunities you are giving up by paying it off early. Others enjoy the freedom that comes from no mortgage payment, and the huge amounts of disposable, monthly cash that comes along with being mortgage-debt free.
Life Without a Mortgage
Mortgages are sort of a necessary evil nowadays, mostly because real estate is too expensive for the average person to pay for a house with cash, but in some cases because people buy more home than they can really afford. In many cases people could nearly pay for a home in cash, or at least put 50% down, if they would settle for a smaller place. Of course, some in extreme real estate markets would argue even this plan is impossible with modest homes starting in the $400,000 range. I would agree.
Still, it is hard not to enjoy the idea of not owing anyone any money. Imagine the freedom that comes with being debt free, including the house. Let’s say for example that you are in your late 40’s, and your kid(s) are wrapping up college. Instead of carrying out that thirty-year mortgage to the full term you worked to pay it off in twenty years. Now you own a $200,000 paid-for home, and have no other debts. At this stage in your life, could you seriously consider an early retirement? Would a career change, or relocation now seem plausible? Of course! With no payments you simply have to earn enough to cover your basic needs such as food, lights, insurance, etc. And assuming you had adequate savings there is nothing stopping you from going after the career you’ve always wanted, but could never afford.
But Couldn’t I Earn More in the Markets?
Maybe. At the time of this writing the markets are doing so hot, so passing on extra mortgage payments to invest in a flat (or declining) market doesn’t yield the kind of returns you might expect in a bull market. The flip side to that is that when markets are in a decline it is a good time to stock up on beaten up companies with solid fundamentals, so setting aside some money to invest does makes sense. I try to look at things through a short-term-pain, long-term-gain filter. I may have to miss out on a few hot investments now, but down the road I’ll be able to make huge contributions to retirement funds and taxable savings vehicles if I have no debt payments. I’ll also be free to make more decisions about how to spend the remainder of my life energy, rather than continuing to work in a passionless career just to make a house payment.
Are you planning to payoff your mortgage early? Why or why not?
I have paid off my mortgage. It was a very liberating day, indeed. I listened to all the baloney talk about tax writeoffs, yada, yada, yada, and did it anyway. Once the mortgage is paid, you know you will always have a roof over your head, although you still have to pay taxes, etc…it’s still way easier to come up with the tax bills (when due) than the mortgage payment (monthly, without fail). I recommend, first pay off ALL high interest credit FIRST, then the mortgage, then anything else. It makes little sense having a large “emergency fund”, earning virtually no interest (the current market is actually losing you money by saving …i.e INFLATION) when you are paying large interest payments on your outstanding credit…it’s nonsense. Of course, you should always have a small emergency fund as a fail safe backup (I like 6 months of income as my cushion, but actually have about 2 years worth of cushion). The media and the government grind us down EVERYDAY to SPEND, SPEND, SPEND, but you MUST resist diligently. ALWAYS remember, no one is going to take better care of you, THAN YOU. The media or government will not be there at your most dire moments of need. Good Luck all.
I’m a new reader, within the last two weeks, but from what I gather you seem to follow Dave Ramsey like ideas for debt reduction. My wife and I are currently eliminating non-mortgage debt (baby step 2). I like Ramseys plan (Total Money Makeover is an easy read). It gave me a great overall plan for how to handle money on a life long scale. He says once you’re debt free but the house, have a 3-6 month emergency fund, and are contributing 15% of gross income to retirement vehicles, then go crazy paying down the mortgage. I like his plan and find that it is working well for my wife and I.
Thus far we have paid off both cars and half of her student loan, all since January 30th. It has been so motivating for us to watch the debts disappear. I look forward to owning my home free and clear.
I’ve spent a lot of time debating this very issue lately. Dave Ramsey does make a valid point when he does the math and says, all this interest is NOT worth the tax deductions. It doesn’t add up.
That being said, I’m not an extreme saver. I have a mortgage, a car loan (which I got at 0% interest. I expect to keep it much longer than the car loan and I couldn’t justify losing the interest my money was making to pay for the car outright. Dave would hate it, but it’s working for me.)
Instead of paying a 0% loan off early, I’ve decided to pay more towards my 5.5% mortgage. I’ve figured out how much to add a month to make my 30 year mortgage now a 15 mortgage. It’ll be paid off by the time I am 50.
