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Everyone always says and aims to "pay off my mortgage"

But in the current climate of low interest rates is this really worth it? Should that money be put to use earning a higher yield?

OR

Does the prospect off another 2008 style financial situation make paying and clearing of debt(mortgage) even more of a priority?

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You must hang around different people than I do. I almost never hear anyone suggest that. Also, why do you think paying off your mortgage would put you in any better position if another 2008 style financial crash happened. (other than if you lost your job) – JohnFx Jan 31 at 18:13
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@JohnFx: Are you kidding? What happened to all those millions of people in the 2008 crash who lost their jobs and didn't have their mortgages paid off? Compare and contrast: what happened to the people in the 2008 crash who lost their jobs and did have their mortgages paid off? One of these two is clearly in a better position; the other is living on the street because the bank foreclosed on them! How do you miss such an obvious thing? – Mason Wheeler Jan 31 at 18:56
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@MasonWheeler - The guy who still owes, say $100K, and loses his job still has to pay the next month's mortgage payment. If you could waive a wand and have zero debt, that's great, but until then, liquidity is key. Paying off 3-4% debt is the last thing most people should do. No, I am not kidding. Neither was John. – JoeTaxpayer Feb 1 at 3:42
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@MasonWheeler if your comparison is "spend all your money" or "pay of a mortgage" then the answer, from a personal finance perspective, should always be to pay off your mortgage. When you start including other risk factors (how much emergency fund did people who lost their homes have?) and choosing pretax investments instead, it's less simple. The reality is for many (most?) people they are better paying off their mortgage since the alternative is spending the money. – enderland Feb 1 at 13:45
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@JohnFx I would rather have a paid-off mortgage, because it's far easier to get a new job quickly than to get a new house quickly with a mortgage default on your record! And if worse comes to worse, it's a lot easier to tap your home equity for emergency liquidity (as a last resort only!) if you actually own the whole house. That's almost certainly worth more than 6 months' salary. – Mason Wheeler Feb 1 at 14:51

10 Answers 10

Paying off your house quickly should be a #2-level priority, behind making sure you have some basic savings but definitely ahead of any investing concerns, because your house is not an investment; it's your home. (If you're brave/foolish enough to try buying houses-as-investments in the current climate, this obviously doesn't apply to you!)

This isn't a financial matter so much as an issue of basic prudence. If something disastrous happens, (you lose your job, get in a serious car accident, your kid comes down with cancer, etc,) it will put tremendous strain on your financial resources. If you own your home outright when this happens, it means that no matter what else might go wrong, you can't get foreclosed on and end up out on the streets, and that's worth more than any rate of return you can reasonably expect to find even in the best of times.

It's a well-known investing maxim to "never bet anything that you can't afford to lose." In light of that, consider this: if you have a mortgage that is not paid off, that's exactly what you're doing. You are placing a bet against a bank that you'll remain solvent long enough to pay off the mortgage, and your home is the wager. Mortgages may be a necessary evil with housing prices being what they are, but make no mistake, they are evil. Get rid of yours as quickly as you can.

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This touches on something that's seldom remarked upon: The ROI may be better if the money is used for investments than to pay off the mortgage, but the risk profile is entirely different. Paying off your mortgage is a sure thing: once done, it doesn't get "unpaid" through circumstances outside your control. Investments, even if the risk is small, are never a sure thing. – Wayne Conrad Jan 31 at 20:12
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"the current climate" depends on which country you live in. – Pharap Feb 1 at 0:00
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I disagree that eliminating your mortgage should be "ahead of any investing concerns." Investing for retirement is extremely important. You don't want to find yourself with a paid off house, but not enough money for retirement. That would be treating your home as an investment, and the only option for you would be to either borrow on your home or sell your home. – Ben Miller Feb 1 at 3:56
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I also disagree that "your house is not an investment, it's your home" implies that it's the most important priority for all people. Clearly it is for Mason Wheeler, but I wouldn't invest in paying down my mortgage if it meant passing up on investing in my 401(k) enough to capture all of my employer's match. Yes, paying off your home has some emotional value that has to be considered, but it's not infinite. You'll generally have the option to sell (possibly losing money) and move, if things go bad. Those aren't appealing options, but the street's not the only choice. – Tim Feb 1 at 4:07
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@JackAidley Your home is not an investment, it's a home. Your home is not an investment, it's a home. Your home is not an investment, it's a home. Please understand this; it's crucial. Also, your premise is badly flawed. Housing values have (mostly) gone up throughout the lifetimes of most people alive today, not because housing values inherently go up, but because of supply and demand--only a small percentage of people alive today are older than the Baby Boom generation, who drove that demand. – Mason Wheeler Feb 1 at 14:46

For some people, it should be a top priority. For others, there are higher priorities. What it should be for you depends on a number of things, including your overall financial situation (both your current finances and how stable you expect them to be over time), your level of financial "education", the costs of your mortgage, the alternative investments available to you, your investing goals, and your tolerance for risk.

