The Top 5 Reasons to Pay Off Your Mortgage?

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.

5. Satisfaction.

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)

How an Interest-Only Mortgage Works

Interest-Only Mortgage Update

Check Out This Dave Ramsey Poll on Mortgages

Follow-up to a Dave Ramsey Post on Mortgages – This is Interesting!

10 Great Reasons to Carry a Big, Long Mortgage

A Look at Mortgage Payments

Ever Wonder What a Mortgage Amortization Looks Like?

Which is Better: a 15-Year or 30-Year Mortgage?

33 thoughts on “The Top 5 Reasons to Pay Off Your Mortgage?”

  1. Well, I am not going to go nuts paying off the house, but I don’t see a problem accelerating the payment a bit, especially in the first seven years of the mortgage. Different people have different risk tolerance… so some people simply are not comfortable with anything besides paying down debt and using a savings account. If they don’t have the knowledge of various securities, this may be an alright option for them.

  2. Anyone who reads my blog knows I’m not debt adverse. I think paying off one’s mortgage over purchasing assets is more risky, especially when one is young. I would prefer to have a more diversified and liquid assets.

    I also consider a primary residence a liability rather than an asset. Granted, it’s a liability that doesn’t depreciate, but it also one that is needed to live in and can’t be easily sold if times are tough.

  3. Every extra bit of cash you are plowing into your house could be plowed into the stock market. Retirement is not reached by owning a house, but rather by accumulating several million dollars in equities. And you can only accumulate such wealth by saving and saving early.

    With that said, I still can’t wait till the day my house is paid off!

  4. JLP it seems you are somewhat obsessed with this topic and rather forward about your numerous reasons about how ignorant people like myself are for paying off my mortgage early. I promised myself not to respond but since this is my favorite blog I cannot help myself. The reasons in my situation I am paying off my mortgage early are sound enough in factual reason I cannot be swayed. They are: 1. I am saving the max in my 401k and getting matched another 8 g’s from my company. 2. I max 2 ROTH’s for the wife and I do 5 g’s in a 529 and another 5.6 g’s in an HSA, really I don’t think additional savings are needed. 3. to be conservative if my mortgage is 6% and the house appreciates 2%/year and I have a super stable profession to allow me to sell if needed its a safe (bond-type) part of my portfolio-rest in equities. 4. my goal is to increase monthly cash flow to spend-not save since i’m saving enough (45%).

  5. I think on thing that is sometimes overlooked in these discussions is that it all depends on the cost of the mortgage versus the return on an alternate investment. Making a blanket statement that it is always better to invest rather than pay down a mortgage is misleading. Just as is the alternative statement that is is always better to pay down the mortgage.

    Most of the discussions I read here assume that you can get a 15 or 30 year fixed mortgage for less than 6 percent, and that you can get a high return in the stock market (10+%), or even a high yield (5+%)savings account. And that pretty much describes the situation at the moment.

    But the current condition isn’t going to hold forever. My first house mortgage in 1980 was at 12% for 30 years, and I felt fortunate to get it because rates went up after that. At those rates, it is a lot harder to argue that the stock market will consistently outperform a mortgage pay down.

    Now I’m not suggesting that mortgage rates are headed back to 12%, but every percentage point of interest added to the cost of a mortgage makes paying it down more attractive versus investing the money instead.

  6. I agree emphatically. In my opinion a healthy net worth statement is one where the person could liquidate assets (such as stocks & bonds) and pay off the mortgage. In other words, the added return of investing is worth carrying the debt for the home.

  7. I’d add a sixth point to the above five: Everyone needs someplace to live. Once you’ve paid off the mortgage, housing costs drop to almost zero – the only payments left are upkeep of the house and property taxes, both of which were being paid at the same time as the mortgage. So, with the mortgage paid off, your residence is secure from financial adversity. Besides, the home equity you’ve built up can be borrowed against relatively easily should money become an issue for a time. (Perhaps that should be reason 7?) The peace of mind from truly owning a home is worth it!

  8. Ok – obviously my “reason 7” is the same as number 4 above. Still, HELOCs are easy to get. Anyone who was able to pay off their house should have enough credit to be able to take one out. For that matter, you can open a HELOC now as a buffer against a later need. That way, the credit check comes when you have a job and no money problems. (My HELOC will stay open until I tell them to close it.)

  9. Pat,

    First off, thanks for saying that AllFinancialMatters is your favorite blog. I hope my thoughts on this topic don’t change your mind.

    Perhaps I come off a little strong on this topic. I tried to temper my post but I guess I didn’t temper it enough.

    I don’t think you are ignorant for paying off your mortgage. Clearly you have a plan. I congratulate you on that.

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  11. I think all the above points on both sides of the issue are valid. Clearly, the mortgage vs. pay-off mortgage debate depends on many variables.