I do have a 6 month emergency fund and no other debt and significant retirement savings.
As a single Mom with a 3 year old (adopted, no child support) I have to consider cash flow too. I really want my daughter to have dance lessons, zoo memberships and other things. I tend to spend less on myself (like most parents I guess!)
So I vote yes, but not to the detriment of some lifestyle choices. It is amazing how much you can save with an extra half payment each month.
I don’t care what anyone says. Not having a mortgage debt would feel wonderful!
when my husband and i were first married i owned a condo outright and it was GREAT not having a mortgage. then we got pregnant and bought a house and now we have credit card debt! our circumstances have changed — i’m home with our two kids and my photo business — but we are working to get back to the non-mortgage days. it’ll be a while, but i’d love to have no mortgage again.
My husband and I are renters and aren’t looking to buy a home any time soon. But, when we do, we hope to put at least 10-20 percent down on a 15-year mortgage.
We’ll try to pay it off early, but if life happens and we can’t, we’ll at least know that the house will be paid for by retirement.
I’m working to pay down the mortgage is soon as I can. Should be paid off later this year. Plan to retire this year and the money that investments might make by not paying it off would not match the mortgage payment.
Never understood the idea of wanting to pay interest just to get a fraction back in taxes(not that I like paying taxes).
You’re right that not having those debt payments give you freedom to persue your dreams rather that just working for a paycheck. Also agree with Christofer, no one will take better care of me than me.
I think it’s a very wise decision to pay off the mortgage. Investing in the stock market will give you better gains in the long run than what you are saving on in taxes.
Also, money in stocks is liquid compared to real estate. If you were in an extreme financial situation where you needed more money than what is in your emergency fund, you’d have to sell your house for that money. If you are invested in stocks, you can pull money, as a last resort of course, if needed.
And what’s the big deal anyways about the tax write-off. It’s either paying the money to the government or to the bank. Either way it goes away. Why not have your money bringing in extra income instead?
We are also planning on paying off mortgage. We are paying half our monthly payment every 2 weeks, resulting in an extra payment every year. Also, once we have completed paying off all our other debts, I plan on sending even more. Plan is to have mortgage paid off within the next 10 years (instead of 29.5).
We have paid off our mortgage. The mortgage deduction is not even worth considering. As for investments, I would rather have a gauranteed 6% return (a typical mortgage rate) than gamble on a possible 8 or 9 per cent return. But money considerations aside, it’s a great feeling to really own your own place. The sense of freedom is fantastic.
We are working towards paying down our debt & I definitely would love to pay off the mortgage too. It would be so nice to not have any bills and to have the option of an early retirement!
Absolutely 100% pay it off. Just think about the cash flow. Almost 100% of your take home pay to do exactly what you want with it. Imagine the freedom. You want to quite your job and pursue a dream, go ahead you wouldn’t have many bills to cover! People tend to overlook the freedom that comes when you are in total control not someone else.
Once we move, I hope to have the house paid off in seven years. That is just my dream.
Absolutely pay it off. We’ve paid off an extra 10 years on our 30-year mortgage (making it a 15 year), and are planning to have it all paid off in about 13 years total. At that point, we’ll be about four years from our first child going to college, so we’ll have some time to save harder for that goal. I periodically think we would be better off investing, but I think owning the house outright still sets us up better for the future than hoping for a bull market.
I paid off my mortgage - it feels fantastic. This debate has been going on forever on various financial blogs, but you know, I’m really believing that those opposed to it are mostly financial planners of some sort because when we pay off our mortgage it helps us and not them. They want us to invest elsewhere so they can get some fees from us. They get nothing when we pay off our mortgages. And then beyond that, when I learned that Dr. Phil paid cash for his house in Beverly Hills, and so did Suze Orman, that was good enough for me to pay mine off too. They could have invested that $ elsewhere, but didn’t. And then, look at what happened to Ed McMahon? No regrets about paying off my mortgage. Absolutely none. Wish I would have/could have done it sooner.
I would definitely pay it off early given the chance. Firstly, paying interest on something like a house adds up to such a significant amount and I believe that should be avoided where possible.
