10 Reasons You Should Never Pay Off Your Mortgage

A mortgage broker I was introduced to recently just sent me this article on 10 Great Reasons to Carry a Big, Long Mortgage by Ric Edelman. Apparently Mr. Edelman is the expert to be quoted on this subject, as I’ve heard his name associated with this idea several times. Here are his ten reasons along with limited excerpts of the original article. My response is included at the end.

Reason #1: Your mortgage doesn’t affect your home’s value.
You’re buying your home because you think it will rise in value over time. Yet, the eventual rise (or fall) in value will occur whether you have a mortgage or not. So go ahead and get a mortgage: Your house’s value will be unaffected.

Reason #2: You’re going to build equity anyway.
Many homeowners try to build equity in their house by paying off the mortgage. But that produces weak results when compared to the equity you?ll build simply by watching the house appreciate in value. So go ahead – keep the mortgage. You’ll build plenty of equity anyway.

Reason #3: A mortgage is cheap money.
[...] You’ll find that mortgages offer you perhaps the cheapest way to borrow. Mortgage loans offer low interest rates because you post the house as collateral: If you fail to repay the loan, the lender sells your house to recoup its money.

Reason #4: Mortgage interest is tax-deductible.
Not only are mortgage loans low in cost, the interest you pay is tax-deductible. You can save as much as 35 cents in taxes for every dollar you pay in interest. That means a 6% mortgage loan really costs as little as 3.9%. Why carry 18% credit cards, paying interest that is not tax-deductible, when you can instead carry a 6% mortgage with interest that is tax-deductible? Your mortgage is probably the cheapest money you can borrow, so it makes sense to get as much of it as you can.

Reason #5: Mortgage interest is tax-favorable.
Assume you have both a 6% mortgage and a 6% profit on your investments. The mortgage is deductible at your top tax bracket, but the investments are taxed as low as 15%. For someone in the 25% tax bracket, that means the mortgage costs them 4.5% while the investment nets them 5.1% after taxes. In other words, tax law makes it beneficial for you to maintain your mortgage.

Reason #6: Mortgage payments get easier over time.
[...] You might be struggling to make your mortgage payment at first, but over time you can expect your payments to become cheaper relative to your income – especially if yours is a fixed-rate loan. That way, your payment never rises, but your income does.

Reason #7: Mortgages let you sell without selling.
In time, you may well find that your home has grown substantially in value, and you may begin to worry that you might lose that equity if there’s a decline in real estate values. You don’t want to sell the house, which is the obvious way you can capture the value, but there is another answer: get a mortgage. By cashing out some of the equity, you essentially collect the value of the house in cash without actually having to sell the house.

Reason #8: Large mortgages let you invest more money more quickly.
Assume you own a house and want to buy a larger home. So you sell your old house and net $300,000. Now you’re ready to purchase a new $500,000 home. How much should you put down? Should you make a 10% down payment of $50,000? Or should you put down the entire $300,000 in proceeds from the sale of the old house?

Big mortgages mean small down payments. Small down payments mean you retain lots of cash that you can then invest.

Reason #9: Long-term mortgages let you create more wealth.
Do you merely want to eliminate your debt, or do you want to truly build wealth? Please realize that the former does not automatically result in the latter. Indeed, many people who are debt-free are also dead broke.

So, the real goal is to create wealth. You do that by adding as much money as you can to your savings and investments. And the best way to do that is to lower your monthly expenses. That’s why long-term loans are better than short-term loans: the longer the term, the lower your monthly payment. And the lower the payment, the more money you have left over that you can place into investments.

Reason #10: Mortgages give you greater liquidity and greater flexibility.
(Long story about Sam and Nick).

My Reaction
I’m not going to refute any of his overall points – they are mostly true but his main problem is that he tends to overgeneralize. Instead, I’ll just say that the basic premise of this argument is actually very simple. Essentially you are trying to perform an arbitrage – you wish to borrow money cheaply (mortgage), and you invest it at a higher rate (stocks), with the difference being your profit. This is very similar to what people do with 0% balance transfers and 5% savings accounts.

However, an important difference is that you don’t know what your investment returns will be, and the arbitrage gap is not definite. Edelman uses in his Sam/Nick story an assumed annual return of 8% after taxes. He doesn’t acknowledge that there is no investment product that Sam can buy that guarantees that (very optimistic) return. In reality, people invest in expensive mutual funds with varying returns, endure tax consequences from frequent trading, or attempt market timing with bad results. The market may return 8%, but the average person might only get 6% after all is said and done. Someone will do worse, others will do better. Of course, most people think they will do better…

As other have put it – If someone walked up to you an offered you a credit card with a 5% APR for life with no cash advance fees or other catches, would you use it to buy stocks? Say you expect 8% investment returns. Does that mean you’d even borrow money at 7.8%? There’s got to be some room for error.

If I had a 5% mortgage rate and had a lot of itemized deductions, I would be pretty comfortable not paying it off early – especially if I had not maxed out my contribution to tax-deferred accounts like 401ks yet. However, if I had a 6.5% mortgage rate and had lost my interest deduction due to the AMT, it would be a much closer call. In that case, I would probably treat paying it off like a bond.

Comments

  1. Let me think about this… I am going to listen to the guy who makes money off of mortgages as to whether I should keep my mortgage. Or I could cut his profits and pay off my house in seven to ten years leaving me with over $1000 per month to invest and enjoy. I don’t know about you guys but those building the mortgage guys work in are much larger than my house. I think I want to keep my money in my pocket.

    • hahah, The Saviing Freak is 100% right. So i’m going to keep my mortgage so that I can save on taxes? Do the math: spend $1,000 to save $350 – you’re still $650 under! This is truly laughable.

  2. One item that always comes up in these discussions is that your mortgage payment never rises over time. True enough, but it seems never to be taken into consideration that all the other costs of owning a house do rise, in particular property taxes but also maintenance. (My furnace guy charges me more every year!) This fact is the main reason that your landlord raises your rent!

    I am beginning to believe that, at least for a single person or a couple without children, it is not advantageous to own a home. As long as you are responsible with your investments, you can easily do as well financially without the hassle of maintenance. In addition, you are freer to move in search of a better-paying job if you don’t have to deal with selling your property.

  3. I find “Reason #7: Mortgages let you sell without selling” just plain stupid. Isn’t that how people end up upside down in their mortgages? Also, taking out another mortgage would just increase your monthly payments. I suppose you could put the equity in stock an pay more each month, but that’s too risky for me. And he also seems to assume that you are carrying credit card balances. Overall, it seems like an oversimplified risk geared at making people who never plan on paying anything off feel better. In my mind, it would make sense to pay your monthly payments at the beginning, taking the tax deduction. But as time goes on, that tax deduction drops as you pay more principal and less interest, you may get hit with the AMT because and your income (hopefully) rises, and your ability to increase your payments increases. At that point, it would make little sense to keep the mortgage.

  4. I don’t believe that Ric Edelman or the mymoneyblog make money off of mortgages (or more particularly – your mortgage) so your point here, Savingsfreak, is somewhat off base. Your post sounds like your entire personal financial management system is based on preventing some assumed “the man” from getting any of your money. I wish you the best of luck (and returns) with that strategy.

  5. Paying off a mortgage, after all other higher interest debts are clear, is an easy way to make a guaranteed return of 6-7%. Its interesting that Mr Edelman also advocates getting out of all mutual funds.

    link

    Edelman says to create more wealth through investments, reason #9. Since he excludes mutual funds does that mean he expects the average joe to leverage his money with a mortgage and become a stock trader?

    The bottom line is that the system wants you to be in debt. As long as you owe someone money, you have no leverage and you will forever be a slave to your job.

  6. Good article. Though I am not sure that having a mortgage really helps that much if you are married. Yes you may be able to itemize some deductions and reduce your taxes, but by a little. For example if you pay $9000 in mortgage, $2K in property taxes, and have other miscellaneous deductions of $3K your total itemized deductions are $14K. If you take standard deduction, for a married couple comes out to $11K ($5.5K x2). So the amount saved is very minimal in taxes ($750-assuming 25%bracket-though usually it works out to be less once you calculate your AGI). And of course his biggest flawed presumption is that Houses always appreciate.

  7. Actually, the #1 reason to never pay off your mortgage is so you can pay more of your money to a bank and the guy who gives you the loan. You know, because we all have too much money laying around and it’s hard to find places to spend it.

  8. There is no tax benefit if you do not itemize.

  9. I have a 5.48% mortgage that is not tax deductible and a savings account paying 6% tax free (I’m in the UK) so I chose to pay more into the savings account than into the mortgage.

    Now I’ve thought about it a bit more I think that since I can afford to pay the mortgage off over the term, and I get the benefit of the house, I’m planning on building up my investments rather than pay off the mortage early. When I get to the stage that my investments are worth more than the mortgage balance, I may decide to pay off the mortgage, particularly if that gives me non-monetary benefits (e.g. allowing me to travel more easily).

  10. P. Lubinsky says:

    So my wife and I have a very similar situation and want to know what you all would do given the current Real Estate Market.

    Purchase Price 463000
    Current Value ~495000 (optimistic)
    Renovated the house for additional 180000
    Mortage Terms 30 year Fixed @ 5.5%

    Maxed out contributions to 401k, IRA (for both us)
    Approximetly 25 years to retirement
    No Bad Debt just minimal 0% Credit Card debt

    So here’s the question…
    Given the fact the that the reak estate market is slow and we need the value of the home to appreciate to 650000 to break even. Do we Prepay our Mortgage in this situation or do we take the money and invest in a Stocks via Brokerage account?

  11. The most important reason why you shouldn’t pay off your mortgage, is chances are your fixed interest rate is probably lower than the current level of inflation. Inflation helps debtors and destroys savers. Uncle sam is the biggest debtor of them all and inflation is his favorite tool. My father bought his house for 80,000 in 1984, its now worth 650,000. The house didn’t increase in value, its the same house, the value of money has decreased in value. And if you really think housing is a great investment just ask someone in Florida.

  12. I don’t know, I always thought the best thing to do is get your house paid off asap and live debt free since it’s such a huge barrier. I’m not too sold I’m sold on this article, i’d like to read more comments.

  13. plonkee has the right idea. The only time you should not pay off any debt is if you can invest the money at a better rate. In my case I have 2 mortgages 1 at 5.625% and 1 at 7.25%. I’m paying tons more in extra principle on the 7.25% mortgage because it’s hard to get an ROI of 7.25% on anything else with very little risk. I do believe I can get better than 5.625% on my money so I don’t pay any extra on that mortgage (and plus it wouldn’t make any sense to pay extra on a 5.625% loan when the 7.25% loan is still out there).

    In short, don’t pay off a mortgage with a relatively low interest rate, pay off a mortgage with a high interest rate.

    And my final thought:

    Don’t get all caught up in tax deductible interest. If you want to lower your taxes by giving away money, give it to charity and not the mortgage company. When it comes to paying off mortgages, too many people get caught up in the tax deduction.

  14. Wow, don’t fall for this trap. Only in the United States.

  15. BuildAndSucceed says:

    I’d rather pay it off early I don’t care what they say… But I don’t want to buy either way.

  16. There was a time when I considered moving around some assets and using the ongoing interest/dividends to pay off the mortgage. However, I decided to forgo the small arbing opportunity and instead pay off the mortgage — I likely gave up some money in returns, but paying off the mortgage was effectively a zero risk investment which nicely balanced my aggressive investments.

    On the flip side, my mother is pondering some of these issues and I’ve advised her to not pay off her mortgage. In her particular case, when everything is considered, keeping her mortgage makes the most sense (and probably refi from 15 yrs back to 30 yrs to address some cashflow and avoid too much equity buildup in a illiquid asset).

    I guess in the end what I dislike about the original article is the “never pay off” and gross generalizations. It’s not that simple and you have to weigh how the decision effects you short, medium and long term financially (including tax issues, cashflow, and equity buildup).

    jeff

  17. One thing to keep in mind is CASH FLOW.
    One’s mortgage can be a benefit, due to the details described above, but if one pays off the mortgage early it will improve their cash flow.
    Furthermore, not all incomes rise over time.
    What happens if one loses their job @ age 45? It is quite difficult to obtain comparable wages @ that age.
    Also, children take quite a toll on one’s income.
    To quote a co-worker, “…between rent, food, utilities, insurance, school, my son’s clothes, and all the other bills, the paycheck from the 15th is exhausted by the 19th….if I’m lucky.”

