Notice the question mark at the end of this post’s title.
I found The Top 5 Reasons to Pay Off Your Mortgage via Debt Blitzkrieg. I found most of the five “reasons” to be quite weak. Here’s their top five reasons to pay off your mortgage along with my response:
1. It’s money in your pocket.
Although the post’s author doesn’t come right out and say it, I have to assume that they are talking about paying off a mortgage as quickly as possible. This means using resources above and beyond those necessary to meet the monthly mortgage payment. The author even references the fact that some “financial experts” recommend paying off the mortgage BEFORE investing in your 401(k) or other retirement plan. This is very poor advice.
The fact of the matter is that to pay off your mortgage early requires a choice. You have to decide what is the best use of your money. Most of us have limited resources. We simply don’t have enough money to do everything we would like to do. Therefore we have to ask ourselves whether or not it makes sense to plow our extra resources into something that has historically not performed much better than a treasury bill? Not only that, part of that performance – the increase in the price of your house over time – you will receive whether you have a mortgage or not.
I’m not against paying off a mortgage. I just think people need to look at the interest rate they are paying and compare that with the return they could get elsewhere. If you have an extremely low mortgage rate, then it makes perfectly logical sense to invest any extra money in something other than paying down the mortgage more quickly than you have to.
2. You’ll save thousands of dollars in interest.
This is one of the biggest arguments for paying off a mortgage early. Unfortunately, they aren’t presenting the full picture because they totally leave out the opportunity cost of paying off the mortgage early. Sure, you may “save” yourself thousands of dollars in interest expense but what did you miss out on by NOT investing your money elsewhere? It’s a legitimate question that they didn’t answer. You can run the numbers for yourself by using my Mortgage Comparisons XL calculator. You can use the interest rates found on the HSH Associates website (at this writing, the national average for a 15-year fixed mortgage is 5.95% and a 6.27% for a 30-year fixed). Simply ignoring the opportunity cost doesn’t present the big picture.
If you have a mortgage with a high interest rate (I’m thinking anything over 8%), then it makes sense to pay off the mortgage as quickly as possible as long as you have a solid plan.
3. You’ll save money on the costs associated with a mortgage.
They refer to disability coverage and life insurance to pay off the mortgage should you get injured or die prematurely. Okay, I’ll give them this one. However, although I haven’t done the math on this one, I can’t imagine the insurance costing that much more.
4. You’ll have a large and valuable belonging that protects you from financial disaster.
Really? If times get tough because you have lost your job and your cash flow is bad, I wouldn’t count on being able to borrow against your house to pay bills. Why? Because banks want you to pay back your loan, which you can’t do if you don’t have income. Sure, you could sell your house and use the equity to pay your bills. However, this is risky too because what if you can’t sell your house? I would much rather have assets outside of my home’s equity to help me through tough times.
That’s their fifth reason for paying off your mortgage. Maybe so. Personally, I would be more satisfied taking my time paying off the mortgage while building my assets elsewhere. In other words, I would be satisfied having a larger net worth than simply having my house paid off.
Still not convinced? Then take a minute to read some of the other posts I have written on this topic:
More on Mortgages (from May 8, 2007)