Your #1 priority should be to ensure that your basic needs (including making the required monthly payment on your mortgage) are met, both now and in the near future, which includes paying off high-interest (i.e. credit card) debt and building up an emergency fund in a savings or money-market account or some other low-risk and liquid account. If you haven't done those things, do not pass Go, do not collect $200, and do not consider making advance payments on your mortgage. Mason Wheeler's statements that the bank can't take your house if you've paid it off are correct, but it's going to be a long time till you get there and they can take it if you're partway to paying it off early and then something bad happens to you and you start missing payments. (If you're not underwater, you should be able to get some of your money back by selling - possibly at a loss - before it gets to the point of foreclosure, but you'll still have to move, which can be costly and unappealing.) So make sure you've got what you need to handle your basic needs even if you hit a rough patch, and make sure you're not financing the paying off of your house by taking a loan from Visa at 27% annually.

Once you've gotten through all of those more-important things, you finally get to decide what else to invest your extra money in. Different investments will provide different rewards, both financial and emotional (and Mason Wheeler has clearly demonstrated that he gets a strong emotional payoff from not having a mortgage, which may or may not be how you feel about it). On the financial side of any potential investment, you'll want to consider things like the expected rate of return, the risk it carries (both on its own and whether it balances out or unbalances the overall risk profile of all your investments in total), its expected costs (including its - and your - tax rate and any preferred tax treatment), and any other potential factors (such as an employer match on 401(k) contributions, which are basically free money to you). Then you weigh the pros and cons (financial and emotional) of each option against your imperfect forecast of what the future holds, take your best guess, and then keep adjusting as you go through life and things change.

But I want to come back to one of the factors I mentioned in the first paragraph. Which options you should even be considering is in part influenced by the degree to which you understand your finances and the wide variety of options available to you as well as all the subtleties of how different things can make them more or less advantageous than one another. The fact that you're posting this question here indicates that you're still early in the process of learning those things, and although it's great that you're educating yourself on them (and keep doing it!), it means that you're probably not ready to worry about some of the things other posters have talked about, such as Cost of Capital and ROI. So keep reading blog posts and articles online (there's no shortage of them), and keep developing your understanding of the options available to you and their pros and cons, and wait to tackle the full suite of investment options till you fully understand them.

However, there's still the question of what to do between now and then. Paying the mortgage down isn't an unreasonable thing for you to do for now, since it's a guaranteed rate of return that also provides some degree of emotional payoff. But I'd say the higher priority should be getting money into a tax-advantaged retirement account (a 401(k)/403(b)/IRA), because the tax-advantaged growth of those accounts makes their long-term return far greater than whatever you're paying on your mortgage, and they provide more benefit (tax-advantaged growth) the earlier you invest in them, so doing that now instead of paying off the house quicker is probably going to be better for you financially, even if it doesn't provide the emotional payoff. If your employer will match your contributions into that account, then it's a no-brainer, but it's probably still a better idea than the mortgage unless the emotional payoff is very very important to you or unless you're nearing retirement age (so the tax-free growth period is small). If you're not sure what to invest in, just choose something that's broad-market and low-cost (total-market index funds are a great choice), and you can diversify into other things as you gain more savvy as an investor; what matters more is that you start investing in something now, not exactly what it is.

Disclaimer: I'm not a personal advisor, and this does not constitute investing advice. Understand your choices and make your own decisions.

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This is a great answer. – enderland Feb 1 at 13:46
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Not to mention that if you have your house but no income, the federal government can still take it from you for not paying your taxes on it... – rogerdpack Feb 1 at 18:12
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@enderland I agree relative to the others - this answer has some nuance, as opposed to the completely dogmatic approach of some other answers. – Aaron Hall Feb 1 at 21:22
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@rogerdpack : the federal government taxes houses? The state and local governments are the ones who set & collect property taxes. They can either set a lien against the property, or they might sell off the debt to a collections agency. (in the case of Maryland, that collection agency is allowed to add their costs of collection, up to $700) – Joe Feb 2 at 15:20
    
@Joe I stand corrected, thank you for the information (I guess it's at the county level that they may even foreclose, if you don't pay for long enough, at least here in Utah). Just to also add my $0.02, I imagine you initially want to have a house so you can "thrive" as it were. Thriving being the higher priority than the house, per se. FWIW :) – rogerdpack Feb 2 at 16:20

You say A #1 priority, that implies multiple #1 priorities.