  18. Robert makes an excellent point there at the end.

    There are SO many things wrong with that article, it’s all I can do not to vomit!

    Points 4, 5, and 7-10 are all !@#$@#%^! (for lack of a better term)

    NEVER……………NEVER……………NEVER give away a dollar just to get 35 cents of it back unless you absolutely HAVE TO!!!

    There you are struggling to make the wisest investment you can by chipping away at fractions of a point of interest and then you find a way to justify giving away 65 cents of every dollar to some dillhole who tries to convince you it’s a “good idea”.

    (Insert obligatory Pulp Fiction, Jules Winnfield-type cuss-fest, here)

    Here’s my one and only rule for mortages………

    Use a mortgage to buy a house……..when you can afford to, pay more to eliminate that debt early. If you want to play any games w/ your mortgage, do it at the tail end (last 5 years or so) when the interest deduction really isn’t doing jack shift for you anymore. Start putting the extra away in whatever investment vehicle you want……SO LONG AS YOU’VE ACCUMULATED ENOUGH LIQUID CASH AVAILABLE TO PAYOFF THE REMAINING MORTAGE AMOUNT AT ANY GIVEN TIME, SHOULD YOU SO CHOOSE!!!

  19. wow, this article sums up all that is wrong in mortgage-land. buy too much house, expect it to appreciate violently, and take out a HELOC whenever the itch for a new Hummer arises. yeesh.

  20. I’m baffled by #7. It sounds like he’s saying “ok, so, prices are high, and they might drop – how do you lock in those gains? take out a loan against your house, and now you have that cash, without even having sold!” But, what happens if you’re right, and the prices do now fall? The value of what you own has still fallen, just, now you have an unsecured loan, such that if you did want to move you wouldn’t even be able to cover the cost of selling? Huh? How could this possibly be a good idea? What am I missing, here?

  21. Hello. Edelman’s list is atrociously bad and most of the advice will make you poorer (but the mortgage brokers richer), as many commenters have identified. Mortgages are not special and follow normal finance rules about debt so the only potential benefit is the leverage/arbitrage but those circumstances are limited and riskier than a debt-payoff, as MMB and many others noted. My Housing Myths series offers detailed rebuttals to many of the list’s points (click name link if interested).

  22. I paid my house off in 5 years instead of 30, I saved over 180K…My house, now, has tripled in value…had I kept my mortgage, my house would have cost me so much more and the profit wouldn’t be so great if I were to sell it.

    That article was painful to read.

  23. Swim Upstream to Wealth says:

    Paying off your mortgage is not just a numbers question. It is also an emotional one.

    If you look just at the numbers, assuming you invest the amount otherwise used for mortgage paydown, having a mortgage makes better sense. But, if you gain peace of mind by paying off your mortgage, then do it. Either way, you are positively improving your financial life. Saving or paying off the mortgage early is a positive.

  24. I think Edelman is exactly right, with two exceptions: if you don’t have enough interest to itemize, or if you aren’t going to be living in your home long enough to ride out any fluctuations in the housing and stock market.

    Most people don’t appreciate that, averaged over several decades, investing in equities is the most conservative choice compared with other investments. By this I mean that over several decades the probability that stocks don’t beat real estate, or other real assets, gets very, very small. On the other hand, averaged over several decades, housing has barely kept up with inflation.

    So the argument that paying down your mortgage is a sure bet, while investing in the stock market is risky, becomes less and less true the longer your time horizon.

  25. diane,

    unless you had a variable rate mortgage or a very high fixed rate (perhaps you bought in the 1980s), your comment makes little sense. You took money that you would have used eventually for your mortgage and simply paid it off early, eliminating the interest expense that would have accumulated over 25 additional years. yes, that is a huge amount of interest. however, if your rate was lower than 7-8% fixed, you likely could have made more than 180,000 by investing that money elsewhere AND offsetting the mortgage interest with a tax deduction.

    everybody argues the same two sides over and over again. its all preference. ask yourself: are you risk adverse or not? do you want to have no debt or do you want to have a lot of other investments besides your home? how old are you and what are your intentions? there is no right answer, but in my opinion, if you are paying down anything under a 6% fixed rate mortgage at present time, you are not maximizing potential return on your money. disregarding any physcological argument you have with that statement, it is the cold hard accurate truth…

  26. Assume you own a house and want to buy a larger home. So you sell your old house and net $300,000. Now you?re ready to purchase a new $500,000 home. How much should you put down? Should you make a 10% down payment of $50,000? Or should you put down the entire $300,000 in proceeds from the sale of the old house?

    I have this running theory that bad questions will only serve to give you useless answers. These are 3 bad questions. None of the questions provide enough information to make any type of informed “non-knee jerk” reaction.

    We need way more information: stage in life, aversion to risk, current income, job stability, potential for job growth, space needs, target “retirement” date, life goals… Clearly this guy’s questions are just useless rhetoric that simply don’t answer enough questions.

    Again, you ask bad questions and you get bad answers.

    As to specific points: #3 is just wrong. A mortgage seems like cheap money, but it’s not. Homes carry a heavy overhead percentage as well. You can’t just say Hey, my mortgage only costs 6%, so I’ll invest at 8%” b/c your house doesn’t just cost 6% that’s just your mortgage.

    Reason #9 is also pretty obvious: more leverage == more possibility for wealth. Duh! clearly there are tons of options for this though.

    Reason #10: mortgages may seem liquid, but they’re not liquid when you need them to be. You could be locked into a shitty housing market and unable to move b/c your house has depreciated and you can’t cover the difference. You could spend oodles of money in the first few years of a mortgage and end up with basically no equity paid down when the job market forces you to move 2 years later.

    The rest of the stuff basically seems like taking additional risk and using the mortgage as leverage. So “get a mortgage b/c it can be easily used to accept even more risk”, seems to be the message here.

    Sounds kind of dangerous.

  27. The easiest way to do this correctly is to treat your mortgage like a bond. Then pick an asset allocation but instead of buying bonds pay off your mortgage.

  28. I read Mr. Edelman’s books and I remember I found them amusing and helpful. Thanks for reminding us about him. I went and got myself in-line for his new book ‘The Lies About Money’ in my local library. LOL.. I was number 12th in-line for this book and the library has about 20 of this books checked out. It looks like people in Miami really want to read his book.

    Personally, I got a 30-year mortgage last year and I am not paying it off… any time soon. It looks like I’ll be in this condo for a long, long, long time.. and I might never finish paying it.. LOL

  29. I think Mr. Edelman simplifies too much. And like the blog author said, it comes down to arbitrage between the mortgage interest rate and the after-tax returns you feel confident in obtaining. I also have a problem with a #7, where he suggests to cash in on the value by taking out the equity loan, maybe I’m missing out on something here since I’m not a mortgage expert, but they way I see it is that you don’t really “gain” anything, you simply enlarge your mortgage when you do that.

  30. This guy is 100% WRONG on reason number 7.

    He suggests that you should take out a mortgage to capture the value if “you begin to worry that you might lose that equity if there?s a decline in real estate values”.

    I’ve got news for you, if the value of your house goes down, your equity in the house is going to decline whether you owe $100 on your house or $100,000,000.

    Further more, if you pull out more equity than your house is worth, you end up paying to sell your house, it’s that simple. Car sales men call this being upside down in your house.

    The only good thing this article mentions is that a mortgage will be the cheapest money you’ll ever borrow.

    -Grant

  31. Ouida Vincent says:

    I just recently read Mr. Edleman’s book. Then donated it to my public library. Mr. Edleman’s advice comes from the experiences of his clients who have greater than half a million in net worth. And their home values are not a significant component of their net worth. After all we all gotta live somewhere, right? Mr. Edleman’s reasoning comes down to one thing, opportunity cost. What opportunities do you give up by having your money tied up in your house. Do you give up savings? Do you give up the opportunity to invest for greater returns? Houses are illiquid. The argument made by many financial planners that you can always just borrow out the equity should you need it just ain’t so.

  32. Grant – student loans are pretty cheap too. Some folks who borrowed while interest rates were low have them locked in at 2-3%… some of that money is just outpacin inflation, some is actually dropping in value…

  33. I bought a house a few years ago that I would be able to pay off early easily with my job at the time, or make the scheduled payments if I hit hard times. At 5.25 apr on the mortgage, I’ve been putting the extra ‘payments’ into high yield savings (FNBO), and recently moved that money to a 5.65 Countrywide CD.

    If the feds keep cutting the rates to the point that I can’t guarantee a better return than my mortgage, I probably will put that money on the mortgage. On the other hand, I’ll also try to wait it out for a short time, just in case Greenspan is right about double-digit rates in the near future.

  34. I think he makes a few interesting statements, but none that would sway me to his beliefs. He makes a lot of assumptions that are just that – assumptions.

    He assumes people have the discipline to invest, he assumes they will earn 8% after taxes, he assumes mortgage interest deductions are applicable to everyone’s tax situation, etc.

    In my opinion, paying off the mortgage early is ore beneficial because it gives you options you wouldn’t otherwise have. A coworker just paid his mortgage off; now his wife is a stay at home mom because they do not need 2 incomes. That is worth much more that a potential tax deduction and a debt hanging on your shoulders for life.

    Nice debate in the comments. :)

  35. Imagine my surprise upon seeing the headline to this story…two days after I made the final house payment! You might say I should not have paid it off what with a 4.875% 15 year loan, but I when I first bought 10 years ago…I had two roomates, and doubled up the payments every month (plus some)…then after I got married, we were DINKs for 5 years. Combo that with a bit of inheritance, and I’m all paid off! Now…what will i do with that extra $1500 per month…tough decision.

  36. Cash is king… If I can get a great rate, sign me up for as big a mortgage as I can get.

    Mortgages are for about 30 years. Interest rates are near 30 year lows. I like that math.

    Heck, I dug up an old interest rate sliding chart (that computed amortization payments) from the 80′s and the lowest rate it had was 7.5%!

    While the “arbitrage” may be low now, there are guaranteed rates of returns that are pretty darn close in things like Short Term Government bonds… In the future, the arbitrage rate may be much greater, even for investments at the future risk free rate. Rates can’t go down much, but there is a lot of potential for them to go up!

  37. Diane, I’m glad to hear you did so well, but don’t confuse price appreciation with what is being discussed. As you stated:

    “I paid my house off in 5 years instead of 30, I saved over 180K?My house, now, has tripled in value?had I kept my mortgage, my house would have cost me so much more and the profit wouldn?t be so great if I were to sell it.”

    The income you made was because the house tripled in value, not because you paid off the loan early. If housing prices go up, leverage actually helps you, it doesn’t hurt you.

    As a simple example, putting 10% down on a $100K house that then triples in value gives you a real return of 20x ($200K profit on an investment of $10K)

    If you had bought that house outright, (paying off the $100K in the first year as an extreme example) you would have made 2x your money. ($200K profit on an investment of $100K).

    I will take a 20x return over a 2x return any day and twice on Sundays!

    The decision to pay off your loan early has EVERYTHING to do with the rate you are paying. Without mentioning what that was in your example, it is difficult to say if paying off your loan was a good financial move or a foolish one.

    And to the person who said Rid Edelman makes money off mortgages so he is giving false info, I would counter that he probably makes a lot more money from his books by giving relatively good advice.

    If you pick the five most relevant bullet points above, it is a much stronger argument… He is reaching on a few of them.

  38. In my opinion, paying off the mortgage early is ore beneficial because it gives you options you wouldn?t otherwise have. A coworker just paid his mortgage off; now his wife is a stay at home mom because they do not need 2 incomes. That is worth much more that a potential tax deduction and a debt hanging on your shoulders for life.

    Hey Patrick, talk about assumptions. I mean, unless their mortgage was really prohibitive, couldn’t they have just invested instead of paid down? They could have used interest from the investments to help supplement the second income.

    But you are right about his incorrect assumptions.

    I made a long post on this here, when we talked about paying down the mortgage early. Here’s a key point: the “effective interest” of the mortgage is not what you’re paying.

    Take out 100k at 10% for 10 years and here’s what your actual interest looks like:

    So in one direction, you’re actually paying less on your loan, however, in the other direction, you still need to maintain your home. That means repairs and property taxes and utility bills, which are not insignificant.

    So Edelman’s model is simple: put money where it will be the most effective. But his math is poor, which doesn’t instill confidence.

  39. Scott Armstrong says:

    Gates VP: You have to pay utilities and property taxes and repairs and upkeep whether or not you pay down your mortgage or not. So that has nothing to do with discussions of effective interest rate / arbitrage issues.

