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When to Pay Off Your Mortgage

My good friend Rob recently paraphrased Warren Buffett as saying, “If he knew where he was going to live for the next decade, he’d buy a house with a long-term mortgage.” Buffett thought a mortgage was a good hedge against inflation, because the homeowner would pay off the mortgage with cheaper dollars down the road.

My own mortgage caused great conflict between the emotional and logical sides of my brain. When I was contemplating paying it off, I spoke with a financial counselor and explained that I was self-employed and my mortgage was my largest monthly payment. I suggested paying it off to eliminate stress. He pooh-poohed that idea, and insisted that I could easily earn more after taxes than the cost of a first mortgage.

I asked if his mortgage was paid off. He looked at me and said, “Oh hell yes!” I was flabbergasted. How could he advise me to do one thing when he’d done the exact opposite? He explained that his wife was from Germany – the old school where you pay your bills and keep out of debt. Were it not for her, he’d gladly have a mortgage.

When my son purchased a new home, I suggested he ask the lender for an amortization schedule, a report showing what portion of each payment will go toward the principal and what portion is interest. He was shocked to realize well over 90% of his payment was going toward interest. It wasn’t until the last five years of his mortgage that the bulk would be applied to the principal. Everyone with a mortgage should pick up – and read – an amortization schedule from the lender so one knows exactly what portion of each monthly house payment actually reduces one’s mortgage.

Paying off your mortgage does change your life. You sleep better, and I imagine my blood pressure dropped ten points. I’ve never met anyone who regretted paying off his mortgage. Once we made the decision, we never looked back.

However, I readily admit that my emotions prevailed in my decision to pay off our mortgage. In an effort to give both sides of the argument, Vedran Vuk, lead analyst for Miller’s Money Forever, has shared his thoughts on when it makes solid financial sense to invest elsewhere and not pay it off. He makes some excellent points…

When Not to Pay Off the Mortgage

By Vedran Vuk

Dennis’ financial counselor gave him standard mortgage advice, but he left out some important factors. If investors can earn a greater after-tax return elsewhere with minimal risk, they should do it rather than paying off their mortgage. Over the last 30 years or so, you could safely expect 10% annual returns on the stock market, and at worst, market crashes were short-lived and stocks recovered in no time.

Unfortunately, we don’t live in that world anymore. Investing is now filled with worry and anxiety. Next year, the market could rise 10%, or it might drop 40% and stay there. Paying off your mortgage is a guaranteed way to save money. Putting money into the stock market is not.

Since the market is still shaky and bonds are paying close to nothing, it makes sense to make a few additional mortgage payments. But suppose the clouds over Europe and the rest of the world economy disappear – then it might be wise to put a little more money into the market.

However, another scenario is much more likely: rising interest rates. If interest rates rise in the next few years, paying off your mortgage would be a mistake. If you can earn 6% or 7% on US Treasuries or AAA-rated corporate bonds, paying off a mortgage locked-in at 3.25% is clearly not a rational decision, because these investments carry minimal risk.

If you can earn a higher return than your mortgage rate with limited risk, don’t pay off your mortgage. But if bond yields are pitiful and market risk doesn’t justify the return, stick to enjoying the emotional comforts of paying down your mortgage.

Whether you’re considering paying off your mortgage or not you’ll want to make sure this works within your retirement plan objectives. Click here to heck out my short letter on how to start your plan or just get a “second opinion” on your current plan.

By: Dennis Miller

Comments

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  2. sunday says:

    The last line above says to " Click here to heck out my short letter on how to start your plan or just get a “second opinion” on your current plan". I clicked, read the info, but was not able to find how I could get a second opinion on my plan from Mr. Miller. If Mr. Miller does really exist, it leads me to believe that he was just a conduit for another angled sales approach by Casey Research.
    I should not have wasted the time to click, read and get confronted with yet another sales pitch.
    I decided to write this response/comment so no one else would fall prey to the same old usual trap.
    I'm sure this pitch will find its way to the Stock Gumshoe list if its not already there.

  3. JP is spot on here. Most readers here at Adams site can make that call, they have the ability to put their money to work in the right place at the right time. That just isn't the case with most Americans.

  4. jp says:

    Wow, this question is right up my ally. I have been in Mortgage Banking for a little over 25 years. In looking at peoples financial postion at all levels I have learned that there are so many diffrent levels and I will just say this. One size doesn't fit all. You cannot say everyone should pay thier mortgage off or everyone should have a mortgage. Some need a mortgage to own a home and others do not need a mortgage at all. A MORTGAGE IS A BAD MAN, KIND OF LIKE A LOAN SHARK! You pay most of the interest up front compounded and your payment doesn't even hit 50/50 until the 22nd year on a 30 year mortgage. This is something you must keep in mind if you think that your going to be in th house for the duration of the mortgage because if mortgage rates are at 3.25% for 30 years you can do better with your money in longer term investment savings like 401k especially if there is a company match. If you don't need a mortgage to own a home and you can put a lot of money in your long term investments then there is no reason at all to have a mortgage and if you want one temporarly then get a Home Equity Line Of Credit (HELOC) and pay simple interest and you can get the rate in the 2's. Many people look at the deduction of mortgage interest for the reason of having one but did you know that only 25% of people who have mortgages deduct the interest on their tax return. Pay the mortgage off as quickly as possible and own your home free and clear. The only way anyone can take your house is if you dont pay taxes so you really don't own it anyway but you will have a sense of security without the added stress of making mortgage payments.

    • Reality Check says:

      I would also like to add one more thing. The mortgage interest you deduct for many people is not 100%. The standard deduction is $11,900. Say you have $7,000 in other deductions like taxes, charitable contributions, etc. You "lose" $4,900 of the interest paid on your mortgage. Make sure you do the math correctly when calculating the tax benefit from your mortgage...you might just realize it's not that great.

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