The second reason, and the bigger of the two for me, is that being bound to that monthly payment can limit your options. It’s much easier to spend 3 months in the south of France to write a book if you don’t have to also pay a mortgage back home. It allows you more freedom with your finances and will be less stressful if something happens to go wrong.
In the USA, you can “write off” mortgage interest against your income to reduce the total taxable income. That’s what people talk about when they say they’re keeping the mortgage for the tax benefits. But how beneficial is it really?
Suppose Person A and Person B both pay $10,000 for mortgage interest a year. Both are in the 25% tax bracket income-wise, which means their adjusted gross income (AGI) before taxes (that is, with all their exemptions and deductions taken out) is between $32,551 and $78,850 for an unmarried person.
Now suppose Person A’s AGI, with the mortgage and all, is $78,000. A will owe 25% federal income tax which is $19,500. If A pays off his or her mortgage, $10,000 of deductions go away, and A’s AGI becomes $88,000. Which puts A solidly in the 28% tax bracket, meaning A now owes $24,640. That’s a difference of $5140, which means that even though A pays more taxes than before, there’s still a net gain of $4860 in A’s pocket from interest alone.
Now suppose B pays the same $10,000 in mortgage interest. B is earning an AGI of only $32,000 which would make B a poor risk for the kind of mortgage that would require payments of over $10k a year if it were a new loan. B will be in the 15% bracket, meaning that B owes 15% * $32,000 = $4800 in taxes. If B pays off the mortgage, B’s AGI goes to $42000, meaning B is now in the 25% bracket and owes $10,500 in taxes. $10,500 - $4800 = $5700 that B is ahead.
So both A and B have come out ahead even though they jumped up a tax bracket as a result of paying off the mortgages. Neither would benefit from paying more money in interest than they would in taxes.
My thoughts on paying off the mortgage early:
1. It’s got to be a great feeling to be completely debt free and own a home. I’d gladly sacrifice some lost opportunity for that feeling.
2. Dave Ramsey says, the savings from the interest deduction can also be had by giving the money to church or a charitable organization. If I feel I need the interest rate deduction after the house is paid for, I’ll just give the money to church.
3. I also agree with Dave on saving 15% for retirement and then using the rest to knock out the house (assuming all the baby steps are being met).
Saving for retirement is critical and you should start immediately. My wife and I continued to save 15% during the two years it took to become debt free and the extra two years it took to save up a 20% downpayment. We will also continue to put in 15% as we pay off our mortgage.
I’m going to take a contrary position on this article. First I agree I would love to own my house free and clear, but I don’t think it is the best choice available and I am NOT willing to sacrifice my investments to do it. I don’t want to have a house and no cash!
It’s very hard to catch up by investing more money later. Do you have the discipline to invest what you once paid for your mortgage? Even if you do, compounding interest makes early contributions worth a LOT more.
The difference between 6% and 8% doesn’t seem huge, but it becomes huge compounding for 30 years! Investing $100,000 with 6% returns for 30 years will total $574,349. With an 8% return it is $1,006,265. That’s a difference of $431,916! I’m sure someone will argue that 8% returns are not guaranteed. That’s true but looking at long term averages for the stock market (i.e. S&P500) the worst 30 year period returned about 8% so I would contend that is a pretty conservative estimate.
I would also argue that because the stock market is so beaten down now that it’s a great time to invest in stocks for the long term rather than investing in your mortgage.
Inflation- if you believe inflation is going to be high then you should wait as long as you can to pay off your house with less valuable dollars. If the inflation rate goes higher than your mortgage rate then the bank is effectively paying YOU to carry the mortgage!
If you really want to own your home sooner check out refinancing to shorter term loan. If you can lower your rate enough it can pay for itself. I recently refinanced to a 15 yr 5% loan from a 30yr 6.75% loan, I wish I had refinanced a few years ago when rates were even lower instead I was doing extra mortgage payments, and that was a huge mistake! Now I am NOT making extra mortgage payments- instead I’ve increased my retirement contributions!