  40. I believe it is the mortgage broker who recommended Edelman’s book to Jonathan who stands rightfully accused of making money off of mortgages. Although it would be surprising if Edelman does not also profit in some way, aside from sales of this book.

  41. It seems that it’s really more about opportunity cost. If the homeowner was very disciplined and could keep to his goal of investing the difference at a better rate, then on paper it all works out for the better.

    The cold reality, and to validate what I’m saying, all you need to do is read all the latest articles about the average debt ridden American, is that people are pulling the money out of their houses and spending it on crap. Many, MANY of the people taking out large home equity loans are just giving in to their desires to consume, consume, consume.

    So, it’s almost like you could write that article in two ways. One for the rare disciplined homeowner that would use the arbritrage to their advantage, and the other for the rest of the people in the country that spend more than they earn and are sucking the equity out of their houses to maintain a std of living. In the latter case, they absolutely should leave their home equity alone and just pay it down.

  42. Mortgage interest deduction is highly overrated, IMO. Did he say 35% or something? My experience (in roughly a 28% tax bracket) is that we make back about 15% of the interest, all things considered, because the standard deduction would have brought in a decent amount if we hadn’t iteminzed.

    But, taking all the emotion out of this discussion, I’d still keep the mortgage. I’m sure paying off your house feels nice, but having an equal amount of money earning interest in an account is the same thing more or less. You can compare your precise situation, but generally, if you have a low mortgage rate (a good rate) it should compare pretty evenly with a good savings rate minus the interest deduction.

    Having a mortgage isn’t wonderful, but it’s just another number to keep track of — the meaning is all in the way you you feel about it. When you think of the taxes and utilities and every other thing you pay for a house, you never “own” it free and clear. It’s always going to cost you something monthly.

    But in the interest of simplicity, if I were to come into an amount equal to my mortgage, I would probably pay it off just so I wouldn’t have to remember to pay it every month. Convenience is King!

  43. You can’t put a price on the peace of mind of paying off your mortgage and living debt free.

  44. Independent George says:

    Oh boy, nothing gets the blood pumping like another pay/don’t pay debate on mortgages…

    I’m definitely in the ‘don’t pay’ camp; I think that that the ‘pay now’ camp misunderstands us on a few points:

    1. Those of us on the non-payment side aren’t talking about using the mortgage debt to buy a new hummer; we’re talking about using it for investment capital. Obviously, it depends on your interest rates, but a 10% annual return in a total market index fund off of what amounts to a 6% loan is a 4% net yield.

    2. The main thing here is risk tolerance and discipline; obviously, the 10% return is not guaranteed. However, if we’re talking about a 30-year mortgage, we’re also talking about a 30-year investment time horizon, where the 10% return holds up pretty well. If you expecting to sell in 5 years, are not willing to risk your money on the market, or can’t trust yourself to invest the money instead of spending it, then the equation clearly changes in favor of less debt. If none of those things applies, though (and, for this blog’s self-selected readers, I suspect that they don’t), the mortgage essentially amounts to cheap investment capital.

    3. Paying off the mortgage early actually makes you less secure, not more. Suppose you have $50k in savings, and $50k left in mortgage debt. If you pay off the mortgage early, you’ve now essentially tied up all your assets in the house, and have $0 in liquid assets. It’s true you no longer have to make payments, but if you lose your job, you still have to eat, and you can’t buy food with your house. If you don’t pay it off, your bills are higher, but you also have liquidity to pay them while you look for a new job. It essentially takes the same risk, and spreads it out over a longer time horizon.

  45. He sure makes a lot of assumptions in his article… never-ending home price appreciation, tax-deductible interest, “cashing out” the money and investing and earning higher returns (instead of possibly earning lower returns, or spending the money rather than investing it), and the fact that your income will always increase (what if you lose your job?)… he might as well just tell evertone to go interest only!

    Never-ending appreciation is no guarantee… just ask Japan.

  46. paying off the mortgage means you don’t pay any more interest. So the interest is tax deductable, WOW!! If I can get to a place whare i DON’T pay interest, that’s less that I have to pay out in the first place.

    Given the choice of paying $100,000 for a house or $300,000 for the same house (which is what I pay with my current mortgage), I’d choose $100,000 if possible.

  47. agree that low-interest mortgage is like bond.

    my mortgage rate is 5.25%, and i dont take advantage of any mortgage interest deduction at all (house not in the hot cities)…

    so, i’m using the $ to invest in stocks, so far i’m making an annualized return of 15% in the last few years for my retirement portfoios (diversified) and an annualized return of 100% for my taxable portfolio (emerging market).

  48. Maury,
    I read Diane’s comments to mean that she saved $180K in interest charges by paying off early- not price appreciation.

    Personally, I’m looking forward to being mortgage free.

  49. Reason no 8 is the dumbest one !!! :(

    Yes, you can buy property with very little or no deposit, but of course you are going to have to pay more per month for the mortgage, and in the end you’ll end up paying more interest as well !!

  50. Wow!!

    So your emerging market portfolio started w/ a zero balance & w/o any of your money has netted pure profit?? How many dollars???

    (yes, sarcasm intended)

    ;)

  51. I think these points are really valid. I probably draw the line at never paying off my mortgage. (Odds are we’ll pay it off in our 40s). BUT the thing I will never get is the whole paid off house/peace of mind thing. Granted living in a very pricey area my perspective is VERY different (for one: buying has always been much cheaper than renting here – all costs considered). But I don’t find anything warm and fuzzy about being rather illiquid and having a paid off $500k home. Eeks! Reason #10 rings much truer with me:

    “Reason #10: Mortgages give you greater liquidity and greater flexibility.”

    This is extra true in an area where both rents and housing costs are VERY high. I just feel much more warm and fuzzy having plenty of cash and investments for a rainy day, rather than no mortgage.

    I’ve also always been very keenly aware of Reason #6: Mortgage payments get easier over time. This has been extra true for us as the same mortgage has gone down over time as we refied to lower and lower fixed interest rates. Our mortgage is already small beans compared to rents in the entire state and we have only been homeowners for 8 years. How will it feel in a decade? (This is something else that rings extra true in a high COL area. Rents rise much more rapidly than property taxes or housing maintenance here).

    I see many of his points and find them to be a good reasons not prepay a dime on our mortgage today. But I think it really depends. It helps to be young, low interest rates, have significant equity, tax-sheltered investment opportunities galore, and so on. If we were older and the alternative was taxable investments, I am not sure I Would be so keen to hang on to a mortgage. Nor would I sleep well if I had less than 20% equity (to ride out market fluctuations). Which is why in our 40s with the only alternative being taxable investments, I expect we’ll pay off our mortgage. By that point in time it probably matters little much route we take. Our investment horizon will be singificant less, our mortgage loan significantly smaller, our tax benefits gone, etc. Could probably flip a coin at that point. & then might as well pay the sucker off…

    I am not a risk taker at all and I find this to be the safest route. I think risk takers probably would fare much better to keep their mortgage. I am sure odds are they come out ahead. But they do take on risks as well.

  52. plonkee, how about once you have enough to pay off your mortgage, then instead of paying it off in one lump sum, you just use that money to pay your mortgage payments. Then you have still freed up other money, but you also still have your other money earning higher returns (probably, over the long term, etc.) and it?s still available in case something else comes up that you want more than a paid-off house (without any more closing costs, etc.).

    P. Lubinsky, your purchase price and renovation costs are sunk costs. And the future value of your house is irrelevant until you sell. You are right, if you sell now, you?re upside down.

    What you should focus on now is how to earn the best returns, financial and/or psychological. If you think you can earn more with a brokerage account than you could save by paying off the mortgage, you might want to do that. If you think you will feel a lot better once the amount you owe gets lower than the value of the house, you might want to focus on pre-paying your mortgage. If you can?t decide, you can do some of each.

    Three of these don?t really apply to me.

    From #1: ?You?re buying your home because you think it will rise in value over time.? No, I?m buying it because I want to own it. One day it will be paid off. And already I have more freedom in making the space my own than I would with a rented unit.

    #4: Mortgage interest is tax-deductable ? not really; I have a small mortgage. It only pays to itemize because I also have charitable contributions.

    #7: Mortgages let you sell without selling. Maybe so, but you?re selling it to yourself, so then you have to pay yourself back, only all the interest goes to a bank. And every time you refinance, you have to pay closing costs, which makes the total cost of the loan higher than the rate.

  53. Here’s the advice I took. The article is dated but the concept is still good! This is certainly thinking outside the box. And yes, I paid my mortgage off based on this 1999 article.Enjoy!

    link

  54. OK, here’s the thing: math doesn’t lie. Given that, IMO there is no debate beyond the following two facts: can you make more in equities with relative certainty given the time frame of your investment, and what are your psychological preferences.

    1. Taking into account all tax deductions, calculate the effective rate of interest you pay on your mortgage. Then, depending on your time frame, choose an appropriate course of action:

    a) If you’re in for the long term, compare your rate of interest with the average return on equities over the past 50 or so years. If you can earn a greater after tax return on equity investments (assuming investment in a taxable account), then you should invest in equities. Sure, you pay more in interest, but the difference between the return on investment of the equities and your home is positive meaning you acquire money more quickly than you pay down your home. This keeps you relatively liquid and flexible.

    b) If you’re in it for, say, 10-15 years and your effective interest rate falls within 1.5 standard deviations of the average equity return or so, then maybe pursue a mixed strategy, ie put some in equities and some in “bonds” where your “bond” is your home mortgage. You will more than likely do better than strictly paying down your home due to superior returns on equities, but if the market has a protracted stagnation, then you have hedged by being a bit more conservative. This has the upside of maintaining some liquidity and flexibility while providing a hedge against a down market.

    c) If you’re in for 5-10 years (or fewer) and your effective rate of interest is within 1 standard deviation of the average annual return of equities, then you are probably better off putting most of your excess cash into your home while still reserving a little, say 30-40%, for the sake of liquidity and flexibility. This way you have a mush safer and certain return in the short term to hedge against a down market.

    In general, basic investment advice applies – if you’re in for the long term, go for a higher return with more risk, otherwise, take a somewhat lower return in exchange for greater certainty.

    2. The psychological factor. If you are the type that loses sleep at night over having debt, or you are a compulsive spender that will burn all your excess money on junk rather than investing it, then certainly paying down the house is worth the increase in your psychological standard of living. I would NEVER question someone paying down the mortgage for this reason. However, it is important to realize that, while it may be the correct psychological decision, it is unlikely to be the correct mathematical decision.

  55. I must say I agree with the notion of not prepaying the mortgage, although some of the reasons are silly.

    I will never ever ever pay off my mortgage, nor will I ever put more than the minimal down payment on one.

    The two main reasons are that the 5.75% rate I have pre-tax is SUPER and my $2,000 mortgage payment that I currently have will only really cost me 1,000 towards the end of my mortgage.

  56. pay it down when in doubt says:

    aditya above early on pointed this out perfectly

    ‘There is no tax benefit if you do not itemize’

    Above is Mortgage Broker Shill #1

    And here is a latter post

    ‘Can you make more in equities with relative certainty given the time frame of your investment, and what are your psychological preferences.’

    …lot of what ifs there.

    My point, there is no right or wrong. My vote is there is no wrong in payin down a mortgage. Keep it simple.

  57. pay it down when in doubt says:

    ‘Mortgage interest deduction is highly overrated, IMO. ‘

    Agreed.

    Mortgage shill. Has been and always be.

  58. pay it down when in doubt says:

    Paul Says:

    October 29th, 2007 at 7:40 am
    You can?t put a price on the peace of mind of paying off your mortgage and living debt free.

    I’ve seen this too. This Dave Ramsey approach too life is an excellent default financially. Stick with it. Get-R-Done. However, most with kids, house, moving jobs, etc. its as simple and worthless as the average potato.

    …crap, I like Larry the Cable guy, my bad in context : (

  59. pay it down when in doubt says:

    ‘aa Says:

    October 29th, 2007 at 9:17 am

    so, i?m using the $ to invest in stocks, so far i?m making an annualized return of 15% in the last few years for my retirement portfoios (diversified) and an annualized return of 100% for my taxable portfolio (emerging market).’

    Wonderfull. ;/

    Consider selling low versus high. Or better yet some less gloating AA strategy for long term sustainable cough* ‘retirement’ plan, as you put it. Keep buying EM, it will continue.