Long term or medium term my goal is to pay off the mortgage. But short term paying off the mortgage isn't a concern.

Some people are comfortable with a mortgage during retirement, others aren't.

When I was younger the mortgage concern was not being overextended. I didn't want to be in a situation that dictated my financial decisions because I needed to make a big house payment.

Being overextended is no longer a concern for me. Now I am looking in more detail about how my retirement will actually play out. How to handle my actual retirement income sources. For me, not having a mortgage simplifies my planning.

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My compromise was to get a mortgage with a term that completes just before I expect to retire. – keshlam Jan 31 at 16:38

Paying off your mortgage early being good is a myth. It is great for the chronic overspenders to have their mortgage paid off so when they rack up credit card bills and get behind, well they still hae a place to stay.

But for those who are more logical with their money paying off your mortgage early in current conditions makes no sense. You can get a 30 year loan well below 4%. Discounting taxes for your average family you would have a rate floating below 3%.

So reasons that paying off your mortgage should be almost LAST (given current low long-term interest rates):

  • The first thing you should do is take care of any high interest debt. I would say that anything more than 7-8%, including all credit card debt should be focus #1.

  • putting money into your retirement savings is #1. You will earn way more than 3% over the long-run.

  • you can earn a higher return in the market. Even with a very conservative portfolio you can clear 5-6%, which will still clear more than 3% after taxes.

  • for those who say you can't be sure about the market... well if the market did bad for 30 years in a row no one will have money and the house will also be worthless.

  • if a disaster happens to your house and you own it, your money is gone. In many cases you would be able to declare bankruptcy and let the bank take the property as is.

  • there are just too many examples but if you are paying off your house early, you lose the flexible/liquid money that you now have tied up in the house.

Now the reasons for paying down your mortgage are really easy too:

  • you don't trust your spending habits

  • you want to move up in houses and you want to make sure that you have at least 20% down on future house to skip PMI.

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"if a disaster happens to your house and you own it, your money is gone. In many cases you would be able to declare bankruptcy and let the bank take the property as is." You mean you don't take out buildings insurance? – WhatEvil Jan 31 at 18:27
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-1. Paying off your house isn't about rate of return; it's about paying off your house. If a disaster happens to you (not to your house), and you own the house, then no matter how bad things get, the bank can't make your bad situation worse by foreclosing on it and throwing you out on the streets. – Mason Wheeler Jan 31 at 18:36
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+1. But I'd prioritize matched 401(k) deposits above all else. – JoeTaxpayer Feb 1 at 3:44
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@MasonWheeler - That isn't true. If a disaster happens and you need the money you will have to sell the house to pay for it, just like 98% of things. Therefore you will expect to get much less for it if you expect to sell it quick. Why would the money you have in the house be different than that money being in a 401k for example? Your comment really is misleading. – blankip Feb 1 at 3:45
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If a disaster happens to your house, that's why you have insurance. If you don't, you're a mug. As for the market, it doesn't have to do badly for 30 years - but you have to be lucky enough to get 4% net every year for the next 30 years, otherwise your house gets foreclosed. And that is luck - judgement plays no part. – Graham Feb 1 at 14:19

If you can make enough ROI from the capital you retain by not paying off your mortgage, then why not? I do, I could pay off a significant chunk of mortgage if I wanted but whilst interest rates are low there's little incentive.

As for another crash... Well, there's no reason to expect a crash would result in high interest rates, more the opposite, but you should consider what you would or could do if interest rates did jump to 15% for whatever reason. As long as your investments aren't too risky or difficult to liquidate, etc, you could always consider paying off a big chunk then, when it makes sense.

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A crash would almost certainly lower interest rates, but could also result in a massive uptick in unemployment. – GDorn Jan 31 at 21:59
    
Yep, so all the more reason to make sure your investments aren't too risky or difficult to liquidate, etc. – Michael Feb 2 at 10:51
    
It is likely you get a crash and high interest rates - but usually the high IRs cause the crash not the other way round. See the 70s for an example. I think its very unlikely however. I'd be more concerned that the investment return is not higher than the mortgage cost - esp as we've seen this year you could end up losing money on both mortgage payments and investment capital. – gbjbaanb Feb 3 at 9:46

Math says invest in the Market

(But paying off your mortgage early is a valid option if you are very risk averse.)

