My view is that everyone needs to consider their own personal financial situation and risk tolerance when making the decision about paying off their mortgage. People have made good points about paying off other debts first, fully funding retirement plans and emergency funds, and diversification.

I made the choice to pay off my mortgage because I’d done all that, and was left with what I call “the big what if?”. I’m a 42 year old single woman and have only myself and my earning ability to rely on. Yeah, I’m making good money now, but that’s not guaranteed in the future. What if I’m layed off and can’t find another well-paying job – or any job! – for a long time? What if something happens to my health and I can’t continue working like this? What if I burn out and need or want to take a less demanding, lower paying, maybe part time job? What if the thought of working until I’m 67 makes me want to scream and I want to retire early?

It made the most sense to me to kill the mortgage so I wouldn’t have to worry about a monthly payment should something bad happen. And because now is when I’m making a good salary and bonus with no mortgage payment every month, my savings is increasing every month in leaps and bounds and I have a lot of investment options with plenty of time before retirement to build up an even bigger nest egg than is in my 401(k). I also now have the freedom to consider alternate careers in the future.

The peace of mind, though, that’s what is priceless to me. I will never have to pay someone else to have a home (except the taxman!), and all my net income is mine to do with what I want. ALL of it. Debt-free is a beautiful thing.

Your interest rate reduction is 0.75% (5.375 – 4.625).

So, it will take you roughly
(APPROXIMATELY YA ONLINE NITPICKERS!)
2 years (0.01455 / 0.0075) to get back to even.

That is, after around 2 years, the amount you paid in closing costs will be equal how much you will have saved in interest with the new, lower interest rate
(whether you roll the closing costs into the loan amount or not).

Thereafter, the money you save on interest each month is gravy for you.

What you have to decide is whether
1) the 2 year break-even point is short enough for you (in this case, “shorter” is better) and
2) how likely it is that interest rates will go lower in the next two years – thereby offering you a better deal.

I don’t know the answer to either of those questions.

2. How long will it take to recover the $4000 ? Do the math.

3. You’re only saving about 1/2 of a percent… not a big enticement to me… but may be to you over the long haul.

4. Find an amortization program and do the math. That will tell you exactly what each one will cost you over the cost of the loan.

5. Remember that the five years extra is not definite on the higher percentage loan. You can pay a little bit extra each month and knock it down to 20 years also.

6. what’s the diffence in the monthly payment between the 275 @ the higher rate, and 279 at the lower rate?

7. Once you do the math and KNOW what both plans entail, then figure out which one makes the most financial sense for the time frame you will be in the house, and goes best with your financial goals.

It’s a personal decision Just gather ALL the facts – do the math – and then make your decision!

It’s not an all or nothing proposal. If the loan to value ratio is low (ie a house’s current market value is $750k, with an outstanding loan of $250k), why am I going to tie up more equity in the home? Im confident I can earn more than 5% going forward (even less needed when you consider a 35% tax bracket). Yes, home values and market return can fluctuate, – but long term returns are on my side. We haven’t even considered age, cash needs (college, etc), and tightening credit — one solution doesn’t fit all — but for your overall argument, the trend is not your friend. Also, they are not giving me access to “their” money, they are giving me access to “your” money (as a depositor socking your cash away in your 2% cd).

Since I’m a sheepherding lemming, substituting sarcasm for reason is all I’m capable of.

You ARE correct in noting that noting that comparing an institution’s strategy to an individual’s strategy has inherent flaws.

Institutions are in a much better position to pursue maximum expected value in the face of risk than individuals are.

However, your recommendation that individuals arbitrage higher expected returns from the stock market against lower fixed interest rates is MORE risky than the strategy that banks use, not LESS.

If your strategy was complete and correct, professionals who “do” money all day every day for a living would never give you access to “their” money. Yet for some reason they do.

Sarcasm isn’t a substitute for reasoning — comparing an institution’s strategy versus an individual’s strategy is a flawed thought process. If I have a loan to value ratio of 25%, would it be an intelligent decision to pay off the home? If the value of the home is 30% of my overall net worth, would it be a smart move to pay off the home? Big bad bank, right? Don’t be a lemming.

No one has made the point that, in general, the best strategy for any investment return is diversification. One’s home equity is an investment, but concentrating 100% of one’s wealth in that investment may not be a much better idea than leveraging it to the hilt to buy penny stocks. A “black swan” can hit your home equity investment just as it can hit the stock or bond markets.

Also remember that mortgage interest is generally deductible, so for most of us the government is giving us a 25% – 40% (or more in some high-tax states) discount on the interest cost.

One must make some judgments about the near future and then diversify to avoid the worst cases and benefit from the most likely cases. In my estimation, we are currently in a historically low period of interest rates, so a new 15-year mortgage at 4.5% is probably a good deal, provided one can find a place to park the money with an appropriate level of risk to one’s taste.

But treating one’s home as a wholly different kind of investment than any other is a mistake, albeit one that only bites now and then.

You smooth smoothie you. You have figured out that the path to wealth is paved with leveraged assets.

Good thing those rubes down at the bank who HOLD your mortgage are such simpletons. Imagine. If they were as sharp as you, they wouldn’t lend you THEIR money. They’d go for the higher rates of return in the other investments you list and leave you out of the loop.

Instead, they lend their capital to you so that you can go for the gold while they settle for measly mortage interest. Gosh, I don’t know WHY they behave like that, do you?