  60. In the even of my death, I have instructed my wife to take part of my life insurance and pay off the house. Why? Because regardless of the economy, the stock market, world events…etc., she’ll always have a roof over her head.

    I used to come down on the other side of this debate, but as a person who has a lot of his money tied up in the stock market, I think that the security that owning your own home brings is an important hedge against a potential world or national financial crisis.

  61. Aw, c’mon. It’s a “devil’s advocate” piece, right?

    Gimme a break!

    The tax kickback is negligible unless you own a zillion-dollar house. For working poor and middle-class homeowners (interesting how those two categories seem to be converging, eh?), it’s almost irrelevant.

    “Reason #1: Your mortgage doesn?t affect your home?s value.” Huh? What’s this guy sniffing?

    I took out a $25,000 mortgage on my paid-off house to finance renovations on another house my son & I copurchased as an investment. If tomorrow I sell my house for, say, $325,000, the amount that goes into my pocket is $300,000. This doesn’t affect my home’s value? I can’t buy a comparable house for $300,000, not in this part of the country. If I move to a cheaper area, I might buy something more or less comparable for that amount, but lo! there’s 25 grand I don’t have to invest in mutual funds. How exactly does this NOT affect my home’s value?

    Can this guy not spell “cash flow”?

    Lordie! My breath having been taken away, I will refrain from yakking further.

  62. nonymouse says:

    Maury, u must have failed high school math.

    if u put only $10,000 on a $100k house and the house becomes 200k, u dont make $200K (20X). you still owe money to the bank. Probably more than $100K (meaning ur profit is less than $100K)

    If u paid of ur house at $100K and house becomes $200K, u make $100K (give or take)

  63. nonymouse says:

    maury, would u rather give a bank $1 and they u back $10 in 5 years (10x) OR u give $100K and get back $900K (9X)

    I guess u might still go for the 10X.

  64. Al,
    That’s a great link.

    And after writing down my top 5 values in a recent excercise, I realized that FAMILY and SECURITY were numbers 1 and 2 on my list. This means getting rid of my mortgage is in line with my values, which means it’s the right choice for me. If becoming a millionaire is more important than your family’s security, then minimum mortgage payments are for you! Invest away! ;)

  65. Large Talons says:

    Obviously always a heated point of contention. I agree with Jon that it all really comes down to an arbitrage. To say one answer is always the best is just simply not true. A home is most peoples single largest investment they will ever make, and historically, it is a rather good one. You need a place to live, so you’re either going to pay rent one one hand or interest, taxes, insurance, and upkeep on the other. Looking back long term at real estate, you can see about a 3-5% return. This is somewhat misleading though, because the rules for home ownership as well as world events across the last 100 years have changed dramatically the potential for investment return. Therefore, its impossible to determine what rate of return to expect on the home itself. You must then concentrate on the mortgage rate vs. the value of the money being borrowed. IMO, the best mortgage to get for most people would be a 15 year fixed rate with 20% down. This will be pretty much the cheapest rate you can get on ANY loan EVER (besides federally subsidized student loans, mine being 2.5% fixed). The 20% down will mean that your not wasting money on PMI, and will also get you a low rate. I wouldn’t be putting any extra money towards this mortgage until you have the following:

    1) At least a high deductible medical insurance.
    2) Emergency fund with 6 months of expenses.
    3) Long term disability insurance @ 60-80% of your salary.
    4) Term life insurance on each spouse (if married) @ 10 X their salary.
    2) 401K contribution up to the employers match.
    3) Max out a ROTH IRA.
    4) Max out your Traditional IRA.

    Once these goals are fulfilled, then I would say its up to the individual to consider the risk/reward of paying off the mortgage vs. investing based on the expected arbitrage.

  66. Large Talons says:

    As a follow up, home ownership is often viewed as a hedge against inflation. Your home’s value will not actually increase over the long term, the price will generally match the rate of inflation over a lifetime. Of course, in the short term your return will fluctuate depending on market forces at the time of buying/selling. Since you have such a large hedge against inflation in your home, most people would benefit from using a mortgage to divest your hedge into the stock market. I believe that 20-50% of your homes value could do much better if dropped into an indexed ETF or mutual fund over at least 5 years. Again, this all depends on your arbitrage taking into account tax advantages, as I would think it’s generally safe to assume a 7-12% return on such an investment over at least 5 years.

  67. MobileDeveloper says:

    Good discussion !

    My take is .. when in doubt sell/buy half. There are obviuosly reasons for both arguments, pay or not-to-prepay; unlike an 401K where there is no doubt that one MUST contribute ; for this topic there are people on both sides of the fence and each side says “Their side is greener ! ”

    I am paying additional $500 for Mortgage; but at the same time puting $1800 into Mutual funds / month, I can pay more for the Mortgage (but also like to keep some liquid cash) ; that way I know after one yr my priciple will be down by 6k and if the stock market does good, I might make some there as well. So not sure what is best, no crystal ball here ; but trying to do a little of all.

  68. MobileDeveloper says:

    Anyway for the number crunching guys, check out the pre-pay vs investment calc:

    http://www.mortgagecalc.com/pr.....invest.php

  69. I remember this story. Before the subprime meltdown there were several “mortgage planning” companies that were citing it as a reason to refi to an interest only or option arm loan and invest the difference with them via annuities that they sold.

    The article was interesting, but I thought the strategy was better suited for someone with a lot of liquid cash and a high income as opposed to someone of modest means like myself. Looks like I was right.

  70. Whether to devote all resources to paying down your mortgage vs. investment / HELOC equity pull-out seems to fall into the “what is your personal RISK/REWARD tolerance?” Balanced investing / debt / cash flow management / savings to handle unexpected expenses all need to be weighed rather than absolutes – Never pay off / Never invest in gold / never buy mutual funds / … don’t we each need to find the balance which suits our financial situation. I find Top Ten reasons for doing anything helpful but as can be seen in the comments above – no one approach is universal.

  71. Maury, u must have failed high school math.

    if u put only $10,000 on a $100k house and the house becomes 200k, u dont make $200K (20X). you still owe money to the bank. Probably more than $100K (meaning ur profit is less than $100K)

    If u paid of ur house at $100K and house becomes $200K, u make $100K (give or take)

    nonymouse, u must have failed reading? Maury said a $100k house that “tripled” in value to $300k, not $200k.

  72. Money Monkey says:

    “Indeed, many people who are debt-free are also dead broke.” Nice sweeping generalization, and totally daft.

  73. #1 may be true unless you flip flop on your mortgage and get to the point where you have negative equity, a common occurrence now as home prices start to fall. Sure you may build equity in the future, but it may be too late.

    Paying down your mortgage can actually lower your loan-to-value which will entitle you to a lower interest rate if you choose to refinance. It will also enable you to refinance assuming you didn’t have a enough equity to do so prior, and open the door to a wider array of loan programs.

  74. Everybody I know who has bought a house in Phoenix in the last two years is now underwater with their mortgages. Edelman’s advice doesn’t work in a down market when you need to move!

    Click my name for a nice graphical chart depicting what’s happening to recent followers of Edelman’s advice in Phoenix.

  75. One point that no one raised (at least from my skimming of the above posts) is that possibly banks will be less likely to foreclose on a house that is completely mortgaged (ie- all of the equity is cashed out). I have heard this suggested, and don’t know if it’s true, but it makes sense if you think about it. If I have a 300k house and have not payed down the principle, the bank will be more willing to work with me, because otherwise they have to foreclose and then try to sell my house in a flooded market. They lose money. But if I have diligently paid in extra every month, and now I only owe 150k on the house, I think they will be more than happy to keep that 150k that I’ve paid them and also take the house and try to sell it. Even if they sell at a bargain, they still made good money. Not at all suggesting anyone default on their loan, but if something happened and you were in hot water, I suppose it would be a decent bargaining chip.

    One other point is that invested money can potentially be much more liquid than money paid into the house. If I pay double every month but then I lose my job and my emergency fund starts to dry up, I can’t call up the bank and say “Look guys, I’ve made double payments every month for years. Can’t you just cut me a break?” That won’t fly.

    Of course, finding the risk free, liquid investment that provides arbitrage is tough. And the emotional factor is the ultimate deciding factor. One of my coworkers can’t bring herself to do 0% BT arbitrage because of the negative feeling of “being in debt”. In the end you have to be comfortable with your financial strategies.

  76. You mean to tell me that its better to give the bank an extra $100-$200k in interest over the life of a mortgage versus paying extra and reducing the life of the loan by 7 to 15years thus allowing you to give yourself an extra $1000+ per month back into your pocket? Wouldnt you be better off not having to worry about paying “rent” to a bank for money to the tune of up to 3 times the amount you borrowed over the life of the loan, and actually OWN the home and place the amount of the mortgage back into your account every month… just to get a few hundred dollars back every year from a tax return?? this is the same logic as someone who just gives up and states that you will always have a car payment… with cars lasting as long as they do, its better to buy a car 2-4 years old and driving it until the wheels fall off, for a toyota corola that cost me $2k 4 years ago and still runs strong after having 200k miles, while doing no more than spending $400 in tires, oil changes and a battery, having no car payment and a good reliable car and saving $300 per month over 4-5 years … $18k versus $2k is a difference of 16k that I didnt spend…. paying off a mortgage 10 years early with a payment of $1k per month would give a return of having $120k in your pocket!! (if you saved the $1000 per month for 10 years, not including any interest earned) Logic like what the author is stating is what keeps people under the banks with a gun in your mouth, just waiting for you to loose your job or have a medical emergency to disrupt your income and then take your house after 3 months?? trust me, the banks are not your friends, and believe me they will not be too concerned about helping you out much should this situation occur… owning is always better than renting money from a bank!! Im sure most people would rather spend 2 months of a mortgage payment on a vacation, home improvement, and have the other 10 months in a savings account or investment, rather than paying rent on a $150k mortgage…

  77. southcampus says:

    I too would like to pay off my mortgage regardless of what the tax incentives are. Nothing beats being debt free. I want the money off my bag.

  78. If you were lucky and/or smart, what you could have done during the height of the easier mortgages is lock yourself into a low rate forever. I was able to find a mortgage of 5.4% locked for 25 years! At that rate, there’s no chance I’ll ever pay any mortgage off completely. Just looking at inflation, the difference is negligible. And that’s not even counting what I can do with the money in the meantime!

  79. The average person knows that the only way to even have a shot at retirement is to pay off your house.
    My house is now paid off and yeah, I’d much rather go back to a time when I lived from paycheck to paycheck (insert eye roll). Now I never worry about money and can retire when I want.
    It is always brokers and professionals who think you should never pay off a home loan. Of course, these people want your money whether to invest or have a mortagage so THEY can make money.

  80. Tammy: The average person knows that the only way to even have a shot at retirement is to pay off your house.

    This comment has so many things wrong with it, I don’t where to start.

    Clearly, not owning a house in the first place seems like a good cost-saving measure to help fund a retirement (unless you live in one of those rare places where renting is significantly more expensive). You know that whole “rent and save the difference” deal.

    Also, the “average person” has a family, so unless they sell the house before retirement, they’re going to retire in a home that’s far too big for them. If you’re already an empty-nester, then quickly paying down an over-sized house is definitely not the answer. Sell the house to pay off the mortgage and move in to a lower-cost rental suite and then invest the difference. You’re planning on living off of retirement money, might as well get that money.

    I could attack your comment from 3 or 4 other angles, but that’s clearly pointless.

  81. Jerad Gardner says:

    I understand the criticisms and the risks of not paying off a mortgage. But really, guys, it’s simple math. If you can safely invest/save the extra money instead of paying down the principle AND earn a overall return on investment greater than the interest you pay on the mortgage, then it makes financial sense to not pay. It’s arbitrage. Of course, if you don’t have the discipline, don’t do it (and steer clear of the 0% balance transfer game). I think Tammy is right that banks LOVE having people pay forever, whether the debtor is making money or not doesn’t matter to them…they ARE making money either way. And again, the emotional factor is very important. Overall, I think most people will have a pretty hard time finding an investment that (with all tax considerations accounted for) will SAFELY cause an overall INCREASE in net worth. But my APR is locked at 5%. When FNBO was paying 6%, it would have made sense to save extra rather than pay the mortgage down. When the numbers add up, vague statements about how it’s next to impossible to retire without paying off a house don’t make too much sense to me.

  82. Pretty simple in that when you retire your income is cut in half and you may have to pay your medical insurance. Getting rid of monthly mortgage debt makes the outlook much sweeter.