You are going to get a better return by investing in the stock market. In the US in 2015/2016, mortgages are 3%-4%, and give you a tax break. The rate of return on the stock market is ~10%, (closer to 6% after you subtract out inflation, taxes, fees, etc.)

Since 10 > 3, (or 6% > 4%, to use the pessimistic numbers) investing in the market is the better deal.

But...

The market has risk, and your mortgage does not. If you are very risk averse paying off the mortgage may make sense.

As an example:

Family A has a single "breadwinner", who works a low skilled job.

Family B has 2 working spouses, both in high skill white collar positions.

These two families are going to have wildly different risk tolerances. It may make sense for family A to "invest" its extra money in paying off the mortgage, after they have tackled high interest debt, built an emergency fund, maxed the 401k, etc.

Personally I would not: in the US you cannot recoup pre-payments if you lose your job. If I was very risk averse, I would keep my extra money as cash, so I could pay my mortgage after I lost my job.

It is never going to make sense for family B to pay the mortgage early. At that point, any decision to pre-pay is going to be based on emotion and not logic.

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The answer depends entirely on your mortgage terms - is the interest rate low, how many years left?

Questions like this are about Cost of Capital.

If your mortgage has a low interest for a lot of years, you have a low cost of capital. By paying it off early, you are dumping that low cost of capital.

Use the extra money to start a business, invest in something or even buy another property (rental). Whenever you have a low cost of capital, don't rush to get rid of it.

Of course, if there are no other investment/business opportunities available and the extra money is going into a low return savings account, you might as well pay down your debt. Or if you lack the self discipline to use the extra money properly - buying flat screens and meals out - then yeah just pay down your debt.

But if you're disciplined with the extra money, use it to get access to more capital and make that new capital work for you.

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Generally, paying down your mortgage is a bad idea. Mortgages have very low interest rates and the interest is tax deductable. If you have a high interest mortgage, or PMI, you might consider it, but otherwise, your money is better off in some sort of index fund. On the other hand, if your choices are paying down a mortgage or blowing your money on hookers and booze, by all means do the mortgage.

Typical priorities are:

  1. Emergency cash (e.g. one month expenses)
  2. 401k matching
  3. Pay off credit card debt (assuming it is high interest, e.g. >7%)
  4. Pay off PMI (pay mortgage down to 80% of home value, so PMI goes away)
  5. Invest in an index fund (e.g. 6 months expenses)
  6. Invest in a Roth IRA (up to limit ~5k$)
  7. Invest in 401k (up to limit ~18k$)
  8. Invest in index fund (everything else...)

Dave Ramsey has a more detailed plan.

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Highest priority compared to what?

Obviously priorities should be repaying debt in the order of interest percentage. Which means among your debts, the mortgage likely comes last. Trying to get a better mortgage deal however has a huge priority.

And if you have a choice between wasting money and paying off the mortgage, the mortgage should have higher priority.

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It is one thing to take the advice of some numb-skulls on a web site, it is another thing to take the advice of someone who is really wealthy.

For myself, I enjoy a very low interest rate (less than 3%) and am aggressively paying down my mortgage. One night I was contemplating slowing that down, and even the possibility of borrowing more to purchase another rental property.

I went to bed and picked up Kevin O'Leary's book(Cold Hard Truth On Men, Women, and Money: 50 Common Money Mistakes and How to Fix Them), which I happened to be reading at the time.

The first line I read, went something like: The best investment anyone can make is to pay off their mortgage early. He then did some math with the assumption that the person was making a 3% mortgage payment.

Any conflicting advice has to be weighted against what Mr. O'Leary has accomplished in his life. Mark Cuban also has a similar view on debt. From what I heard, 70% of the Forbes richest list would claim that getting out of debt is a critical step to wealth building.

My plan is to do that, pay off my home in about 33 (September '16) more weeks and see where I can go from there.

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i agree that paying off your mortgage can be nice from an emotional perspective, but even the "really wealthy" people generally don't make it their #1 priority. it's more like something you do when you are looking at retirement (or at least financial independence), not step #1. – james turner Feb 3 at 14:55
    
Utterly wrong answer here. "The wealthy" do not recommend any one thing or another as a group. Situations vary for everyone. Some wealthy are wealthy because they don't have this kind of debt in the first place (inheritance). Debt from one's home tends to be one's largest amount of debt only for middle class people. Those that are wealthy often have vastly more debt (buildings, businesses, boats, etc) that is far greater than simply the place they live in. – sohtimsso1970 Feb 4 at 19:04

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