-Rick
Your posts have been so timely lately! I was up in the middle of the night to get a glass of water. As I walked up our stairs to go back to bed, my first thought was, “Gosh, I wish I owned this house and not the bank….” I think just the sense of owning your home is worth any tax deduction, or better return on the stock market. Sharon
The problem with the mortgage tax deduction is that you have to pay someone else money in order to take a deduction off your gross income for tax purposes. It isn’t like depreciation, where your loss is on paper, with a mortgage payment, your loss is real.
I paid 50% down on my house, then paid it off 3 years later. That allowed me to retire at age 49. Now, all I have is real estate taxes, which are a deduction, and homeowners insurance to protect my investment.
As Squeaky pointed out, even a jump in tax brackets from having fewer deductions still puts you ahead. I did the almost unthinkable; I paid off my mortgage and then let my income dip way low, so my taxes dropped accordingly.
I am creating new revenue streams, but have basically taken two years off to enjoy life. My “more life, less work” program is going very well indeed.
After all, what are we here for; to work, or to live and enjoy?
The problem with staying in the rat race to accumulate gobs of wealth is the rats keep winning the race, and we end up giving Washington a good portion of the wealth we create.
Clair
@Squeaky - Tax brackets don’t quite work that way. You would only pay 28% on the amount that was over the 25% limit.
@Rick - I don’t think many people are arguing retirement over paying of the mortgage. Fund your retirement accounts, generally 15% of you income is a good number and then put the rest on the house.
Having 1175 dollars a month to do whatever I want with is going to RULE! I can’t wait until that day comes! I don’t care about making a whole bunch of money on investments, blah bla blah. Thats why I contribute to a 401k and I have an extra cushion: PENSION!
I paid cash for this final house. $40,000 as-is, and it was bad, but structurally sound…(but the location was great - across the street from my grandkids) And cash $60,000 for the repairs/addition and remodel to make it ready for my retirement when that time comes. It was 560 st ft, it’s now 1010 sq ft. For $100,000 and a lot of personal labor, sweat, getting sawdusty and paint dripped, and living in a construction zone for 16 months, I have a $200,000 house all paid for. It is GREAT to know it is all mine and I sleep well at night knowing I am debt free and well set for my retirement.
This allows me to work 24-32 hrs a week or less, instead of the 40 I used to work, and at a very low stress job. This gives me time with grandkids which I want more than money
And time for my great veggie/fruit garden. Yes, having the house paid for let’s me live the life I want and the way I want it 
And it let’s me do it before retirement - I’m only 54. Sometime from 55-62 I will retire - when I chose - because having the house paid for gives me that choice 
Right now I’m too attached to company paid health insurance to quit, altho I could if I really wanted to.
The last house I paid off in 10 years a 30 yr loan, and the dairy farm I paid off in 14 years a 30 yr loan. I am a firm believer in paying off early - But that’s my personal feeling - I don’t sleep well owing money on anything.
In my low 20% tax bracket, the mortgage interest deduction would do me little good. Do I save money now instead of making a mortgage payment? You betcha - every other paycheck goes right into the investment account without ever hitting my regular checkbook.
My parents paid off their home by the time they were 40-43. It’s the only own they have ever owned and they have added on a remodeled many times over. They also funded their retirement plans in full. Mom took an early retirement package at 49 and Dad worked until 59 (he wanted to - he could have retired much earlier). My mother constantly tells me they have more money now than they ever did before.
They have several toys and travel alot. It looks pretty desirable.
I am torn. I see the advantages to both sides of the coin. I have paid 1.5x my mortgage payment for many years. I am currently getting back to work and trying to decide do I save and invest or continue to pay down my mortgage? In a perfect world I would do both. I have a very low 30 year fixed and would actually benefit more from investing than paying off my mortgage early.
So I think it is a personal choice and one that must be made on your tolerance for risk etc. However, I do encourage anyone that can pay 1 extra payment a year to do so; it can be broken down by paying a little or a lump sum - it does help you pay off early.
I paid off my mortgage at 29 and I can tall you it’s a fantastic feeling.
However once you do so you realise that you can remortgage your first property to buy your second property, and so the cycle continues.
I don’t care what anyone says. Not having a mortgage debt would feel wonderful!
People who argue for not paying off the mortgage often cite numbers relating to the tax deduction. People who argue for paying off the mortgage often cite the feeling obtained from being debt-free. My view is that experiencing good feelings about saving translates into seeing good numbers over time.