  83. I’d rather pay myself than pay interest to the bank for 30 years! That’s why I paid-off my mortgage early, and used the payment I would have been making to the bank for MY benefit…
    Add your payments (principal and interest) over the life of the loan and see what your house really cost; then see if you have made any equity!

  84. Let me see if I have this right…I can pay off my house and have no money but my house is paid free and clear..Great!..now I have a big pile of bricks and mortar that I can live in and say “look at me, I live in a house that I own”…or, I can get a mortgage, take a big pile of CASH and stick it in the bank (mutual funds, stocks, bonds, football bets, whatever) and STILL live in the house….hmmm…maybe I’m just GREEDY, but I think I’ll take the house AND the cash…besides, I’ve always been told that you never buy a house because you need a place to live..that’s what they have apartments for..C’mon, guys, this is a simple one…you ALWAYS keep back a mortgage, as long as the capital is put to work earning more money and not blown on Hummers and hookers…(redundant).

  85. Steve 1/16/08…you are on the right path!

    While I don’t agree with all of Edelman’s advice, in general I agree with him that many people are WAY too uptight about “paying off the mortgage.”

    I know people, just as some who’ve posted here, who love to brag about all the EXTRA money they pay towards principal on the mortgage. My question: WHY, WHY, WHY!?? You GAIN NOTHING, except an OPPORTUNITY COST.

    I love asking them, “so what will you do if you get in a bind from an injury, job loss, etc. that keeps you from paying your monthly payment?” Now, some of you are going to yell, “Tap my emergency fund.” Okay, now let’s be realistic, okay? Anyone who lives in the real world knows that in CA, it’s not all that easy to build up a fund more than 2-3 months worth…IF THAT. I love when you yokels from the South or Midwest where a home costs $95K yell about your damn emergency fund. Good, great for you…now come do it in CA.

    Anyway, some people answer they’ll tap their equity from the HELOC they opened. Yeah, okay, plausible…but then you still have to repay that, with interest. Then the people who never even thought about a HELOC, say “then now I’d open one (HELOC).” Well, did you forget you’re injured? Almost any secured loan is not REALLY secured by the underlying asset…it’s secured by YOUR ABILITY TO REPAY. No job or ability to repay, NO HELOC!! So you paid all this extra principal, and now you’re in a position where you are willing to PAY INTEREST TO GET BACK THE MONEY YOU VOLUNTARILY GAVE UP!!

    And want things to get really nasty? What if you’re like some people I know right now, who bought within the past few years, and due to DEPRECIATION they have NO EQUITY. Oh great, you made extra payments, so now your negative equity is slightly less.

    So now, wouldn’t it have been better to put that money to work ELSEWHERE? Hell, I don’t care if you considered the stock market too risky and put the money in a simple savings account. If you did that with a bank like Emigrant Direct or ING, you would’ve at least been making 4%-5%, even higher when rates were up the past couple yrs.

    So while you “pay more” people like to crow about the “guaranteed return = to rate on mortgage” on the extra payments, that doesn’t do you a damn bit of good when things go south. Thanks, I’ll settle for a slightly less return on a safe and LIQUID “investment.” Oh, and when I NEED that money, I don’t have to QUALIFY and PAY INTEREST to get back MY MONEY.

    Sheesh.

  86. Steve… I like your “big pile of cash” concept. “I can get a mortgage, take a big pile of CASH and stick it in the bank (mutual funds, stocks, bonds, football bets, whatever) and STILL live in the house… I think I’ll take the house AND the cash”.

    And you will get this big pile of cash by paying a big, fat mortgage each month? Where does the big pile of cash come from to invest? Maybe the bank loans you investment money. I like it.

  87. As a matter of fact, yes, the bank DOES loan me investment money…that is exactly what I’m taking about…If I have a choice of owning a house free and clear or having a mortgage and a pile of cash to invest, I will choose the latter option everytime…now, if I need money to borrow just to buy the house in the first place, that’s a whole different story…I’m taking about people who are trying to make the decision of paying off or not…let me put it another way…let’s just say I have a house that I owe $250,000 on and I have that amount on hand and can pay off the house…I would NOT pay off the house, rather I would continue making the monthly payments, whatever that is (a couple of grand or so per month) and invest my $250,000 in other smart, well advised investment vehicles…my $250,000 should earn enough to pay the mortgage and put some profit back into the mix…does that make sense to you now?? Of course if you can’t afford to do that, maybe you should consider just renting..I don’t mean that as a put down–I mean that is a very viable option for some people..alot of folks buy houses for the wrong reasons when renting makes more sense…like older retirees..renting is smart for them..or young people starting careers…but think of someone who has been in their home for 20 years and they are getting ready to make the last monthly payment…it might be better for them to refinance, get a “big pile of cash” and INVEST IT!

  88. hey look here….In response too this article and the idea of not owning my home without the bank holding the deed hostage, In words of a great woman named Flo….. KISS MY GRITS! I have til April 2009 my home mortage will be paid off. I am not going to let bankers and investors get rich off of me anymore than I have too. That is my way of getting in control of what I work hard for and I am getting too old to continue playing their game of monopoly.

  89. Wow, in less than one hundred words you managed to totally expose yourself as the financial moron that you are. Just being able to formulate a sentence that says “I am not going to let bankers and investors get rich off of me anymore than I have too (sic)” shows me just what kind of individual you are. Let me give it a try and you tell me how close I am:
    1. You work at “the mill”, “the plant”, or “the shop” for an hourly wage and you really aren’t doing all that well.
    2. You don’t have very much formal education.
    3. You live within a fifty mile radius or so of where you were born, and you haven’t traveled very much at all, unless you count military service or you are an over-the-road trucker, in which case you are NEVER home so why bother.
    3. You actually believe that by making an unsound financial decision and being less successful than you could be will somehow “spite” those lousy “investors” and put you in control..hmmm..good thinking!
    4. You really think life is a zero sum game like Monopoly where there are winners and losers instead of realizing that everyone can be a winner. You think like a democrat. You believe that equality is everyone being at a low level instead of thinking like a Republican and a capitalist and going out and being an active participant in your own success.
    5. You are old and you have lost, as you state yourself in your closing sentence, yet you think that people that get it and know how to use the system to become financially independent are somehow “evil”.

    So, how close am I? I’m sure I’ve pissed off a few of you out there. But thats okay..you just continue working until your dead, and hope for a little social security someday when you are about 90 or you can get going financially and get smart. Heck, I haven’t even turned fifty yet and I’m already retired. You use phrases like “work hard” and “getting too old”…and I’m planning my next cruise…you tell me now who is doing it right!

  90. i think everyone has made some interesting points but we all need to keep in mind that this is very case-specific.

    case 1 – i live in California and my wife and i bought a condo in the mid-400s last year. a condo, not a single family home. we will more than likely not live here for more than 8 years. while paying extra would build up some more equity (as long as the market doesn’t implode), but we will not realistically live here long enough to pay it off.

    case 2 – my sister and her husband just built a house on their land in Texas for 140k. they are in it for the long haul and believe that they will live there for the rest of their lives. if that were me, i’d split my excess money between building my savings and paying that place down ASAP to avoid the interest since they believe they will be there beyond the end of the mortgage.

  91. I have been contemplating paying off my mortgage-which is 120k on a house worth about 185K. I would have to liquidate all my mutual funds to accomplish this–something that gives me pause.

    But on the upside, I would have about 750 extra dollars a month that now goes to the bank. Seems like there are pros and cons to doing this. The biggest pro is extra money at the end of the month and saving over 100 thousand dollars in interest payments. The down is that I won’t make any money in the stockmarket since all that money will go towards the house.

  92. “bubble” people welcome back to earth. The “normal” people are waiting for houseing prices to drop 30%

  93. If you are interested in the ‘never-pay-off’ approach, look into Equity Index Universal Life. Actually, either way you approach your mortgage, it’s a tax shelter that you might want to consider. And no, I am not an insurance salesman, nor a mortgage broker!

  94. I’m just a regular guy who started a company 5 years ago in my basement, and sold it 2 weeks ago for $30M. I controlled only 25% of the total and after taxes I’ll net about $4M. I just turned 30 last week, my wife is pregnant with my first born child (a girl) and we live in a $550,000 house.

    Should I pay off the mortgage or not?

  95. Bumbler says:

    My mortgage is paid off. I wanted to see how it would feel, and it doesn’t feel all that different than when I had a mortgage on it. I think this is true because after I paid off my residence and two rentals and I still have a third rental that is almost also paid off, I thought I was at liberty to go and buy my life’s dream toy, a cool piano. Even though my payment is not that high ($220) it is at 10.25% interest -why you ask???? Because even though I have grade A credit, I decided since now my house is paid off, I didn’t want to put the loan against the house. (Stupid, right?)

    Well, I hate the 10.25% interest rate so much, that I have been making double and triple payments to pay off the piano. Oh-and in the meantime, I knew I was going to have to get another car so I did: 5.25% interest with payments of $166 a month. Well, I guess I could pay them both off if I wanted, but here’s the thing: if I give one person piano lessons, I get to deduct the interest on the piano as it is now a “business” item. With my car, the IRS wants to know what percentage of miles are for business, and what percentage is for pleasure. They don’t ask that for the piano-like how many hours a day do you play the piano for pleasure, and how many hours do you give lessons?

    Well, now a year is up, and the piano brand new would cost $43,000, and I owe $16,450 on it. Should I take out an equity loan on my paid off house to pay off the piano? I dunno. Six of one half dozen of the other. My mortgage would not provide a deduction for me if it were only $16450, but using the piano in business does. So, there you go… everybody’s different.

  96. Doctored says:

    I personally follow Ric Edelman on this topic & have followed his advice with great success for 20 years.

    Your comment about the AMT is wrong. Mrotgage interest (& home equity interest supported by home improvements) remain deductions under the AMT. The AMT takes away deductions for state, local & real estate taxes.

  97. I always am amazed at people who tell me it not a good idea to pay off a 6 figure mortgage. It truly boggles the mind.

    People have pondered the wisdom of carrying debt since the beginning of time. Some of the smartest people that ever lived decided it was a bad idea.

    Here are some of their thoughts.

    Proverbs 22:7 – “The rich ruleth over the poor, and the borrower is servant to the lender.”

    William Shakespeare (Hamlet) – “Neither a borrower nor a lender be; for loan doth oft lose both itself and friend, and borrowing dulls the edge of husbandry.”

    Aesop: “A crust eaten in peace is better than a banquet partaken in anxiety.”

    Ralph Waldo Emerson: “A man in debt is so far a slave.”

    Ogden Nash: “Some debts are fun when you are acquiring them, but none are fun when you set about retiring them”

    Benjamin Franklin: ‘Tis against some men’s principle to pay interest, and seems against others’ interest to pay the principle. ”

    Thomas Jefferson: “Never spend your money before you have it.”

    Benjamin Franklin: “Rather go to bed supperless than rise in debt.”

    Robert Green Ingersoll: “A mortgage casts a shadow on the sunniest field.”

    Benjamin Franklin: “Think what you do when you run in debt; you give to another power over your liberty.”

    2 Kings Chapter 1 – “Pay thy debt, and live.”

    Publilius Syrus – “A small debt produces a debtor; a large one, an enemy.”

    Ambrose Bierce – “Debt, n. An ingenious substitute for the chain and whip of the slavedriver.”

    Moliere – “Debts are nowadays like children begot with pleasure, but brought forth in pain.”

    John Maynard Keynes – “If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.”

    Henry Wadsworth Longfellow:

    His brow is wet with honest sweat,
    He earns whate’er he can,
    And looks the whole world in the face,
    For he owes not any man.

    Frank Zappa: “It would be easier to pay off the national debt overnight than to neutralize the long-range effects of our national stupidity.”

    Thomas Jefferson: “Be assured that it gives much more pain to the mind to be in debt, than to do without any article whatever which we may seem to want.”

    Andrew Jackson: “Live within your means, never be in debt, and by husbanding your money you can always lay it out well. But when you get in debt you become a slave. Therefore I say to you never involve yourself in debt, and become no man’s surety. If your friend is in distress, aid him if you have the means to spare. If he fails to be able to return it, it is only so much lost.”

    And finally the ultimate quote about Debt:

    Merle Travis (wrote the song 16 tons)

    You load 16 tons, and what do you get?
    Another day older and deeper in debt.
    St. Peter don’t you call me ’cause I can’t go.
    I owe my soul to the company store.

    To each his own.

    But I will heed their wise council and will have my home paid off within the next year before my 46th birthday.

  98. Stan..nice little pearls of wisdom but the fact remains that by paying off your mortgage in full, all you have is a pile of bricks and mortar that just sits there and does nothing…a place to live is not the only reason for owning a home..it has to be viewed as a vehicle for investment…if you only require a roof over your head, you should rent and not take on the debt of a mortgage..some of you people are not getting this important part of my position..you are right about being in debt and the evils of “owing your soul to the company store” and the like..what I am saying is if you can afford to pay off your house, or have reached a point where you are about to make the last payment on it after twenty years, you should STILL have a mortgage and put the money somewhere else where it will work for you AND continue to live in the house…this way you have the use of the house AND the cash value of the house which when invested in other good, solid, safe investments pays the mortgage payments AND leaves a remainder called PROFIT…a house or any real estate is not a car or a toaster…I NEVER finance cars…all three of mine have been purchased for CASH…I NEVER carry a balance on my credit cards..I use them for convenience and to earn reward points and pay the balances in full each month…but I will ALWAYS have a mortgage on BOTH of my properties and continue to reap the benefits of INVESTING the money that I’m able to pull out…it is all about cash flow and looking at the big picture as an overall plan for wealth…If you can’t grasp that concept, then you are living an hourly wage mentality and a paycheck to paycheck existence…I guess you can say I’m much more greedy than that because I want it all..the HOUSE and THE CASH VALUE THAT THE HOUSE IS WORTH, not just simply a roof over my head..to me, my properties are MUCH more than simply objects…they are part of my overall portfolio, much in the same way as my stock mutual funds and bonds..if I just wanted a place to live, I could move into my RV…oh yeah, I paid cash for it, too…do you get it now, Stan? You think it’s a big deal that your house is paid off by your 46th birthday…congratulations…I’ll be 50 on my next birthday and have paid off three or four other houses, currently own two (with mortgages, of course) AND I’m retired..no company store..heck, no COMPANY!!! Cash flow, my friend…CASH FLOW!

  99. Phoenix home OWNER says:

    Do the math guys, mortgages will only pay off if you’re in it for the long haul, ie 30 years. After 10 years, you’ve only paid down 20%. Putting the equivalent of a monthly payment in a bank will gain 4x what you’ve paid down on your mortgage. When you move, you get a new mortgage and you start over paying just interest.

    It takes 23-26 years to catch up to someone that has been saving the equivalent of a monthly mortgage payment. Remember, you haven’t beaten down the principal until after 20 years, then your principal payments are high enough for the investment to make sense. After 25 years, you will pass them up.

    Those of you checking my math should consider taxes on interest payments as well as compounding interest on a saved mortgage payment.

    Saving $1500 per month works out to 18k per year. That’s liquid enough for me, especially with no house payment. That will easily cover me for a year without a mortgage.

    Thanks to the California real estate market of 2 years ago, I’m 34, and I OWN my home. My biggest monthly bill is a car payment ($350) in the winter and the electricity bill ($390) in the summer. The quality of life and peace of mind are wonderful.

  100. Lets look at the math in plain english. Lets say your mortgage is 170,000 dollars fixed at 6.875% over 30 years. Total interest paid over the life of the loan: $240,230.10.

    Term of the loan: 30 Years | Loan amount: $176,000.00 | Interest rate: 6.875%
    Starting date of the loan: March, 2009
    Monthly mortgage payments: $1,156.19
    Prepayments
    Monthly prepayments of $3,464.00 beginning from March, 2009, last payment in March, 2010

    Calculation Results
    Total interest paid over the life of the loan (no pre-payment): $240,230.10
    Total interest paid over the life of the loan (with pre-payment): $85,986.56
    Your Savings:
    Total interest saved: $154,243.55
    14 years and 4 months shorter loan

    This how much I have put in to my home since I have been in Iraq. What I want to stipulate is this. For those who want some security in life and have a place to lay you head. It’s not about beating “the man” its about making sure that you have a home to lay head even if you are laid off from a job or reached some economic hardship. Sure it was easy to say during our economic boom to sell you house and move on with your profit for a new home. But look at the market now. I know six people here trying to sell there home just at the cost they bought it for at least a year now. Since I have come to Iraq I have put away 6 months of my expenses and thrown a hefty amount to the principle. When I return home the job I find whatever it may be will go to retirement and savings. So I say own your home as quiclky possisble. DO the math.

    Car note & Insurance: $350
    House note & Insurance: $1388
    Owning the roof over your head and saving for retirement: Priceless

  101. What happens when the economy goes bust? Are the mortgages wiped out or is there always going to be a bank that will take up the debt and look for the repayments to be continued?

  102. Bet most of the writers from above voted for obama.

  103. OK quick synopsis here of where I currently stand.
    Me and the wife 40yrs old. We owe $86k on our 15yr %4.5 mortgage w/ 11yrs left to pay on it. We own a condo %100 also that is about to be sold for $105k that we will net after taxes $97.5k.
    I want to pay off the house and wife does not want to.
    Who is right? We have no other debt or OUTSTANDING BILLS. I want to max out the 401k’s and build up some more liquid savings by putting away our monthly mortgage payment.
    Just looking for some other peoples view on my situation.
    Thanks and Happy New Year.
    McCain Voter :)

  104. The only person I know that actually paid off his home loan was my Dad.
    Now all he does is sleep on the couch in the fetal position with praying hands between his knees…
    When I asked him if that is all he can do…
    He says no and shows me how he can reposition his hands under his head.

  105. I just paid off my mortgage and I am psyched about it. There is no reason to keep a mortgage around, or any debt, if you can afford to pay it off.
    We’ve all seen over the past year that the financial markets are built on a foundation of sand. It’s a complete sham! We are over $10 trillion in debt with another $40 trillion off the books as debt obligations. Our whole economy is a sham and we will pay dearly through hyperinflation and upcoming recessions and depressions.
    The only thing the gov’t will accomplish through their bailouts will be future bubbles…and we all know that bubbles burst. We will have 1-2 of these every 10 years.
    Bottom line – Don’t bet on the economy and the stock market completely. Don’t bet on house values appreciating like they once were. Bet on yourself and become debt free as soon as possible.
    Once hyperinflation creeps up on us we will all be better off for it.

  106. This article is complete rubbish and it is this thinking that has put our country in the mess it is in. All of the assumptions in this article is that you have bad credit and lots of debt. It assumes that you would want to trade the ample amount of cash that you have for all of the nasty high interest credit that you have amassed.
    The facts are if you have little or no debt, what ever income you have, can be amassed into a comfortable future. If you have run in to hardship, then it requires much less to keep your head above water if all you have to pay is the energy bill and groceries. Buy your home and get out of debt – I did, and it is euphoric, and very much like a deep religious experience.

  107. Rarely have I seen poorer advice ever in print. Edelman should be arrested. My brother-in-law probably would think that Edelman is a wizard. My brother-in-law lives in his car with two kids and a wife.

  108. Larry M says:

    We paid off our 30 year mortgage in 15 years. Now in retirement I’m able to put $1000 a month into savings just from my pension and soc security income. Paying off a mortgage should be a primary goal.

  109. stevie g says:

    1 reason ric edelman is a idiot look at the mess we are in right now i hope he lost in this down turn with all the great advise he has to offer.
    I’m 28 paid off my mortgage got laid off work and not lossing any sleep YOU MR RIC MY FREIND HAVE NO IDEA ABOUT ANYTHING
    do not listen to this jackass

  110. Tracy Seaton says:

    Question I have a 30 year loan and want to pay my house off in 15 years a 15 year loan would be 350.00 more a month rather than getting a 15 year loan Or can I just pay 350.00 each month on the principle line on my statement and get the same results ? paid off in 15 years ?
    Tracy Seaton

  111. Hose Hunter says:

    It all depens on your age, income and financial situation. e.g. as you get older more of your assets should be in income producing/low risk investments. If you had part of your assets in treasuries earning 1 or 2% annually but could get a mortgage at 5% it would be important to consider the after tax effect. e.g. using a 33% tax rate your treasuries would yield you 1.32% after tax. Your mortgage rate after tax would be 3.3%. So having the mortgage actually would cost you 2.2% vs. using your “cash” to put into the house.

    It’s never as straightforward as it sounds. Plus with the way the markets have performed I’d be leery of counting on anything. If you look at the market from 1998 to today you would have actually lost money by having your money in stocks. That’s 10+ years or essentially no return.

  112. @Larry: Now in retirement I’m able to put $1000 a month into savings just from my pension and soc security income.

    Why are you saving your pension and social security income?
    Isn’t the goal to spend your retirement income on “retirement”?
    Are you planning to die with a whole bunch of money in the bank?

    @Hose Hunter: If you look at the market from 1998 to today you would have actually lost money by having your money in stocks. That’s 10+ years or essentially no return.

    For those who haven’t seen the chart, this statement is true even before the crash. Draw a line from the highs of 1998 to the highs of early 2008. Factor in 3% annual inflation (or 30%+ over 10 years) and even from peak to peak the markets are way down.

    @Stevie G
    Looking at my previous comment on this thread (dated October 2007), I describe Edelman’s plan as basically using the house as an easy leverage mechanism.

    Given that this crisis is basically a crisis of excess leverage, I think it’s safe to say that this was indeed very dangerous. It’s a mass of thinking just like Edelman’s that brought us to this point.

  113. I’d like to know who is getting an after-tax rate of return of 8% on investments in the last 10 years. Also, the interest may be deductible on a mortgage, but isn’t paying zero interest cheaper?

  114. I have a current home loan of 50,000 and I have 70,000 in a money market. My current interest per month is 260.00. My gian on my money market is only 53.00 in interested per month. Should I pay off my mortgage or keep paying it and saving in my money market? I also have 100k in a cd that yields 4% at this time.

  115. Here is the bottom line for me…all the other advice..(instead of paying off your mortgage early, increase your 401K or other investment contributions, etc).

    Well, that plan works great in a bull market…but imagine if you chose that strategy at age 55 10 years ago and had the opportunitiy to pay off your mortage over the last 10 years at age 65 and have NO mortgage…….and then in the last 2 years the market collapsed and your 401K was cut in half..yet, you STILL Have your mortgage.

    Paying off your mortgage is NOT dependent on market trends….having no monthly mortgage payment does not change…once it’s paid it’s paid.

    Pay it off.

  116. This is pretty much a no brainer! Rick Edelman is in the business to make money sitting on his a$$ behind a desk making more money off of your money. That’s it!

    If you pay off your morgtage early, you will have all of that intrest in your pocket instead of ole Rick to do with whatever you want.

    As far as a tax deduction. What a load of crap. The deduction that you receive is far less than the interest that you pay each year by thousands! You do the math. I’m not lying to you.

    If you lose your job, like many already have, you’ve lost your home as well unless it’s yours. Pay the damn thing off for Christ sake! Do it for you and your family.

  117. Tony, $50k of the $70k earning less than %1 is a prime candidate for paying off the mortgage, if you are comfortable with your remaining cushion of liquid money (including the CD early withdrawal penalty if you have a future emergency) at your lower monthly expenses with no mortgage.

    I crunched some numbers for you (or everyone) to consider on my site (click my name).

    I also have the stock graphs that Gates VP mentioned.

  118. Ironically I just wrote an article on this very topic. It will take a couple of days to get up on my blog. There are many reasons not to pre-pay your mortgage. Oddly one of the main reasons is liquidity. Prepaying a mortgage ties up funds that can be used to build a cash cushion. The equity in a home is basically dead equity and the only way to access it is to sell the home (the market determines whether or not you can do that) or borrow against the home (the bank determines whether or not you can do that). Therefore trapping equity in a home carries a significant opportunity cost.

  119. “Dead money” is a marketing slogan from banks and Wall Street who want you to stay in debt while locking your money into their preferred forms of dead money (restricted retirement accounts or hedge funds that do not allow you to withdraw).

  120. The point is to maintain liquidity and not lock your money into accounts where access to that money is restricted by statute. I invited a finance group from the NM Consortium of Financial Literacy to speak in Gallup NM. They advised against using another sacred cow, the 529 plan, to save for college because the money is restricted and parents often save for college at the expense of proper retirement and estate planning. The point is not to lock your money up.

  121. Ouida, we agree that liquidity is good and restricted accounts deserve scrutiny so I only will add a reminder to aim for liquidity with positive ROI, not liquidity with negative ROI (losing money every day, negative savings, often caused by keeping a mortgage).