The reason why most people do not save effectively is that most people find more enjoyment in spending than in saving. It doesn’t have to be that way! Effective savers are people who find it fun to save. One of the most fun things in the world to save for is a mortgage-free life.
People do what they enjoy doing. If we encourage people to pay off the mortgage, we will see more people saving. It’s a mistake to ignore the good feeling about saving that comes from paying off the mortgage when we assess pros and cons of this money decision. Those good feelings affect the bottom line in the long run.
Rob
If your mortgage interest rate is low, ie under the rate of return you could get by putting your money into a high yield CD or a (relatively) safe investment, then you are technically better off keeping the mortgage longer because your extra money would work harder for you elsewhere.
However, psychologically, paying the mortgage off early is very rewarding, as most of the comments here show.
Here’s a great compromise for an average homeowner: Send in one extra morgage payment per year, mark if for “Capital reduction,” and shave 7 years off an average 30-year loan.
Great article!
I’ve started down the path of paying off my mortgage early about 10 years ago. Sometime, in either May or December I’ll have my house paid off.
It will depend on if I decide to put some money back in stocks I sold before they crashed or not. I got luck once, maybe I’ll get luck again ;^)
It’s amazing the number of people that feel this way. I can’t wait for that feeling of being free from the primary chains of my indebtedness
Thanks for the great quality of your blog! You’re one of my top 5 blogs.
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If I could pay off my mortgage I would do it in a second. Our monthly payments are ridiculous and I hate paying interest on anything. We try to put some extra money towards it every month but it is hard to do!
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I absolutely am working towards paying off my mortgage early. When we married three years ago, my wife and I had a -$3.44 cent balance each month after paying debts. We have been frugal and aggressive in paying down our debts and now are down to one school loan and the mortgage.
At our current rate we will (Lord willing) pay off our mortgage in 7 years. I will be 44 with our (at least) two children and no debt. The discipline and doing without now will all be worth it to have that Sword of Damocles done away with!
I am with everyone who says that paying off the mortgage early would be a good idea.
We’re following the Dave Ramsey plan of first getting an emergency fund of $1000 (done), paying off debts (done), a 3-6 month emergency fund (done), and then paying 15% to retirement and then paying off the mortgage early.
When we get back from our big vacation next month we’re buckling down and starting investing 15% and paying extra towards our mortgage. We want to be debt free - even without a mortgage!
I agree with Suze Orman, if you’re over 45, you should go ahead and prepay the mortgage. You want to be heading toward retirement with the house paid off and you still have 20 years or so to invest in other things. Our original 30-year fixed rate mortgage was supposed to be paid off in 2023. Between prepaying and refinancing to a 15 year fixed rate mortgage, we will hopefully have it paid off within the next five years. It will be a great feeling!
Let me tell you what a difference having the paid off mortgage and no debts means to me today…. (This really happened today…)
(I’m over 50 and work 4 8hr days, my choice)…. Today, the boss asked me to please reconsider going back to 5 days a week, 8 hrs. (I’ve changed from 5 days to 4 days 10 months ago) I told him that I do not need to work 5 days a week, that my $1000/month take home is more than enough for me to enjoy life with. I was able to tell him that I really do NOT want to work 5 days - period! When he saw I really meant it, we discussed other options, and came up with a better plan involving the one day a week I work at a 2nd facility for the same company. By having someone already at that 2nd facility learn the job, I could then be at my regular job 4 days a week (which is what he wants) instead of the 3 I am presently there already.
See what a difference not needing the extra money can make!!! (and having a nice boss who is very family oriented)
I’ve got grandkids and a garden needing my attention a lot more than my job does
No debt gives me the choice to live my days the way I want to - with my family!
@TheHappyRock
You’re right, I over-simplified. Yet even when I calculated 28% tax on person A’s whole income, it was still more profitable to pay off the mortgage. If the 28% were only due on the portion over the 25% limit, the tax hit would be even less and a person paying off the mortgage early would save even more.
[…] there are a lot of arguments being waged on the benefits of paying down debt, buying used cars, paying off mortgages early, and building savings. All of these are noble financial goals, and generally receive positive […]