  122. goofy noodlehead says:

    Well, I’m pretty low on the comments list, so I don’t know how many people will actually read this, but here is my two cents anyway.
    I think that if you take your money and put it in stocks and bonds that yield 10 percent interest, you probably are the victim of a ponzi scheme. How many times over and over do we have to hear of the hundreds of thousands of people who lose their “investments” have been victims of someone else’s greed? The fact for me is the old addage: If you want to double your money, fold it in half and stick it back in your pocket. Forget trusting some slick talker to “hold your money and make it grow”. I say pay off your mortgage, and if you want to move, then rent it out and enjoy the cashflow, which plus your job will make your new mortgage easier to pay, along with any repairs included with managing two houses. Two rules here: Don’t buy a house that is too big, and rent out a house that has too many mechanical problems and you will do fine. I just don’t understand the 20 year investment that ends in someone else stealing my money. I’d rather have a house paid off that depreciated 100,000 than 300,000 in paper investments that someone is lying to me about. But I am risk averse in a big way. I’ll pay that mortgage down, thanks. On the other hand the rentals I do have mortgages on, I won’t pay down because my renters do that for me. Good luck and great ideas, everyone!

  123. goofy noodlehead says:

    Here’s another bit…If you have an extra room in the house that’s fine, but if you aren’t using more than two or three rooms on a regular basis, you probably have bought too much house. I hope noone falls for the get rich investment schemes out there. They take 20 years before you find out you have been taken. Then you still have to pay off your mortgage. Just look at the retirement benefits of alot of companies that never panned out. PROMISES, PROMISES. Pay off your debt in this order: Credit cards with high interest. Credit with no interest for x amount of months, or revolving credit, and then pay off your house as fast as you can. Most people don’t have the willpower to do it, but if you do, you are blessed with a serious talent. Never take out an Equity loan. Is this possible? I think so. If you want to invest in something, don’t invest in a sheet of papers with numbers on it, invest in a tangible item like real estate or precious metals and hold them in your hand and not on paper. Don’t fall for the tricks!

  124. goofy noodlehead says:

    They say, get that equity loan so if you run into bad times, you will be able to make your mortgage payment and not be out on the streets. Well listen, if you have a paid off house, that isn’t even an issue anymore. Security lies in owning, not owing.

  125. Security lies in money in the bank. If you paid off your home yet have no savings, you may end up hungry in an dark home with no water all because you paid off the house without being a wise steward of your money. My mortgage reduction secret strategy will let you kill several birds with one stone: pay off your home sooner, save tens of thousands in interest, while still obeying wealth principles and engaging in wise financial stewardship.

  126. My wife and I are 22 years old (we married 1.5 ago, because we wanted to, no children, etc. etc.). Now tell me if my choices are bad (because acording to the article and people’s comments, they are).

    We received our 8,000 kickback from our $124,000 first time mortgage. I immediatly paid off our two high-int. credit cards (carried full balances on them for three years, credit cards and being young do not mix). I also paid off the remaining balance on my ’68 Chevelle investment. I took the rest and put it in savings. By May 2010, I will be able to pay off our two daily drivers and have a 3 month cushion in savings and only a house payment (debt wise).

    Jan. 2012, I will have enough saved to pay the house off and have 9 months of cushion in savings. We will be 25 years old, debt free, wish a wonderful savings built up and a very nice house that can accomadate three grown children.

    This is when I will be able to max our contribution for EACH of us to 401k, IRA, and a ROTH IRA, and still be able to save a good amount each month, and live comfortable.

    Like I saw only a few times in comments, it isn’t always the mortgage, the savings, the kicks backs, etc. It is usually the very beginning, where people go after what they want vs. reason. Instead of taking an approved mortage of $180,000, we found a wonderful house for $60,000 less.

    Basically, DON’T BITE OFF MORE THAN YOU CAN CHEW, it will probably screw you if you do.

  127. I don’t see anything wrong with your plans. The only comments seemingly critical of your choices are from those wanting to sell you something you don’t want or need.

  128. Well, Well, For all those out there that still have a mortgage in this failing economy, I pity you for taking the advice of those that still want to invest their money into something that they cannot control.

    When will people realize that a mortgage is just a way for other rich people to become richer? If you can’t afford a $200k home, buy a $50k home and work your way up to a $200k home.

    I purchased a $170k home 5 years ago, (1700 square ft, 3 bdrm on 2 acres) and today I own this home outright and am totally debt free. My whole paycheck is now mine. I see positive $$ coming in every two weeks.

    Here is where you are getting scammed. By having to pay on a mortgage for 30 years at 4.25% interest, you basically pay the bank over $200k over the life of the loan. (Depending on the size of the loan).

    If you pay extra on the principle every payday, not every month, you will make that puppy go away twice as fast. Don’t get me wrong, this isn’t an easy task, but in the long run you will be better off. There were times when I was soooo frustrated I could scream, but my wife and I worked together to make it happen. Now We have $6k a month that is ours to do what we want with. We can invest, purchase, save, splurge, give to charity, whatever! Its ours…

    So, do yourself a favor, stop spending your $$ on $4 lattes and $300 cheap suits. Use instant coffee and buy your clothes at yard sales and Goodwill until you are debt free. That’s how we did it!

  129. Oh, and did I mention that we have two growing boys and my wife is a stay at home mom and we homeschool?

    Being a good steward of your money is owing no man nothing. It says it in the bible. Check it out!

  130. Things have changed a lot since the first postings in 2007. At that time I wasn’t upset to have a 5 1/4% mortgage and CD’s at a similar rate and/or investments growing at 5 to 6% per year. Now my (failed) bank has just sent me a check for the proceeds of my CD’s – they don’t even want to pay me 2% on it! I can’t think of anything better to do with that money than pay off the balance of my mortgage. It’s to the point that the standard deduction is just as high for me – only other significant deduction is property tax. I know it involves tying up a lot of money, but investments are so shaky now and I know I’ll smile every time I don’t have to make that monthly payment.

  131. Kirk,

    Congrats on the sacrifices you have made with your wife! You folks sound like my kind of people.

    I starting saving for a downpayment for a house years ago and lived well below my means to do so. While looking for a house I continued to save. Also, by this time I had grown quite fond of my apartment and my low cost of living expenses, but decided to keep saving regardless. I eventually found a nice house and bought it in November of 2007. Just paid it off in Aug of 2009.

    Oddly enough, I eventually married that gal I bought the house from 3 weeks ago. :-)

  132. It doesn’t matter when this was written, this guy is full of it. Keep playing number games with people caught up in the credit hole that is America. I am paying mine off ASAP.

  133. Pay it off!!
    I have always looked at my mortgage payment with disdain.. primarily that pesky INTEREST amount… even after writing if off, you are still in the hole. You have to look at it as an overall part of your balanced portfolio. I max out my 401k first. I have no credit card debt is my second rule. Next, I pay extra on the mortgage payment each month. I ensure I have a year’s worth of living expenses in savings if I were to lose my job. Lastly, I invest additionally in a Roth or something else if I have additional cash.. Balance it out. I will save around $100,000 in interest alone by the time my mortgage is paid off in a few years. That is enough to help fund my kids’ college. Also, there is peace of mind knowing you live in a place that the bank can’t take if you own it!

  134. Well, We’re well into our 8th month of not having a stinking mortgage and guess what? I have been able to save every penny! My bank account is growing and not theirs!! I’m able to afford anything that I want (within reason).

    I just got my taxes back from my accountant and guess what? You guessed it. The amount of interest that you get to deduct isn’t squat compared to what you get in return. IT’S THE BIG LIE THEY WANT YOU TO BELIEVE!!!

    Please for you and your families, PAY OFF YOUR HOUSE!

  135. Now that the house is paid off our income tax refund was rather small.

    However, we now have a positive yearly cashflow of $9,220! My former monthly mortgage payment of $768 actually covers our property taxes, HO Ins, elec, nat gas, water/sewage, phone, internet, FiOS, cellphones,

    The excess cashflow has enabled my wife and I to increase our 401k’s, vacation more often, and to enjoy life without worry about money. You can’t put a price-tag on that.

    Those that want you to stay in debt are leaches and need you, the host, to survive. Pay it off and enjoy the lifetime of benefits!

  136. PAY IT OFF says:

    I agree with Chris above.

    PAY OFF YOUR HOUSE!

    Then pay off another house.

    After that, look to retire early.

  137. The commenter above seem to think emotionally rather than logically. It makes sense in an inflationary environment to have low interest debt. It gets inflated away.

    Thinking emotionally instead of logically is a great way to shortchange yourself.

  138. Andre Abreu says:

    Things sure have changed since this article was published in 2007.
    I was a fan of the idea of paying off my loan…
    Now that I am $40K underwater, the idea of paying off this house seems like not such a bright idea. Would I be doing my family any favors by throwing away $40K into our current house?
    Now my thinking has changed to … buy the foreclosed house on the corner and mail these keys to the bank.

    Frustrated,
    Andy

  139. Debt is stupid. Owing money will never help you. It only helps the person who lent you the money. The only way keeping a mortage will help is if you have 4X the amount in the bank ready to pay off your debts.

    Loose you job and see how much a big mortage will help.

  140. Most of your responses to this article are from people who probably dont even have a mortgage or know what its about.

    Not paying off your mortgage entirely is the best form of credit you will ever have. Leaving 10 grand owing on your mortgage means you have x amount available to you at any one time, and at an incredibly low interest rate. This isnt saying that you shouldnt just save up and buy the item, but essentially, a home loan is pretty much like a low interest credit card.

    This article wasnt about keeping people in debt or trying to make money from you. Its about the simple facts of having a mortgage, and the benefits of not paying it off entirely. You idiots.

  141. Sasha,

    You are wrong. You don’t need a morgtage to have good credit. You don’t need credit if you own your home. Your home is your credit. Why not pay off your house and cars and live debt free? Why not keep your hard earned money for yourself? Why not live in peace knowing that you don’t have a mortgage payment looming over your head every month? Why keep the banks/lenders rich. Make yourself rich, by paying off your morgtage early. You, are the slave. You are the idiot.

  142. I read a large portion of the responses but not all (tl;tr). I did wonder, since this thread began in 2007, if some of the posters have changed there mind about earlier payoffs. I wonder this because my sister, and her husband, decided to use their equity, keep the interest for write-offs, and invest in two additional houses to “flip”. I warned them of a tide I already noticed in California but they didn’t listen. They not only lost the two investment properties but they also lost their primary residence. Now, they have a home only because his mother was fiscally responsible her entire life and had an additional property after paying her own house off, possibly early.

    I for one, will be honest, think that keeping debt when you can remove it makes little sense. I’m very conservative with money and so is my wife. We have already knocked 10 years off of our mortgage, in just the first two years. Also, the projected interest will be as much as 150K less using this approach (assuming that we don’t just take a break as the interest savings start diminishing).

    I was just curious though. It seems that we had a view that the bottom would never drop out and now it has for so many. Please feel free to comment. But, please don’t call me an idiot for having a different investment approach. :D

  143. Investment approach? I too am conservative. I make over $80K a year and I bought a $100K house. I have often heard a general rule of thumb that you can afford a mortgage 3X your annual salary . This puts me in a $240K home. If we included my wife’s salary.. we could have bought a $500K home. So what was our strategy? I don’t know about that but we ended up only buying an affordable home…. unfortunately… my home has become even more affordable in the past 5 years. Any prospective buyer will only pay ~$60K for my house… thanks to market forces and poor government policies, rules and regulations. I have no immediate plans to pay off this house… Interestingly, the foreclosure house identical to mine down the street is going for less $30K. I’m half tempted to buy that house and mailing the keys to this one back to the bank scheisters.

  144. Andy, sorry to hear about your situation. It’s hard to say about your specific area but I imagine that the home values will eventually go up. We bought our house in a situation where a $675K house (in pretty bad condition) dropped to $275K. We bought and immediately started improving it. Some neighbors probably felt the same way you do. But, the values will go up as soon as the economy recovers. And, ambitious first or second time buyers might help to raise the values beyond what they were.

    My first house was less that $100K and it was in an area that hardly appreciated at all, over 7-8 years. It’s really hard to say but I hope you see things turn around.

  145. Let me tell you that this article is just B.S. theres nothing better than to be debt free. Let me tell you that i had a mortgage back in 2008 and after i lost my job, i had a hard time making mortgage payments let alone my utility payments so i end up loosing my home last year,i could had pay a big down payment so my monthly payment would be less.So pay your mortgage off,if you’re told different then that person is working with the banks. So the next time something like this happens
    you’ll be more prepared you never know what the future will be, today you have a job tomorrow who knows.Lets put it like this, i got my house at 324k and monthly payment $2,400 so every year would $28,800 so in the course of 30 years that will be 864,000 more than half a million dollars so don’t you ever believe that paying your mortgage its a bad idea theres no benefit at all you’ll end up giving more to the bank .Also don’t invest we are in times that risking your money is not good ,my annuity was invested without my authorization and lost more than have of my money.

  146. CPA says... says:

    The fatal flaw in Edelman’s article is that its a one-size-fits-all strategy for the masses. There are too many dynamics in this equation (both personal and financial) and that is why people who don’t understand finance and tax matters should consult with an independent, experienced, professional accountant to provide them the right answer for their unique set of circumstances… the key word here is Accountant….not an attorney, not a so-called “financial advisor”….we’ve already seen what those jack-asses have done to our Nation’s budget… an accountant!!! If you’re too cheap to hire an accountant…then you need to do some major homework on inflationary impacts, cash flow analysis, present value, future value, etc. before making that decision because it could wind up costing you a huge amount of money…. The safe choice is Pay Off the mortgage as it is a guaranteed % return…but as mentioned earlier you could – depending on your circumstances – end up losing alot of money taking that course of action…and possibly wind up with some severe cash flow problems. You need to also remember that you never truly own your home…you may have the deed, but if you don’t pay your property taxes for whatever reason…the sherriff will seize your home and it will be sold at auction.

  147. I see it this way. The mortgage is a debt that has to be paid off at some point in time, whether I do it now or let my kids do it when I die. Sure I might make 8% interest in the stock market but why risk it. I’d much rather pay off the mortgage early and be able to sleep at night. Just my two cents.

  148. I have read this whole thread and just wanted to comment that “Steve” from his comments in 2008 is a Giant Douche Bag.

    Thanks to all for the advise and pearls of wisdom.

    There are many factors to be considered on when – if ever to pay off the mortgage, and this thread helped to bring some to light I never considered.

    That being said, for my situation in life, August 2011 will be my last mortgage payment.

  149. CPA in St. Louis says:

    It is rarely ever a “bad” decision to pay off the mortgage; even if looking back you could have made more in the market vs. the saved interest on your loan. You have chosen a course that has less risk. If you pay off your mortgage, you now have free cash flow to begin buying those investments for the future. If the market goes down, you don’t have both market losses and a debt to repay. If you get sick, disabled, unemployed, etc., you own your home and have a much more flexible financial condition to weather hard situations.

    If you want to play the arbitrage game, that’s fine…in fact I have taken that approach myself in the past. Just know the risks involved…and with risks at times come negative results…otherwise it wouldn’t be a risk.

    As both a CPA and financial advisor that manages millions of dollars in client assets, what do I advise my clients? Better yet, how about what do I advise my wife. With a 3.75% mtg, healthy current income, strong future outlook, maxing out our qualified retirement options, and investing agressively in the market; my wife and I decided to pay off our mtg that had ~ 13 years left. We’ll pay about $0.35 more in taxes for every $1 we don’t pay to the mortgage co. That means $0.65 in our pocket to add to our investment portfolio.

    I have little doubt that I could earn more in the market over the LONG TERM compared to our low 3.75% mtg rate. However, I’ve lived debt-free before and it’s a great thing. We won’t even look back to analyze if there was an opportunity lost.

    My general advice without knowing anyone’s specific circumstances…
    1. Don’t have a mtg that is more than 2Xs your annual income. Find your happiness in something other than the big house.
    2. Pay it off as soon as you can. Then consider the bigger house…maybe.
    3. Don’t use credit cards unless you pay them off in full each month.
    4. Spend less than you make and attempt to save 10-20% of your income on an annual basis.
    5. For retirement savings…first utilize employer retirement plans (at least to the point of company matching contributions).
    6. Hire a fee based financial advisor (not a commission based sales broker) to help you develop a financial plan and keep on course during your lifetime.
    8. Utilize a passive investment approach vs. active management. This means using low cost mutual funds, ETFs, index funds to capture the broad returns of the markets.
    9. If you have both auto loans and home loan, pay off the auto loan(s) and set aside $s to pay cash for your next car. It is not a given that you will always have debt, car loan, etc.

    Most of my wealthy clients are individuals who’s financial lives can be characterized by the above.

  150. I have a 15 year loan at a 5% rate. I have about 3 Years left. Does it make any sense to pay off whats left. It’s almost all principle left. Haven’t I already paid the interest on this money and would just be paying off money I already paid interest on. I HAVEN’T GOTTEN ANY SOUND ANSWER ON THIS. THE INTEREST IS MINIMAL IF ANY. PLEASE ADVISE….

  151. @dave – You are still paying 5% interest on whatever principal balance in left. Nothing more, nothing less. For example if your principal is about $10,000, you’re still paying $500 of interest a year, perhaps tax-deductible depending on your situation. You can decide if you think it’s worth paying off based on that.

  152. Pay it off. You would be better off with the money in your pocket, vs. losing the interest every year. Believe me. Mine is paid off and I enjoy every cent, every month that I don’t send to the bank. Funny thing is, once you pay it off, you start looking for other ways to save and invest that money that you never would have thought of.

  153. @dave: To expand on what Jonathan is saying, you’re paying 5% on the money you have left.

    If you have enough money “sitting around” to pay it off, you’ll have to make some tradeoffs, some risk/reward decisions.

    Some questions about the money “sitting around”:

    – Is the money earning more than 5% right now?
    – Is that money part of an emergency fund?
    – Is that money being stored for “upcoming expenses”? Car repairs, home repairs, insurance deductibles, etc.
    – What are the odds that you will need/want to move? What’s the cost of that move vs. the potential gains of moving?
    – What are you planning to do with the extra money in 3 years? How is that different from what you’re planning to do now?

    The point here is “how much risk do you want to take?”. If you have cash sitting around already, paying off the mortgage is going to mean that you have even more cash sitting around every month.

    If your only plan is “pay off mortgage”, then you’ll have to come up with a new plan once that happens. So what’s the new plan?

  154. This guy probably worked for the Banks!! why would anyone would wants to stay in debt to the Banks? FTS!!

  155. Forex Analyst says:

    I think it’s worth considering how long you plan on being there. If you’re only planning to be in the house for a few years, then buying used certainly would seem to be the way to go. If you’re reasonably certain that it’s going to be your permanent home (20+ years), then it may be worth while to get the house exactly how you want it.

  156. Ha…

    I found this site looking for information on what happens when a mortgage gets paid off–so I can make sure it gets done correctly as the soon-to-be owner.

    My initial mortgage was through a small, local company, but the note was promptly sold to a TARP bank and most likely securitized into a CDO. Many folks are fighting forclosure because the bank trying to forclose doesn’t have legal standing to do so because the title/note was not always transfered correctly in the chain of ownership. In some cases people get to keep the house without paying the full amount of the mortgage. The flip side is that if you pay it off as agreed, the same SNAFUs can cloud the title and make it a chore to be sure that you actually own the title free and clear.

    I plan to use a real estate lawyer to ensure that the process goes smoothly.

    Folks finding this page now need to consider that in 2011 their cash is earning them a negative real rate of return in a savings account and that cash “in the market” comes with real risk in today’s ponzi markets. For me it a no brainer to reduce the amount of interest I pay to a TARP bank from $300k to $50k and then free up cash flow for more productive purposes.

  157. Andy Mitts says:

    Dumbest article I’ve ever read, ever

  158. I guess the best point made in this article is that if you are aware of no risk options that provide better rate of returns than paying off the mortgage, you should not pay off the mortgage. At this time, where my best FDIC insured CD is 1.1%, the math dictates that paying off the mortgage early is my best rate of return.

    If you are more willing to add risk to the equation, you might be able to find a better investment vehicle that could maximize your rate of return greater than paying off the mortgage.

    Problem is, I think high risk investment vehicles probabilities of paying off are worse than a roulette table of doubling your money by putting in all one spin (Red or black bet would double your money at 48.7% chance and lose your money at 51.3%) So, if your low risk, do the prudent thing and pay off your debt early and if your high risk, go to Vegas and put it on one spin of the wheel – better shot than other investment vehicles at this point of doubling your money:) LOL

  159. This guy assumes everyone knows how to invest and knows how to deal with risk. The author is well off and know how to invest and thats good for him. Not everyone is financially savy. It is better to pay off the house and be debt free.

    what happens if you lose your job? i guess it’ll be challenging to pay for the mortgage.

    I guess his recommendations are fine if you know how to invest, but that’s a RISK in itself and not always a sure bet.

  160. This is the single stupidest web article I have read in along time. If you can eliminate debt, do it! Equity is what you can borrow against the value of your home, borrowing is not good! Your yearly earnings determine your tax bracket and if your bracket is too high, a mortgage interest deduction is a waste of time. Everything this moron says, is against what the average middle class American situation is. Granted, it a was written before the housing crash, but even before then, it is common sense, being debt free is always always always better than being in debt.

  161. Where's Steve says:

    Really funny to read this thread from pre-post the bubble bursting. Noticed that the last thing “Steve Says:” was ” July 16th, 2008 at 12:43 am.” He never posted again after the collapse. Guess maybe his internet service provider didn’t like it when his cash flow couldn’t keep up.

  162. Mike Johnson says:

    … it should be illegal to that dumb … pay $1.00 to save 35 cents … and imagine how good it feels to give the bankers the middle finger, priceless …
    “He is always a slave who cannot live on little”

  163. I notice the Sam and Nick story didn’t feature much in this debate, their tale however does make compelling reading, and after said ‘crash’ in jobs and housing I wonder if a few more people around here would have been swayed to thinking keeping the mortgage longer is actually an option that allows a little more flexibility.
    I can sympathise with all those wanting peace of mind in owning their own home, but consider, there are places in the world (developed world) where ownership is nothing, “rent forever, move whenever, the landlord can fix the pipes”…and if those people believe one thing – and you believe another then the answer must be somewhere between. The burning desire to own a home is actually quite cultural, and can be influenced over time and importantly, also by those who stand to profit from mass trends towards such a thing.
    I have owned through this boom and bust, and EVEN IF my would-be-repayment money is NOT recycling a profit somewhere else I sure feel better about having a chunk of it floating around for me to do with as I please.

    Question – if a long mortgage is so profitable for the banks, as is being argued here…why are there no longer term mortgages? Why not a 50 year mortgage? Is it possibly because somewhere along the looong 30 year curve shelling out 500,000 25 years ago to buy me a house to live in starts to favour me more than it did the bank?

  164. @Mikey: Question – if a long mortgage is so profitable for the banks, as is being argued here…why are there no longer term mortgages?

    Federal regulations have been really tight on granting such long mortgages. In particular, most banks don’t actually lend the entire mortgage amount. Instead they just service the mortgage and resell to Fannie Mae and Freddie Mac (CMHC in Canada).

    These two briefly supported mortgages in the 35-year range, but after the crash have scaled this back.

    Honestly, the biggest problem with even 30-year loans is that they are kind of ridiculous. And frankly, they’re a little risky.

    Without Fannie & Freddie, who would want to make the loan for even 30 years? 30 years is a long time. If you make that loan to a 2-income family there is nearly a 100% chance that one of those people will be out of a job over those 30 years. Over the course of 50 years it’s almost guaranteed that someone will fall on hard times and need to skip a couple of payments.

    Plus, if you’re the bank issuing a 50-year loan, you’re getting deeply depreciated dollars at the end. Even with inflation at 2%, those dollars in year 49 are basically worthless.

    Here’s a great podcast on the 30-year mortgage to put some perspective on the whole thing.

  165. The borrower is slave to the lender. Pay off your mortgage, and you are one step closer to independence. Think about how much freedom you have when you actually OWN your home, it’s a step closer to independence.

    Any guy who tells you to stay in debt is just making money off you.

  166. I have paid off my house and I save the 1000 a month. I can take a vacation every month. 36 with 0 debt.

Trackbacks

  1. [...] Conclusions So Far Before even considering these programs, you have to ask yourself if you really do want to pay off your home early. That is a separate argument, and there are several arguments against it. [...]

  2. [...] taking advantage of low fixed interest rate for 30-year mortgage can be argued to be advantageous on a mathematical level. But I am still enamored with the simplified cashflow situation once this huge monthly expense is [...]

  3. [...] significantly shorten your loan period. Whether or not this is a financially appropriate idea is a subject of debate, which I won’t go into [...]

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