    IMO, much really depends on where you are on the savings and NW curve. Since I have the liquid invmnt funds to pay off my mortgage if I really needed to, I feel comfortable having a sizable mortgage as a way to improve my asset allocation (i.e. as a way to have more funds to invest in stks/bonds). If I paid off my mortgage, then my assets would be heavily skewed towards r.e., which though it has served me well, is not really the basket I want all my eggs in right now. Yet, I retain the option value of the r.e. position as well – so in my mind its a win-win (so long as borrowing costs remain low and my liquidity would allow me to repay or substantially reduce the mortgage if rates rise).

    I also think that the equity in my home will be more than enough to roll into the purchase a new home when I decide to downsize (probably in 20 years). I figure by that time, I will not need a family size brownstone – especially one with the costly maintenance and upkeep a 100 year old home requires. I’ll probably get an apt if I stay in NYC, or a condo someplace in a warmer climate. At any rate, paying off the mortgage is not going to be critical to affording my next home.

    So, in a nutshell, I’m a good example of someone that is in no hurry to repay the mortgage, especially since I have a great rate, that does not start adjusting for another few yrs. Once it goes into the adjusting period, I may pay it down, depending on prevailing rates, but I have the fin’l flexibility to do that anytime it makes sense.

    If I did not have this kind of fin’l flexibility, I would be more focused on reducing the mortgage so that it does not become a burden in the future at retirement (which I prefer to think of as downshifting rather than ceasing to work).

    And speaking of retirement, I think this topic does feed into the whole concept of retirement. I could never see myself not working or not having any income, absent some major health issue. I would however eventually like to have more freedom to experiment with different business ideas, and writing, which would likely mean severely reduced income. At any rate, that planning certainly factors into the home/mortgage thinking as well.

  12. @FMF:

    I’m really pretty tired right now and not at all up for the next round of Mortgage Wars.

    However, regarding item #4: The way I took that wasn’t so much that it would give you the means to borrow in financial disaster (I’d rather walk on hot coals barefoot than consider borrowing against a HELOC). Rather, I looked at it as saying that in the event of a financial disaster, you don’t have to worry about the expense of your #1 priority: keeping a roof over your head.

    This to me is actually one of the most compelling points of paying the mortgage down early. When I was laid off, having to keep the rent payments current was really hard. I actually got behind on all the rest of my bills, but managed to never pay the rent late. It took every penny of my unemployment insurance and more to do this.

    (And of course since I was renting I had a nice clause in my rental agreement that started tacking on $50/day if I was more than three days late with rent, and allowed them to evict me after a very short time. I couldn’t AFFORD to get late on the rent).

    So — forwarding that experience to the mortgage situation, I like the idea of having the mortgage paid off because then you need less income every month to stay afloat.

    (The same is true of financial independence — if you don’t have a mortgage to worry about, you simply need less monthly cash inflow).

    I really hope that as I build up my full year’s emergency funds that I can grow less anxious about affording my housing costs per month. I never completely relax about being able to make my rent payment. Likewise, that same anxiousness is one of the factors that bars me from buying a home, because I’m anxious about the potential of being foreclosed on if I am laid off again.


  13. I realize that Pat has a plan and that’s a lot more than most people. However, I think (s)he would be better off if the additional money was poured in the stock market. If the gains are be 10% (and Vanguard’s S&P500 has been 12% since inception) over the long term then the money could grow faster and be used to pay off the mortgage faster.

    I realize that the stock market isn’t a 100% certainty, but over a 20-30 year span, it has been a certainty. I’ll take 99% chance at making 10% vs. a 100% chance of making 5% (the cost of many mortgages after deducting interest).

  14. P.S. — After reading my own post I realized I must sound like a neurotic mess. Two facts:

    1. I have absolutely no problem making my rent payment in my current situation. My rent payment is about 25% of my take home pay. My anxiousness about making rent is in the event I lose my job.

    2. I work in a company/industry where layoffs are frequent. Every year they cull the herd at least once, and every time it touches my department. My fear of being laid off is not an unrealistic phobia on my part, though I’m working to be better prepared if it happens to me again.


  15. @ DB:

    How many years until your mortgage will be paid off, if it isn’t already? I read your posts (#14 & #16) and if your house isn’t already paid off I would think that you would WANT to save money outside your mortgage instead of paying your mortgage down.

    If your company/industry has frequent layoffs and you do have a monthly mortgage to pay, where are your backup savings to pay the mortgage?

    I realize you don’t want to invest that money in equities but what about a high yielding savings account? You will have the safety and liquidity you desire but also have that money saved up in case you need it during a layoff (pay bills, mortgage, living expenses).

    Why not keep saving into a high yield savings account and when it equals your mortgage debt then pay it off in full?

  16. If your home is paid off, you will always have a place to live. If times get really tough (anyone remember the depression?) your kids and grandkids will have a place to live too.

  17. @20BigOnes – If I am reading DB correctly, he/she does not own a home, they rent. (Ref:” My rent payment is about 25% of my take home pay.”)

    @DB – I have to admit that I am very surprised that you do not actually own a home (and by default a mortgage) given your strong views on home ownership. For what it’s worth, for the past 20 years I have worked in very cyclical and competitive fields where lay-offs were commonplace, less so nowdays, but just wait til the next economic downturn. I know what you mean about the culling process every year.

    But, I’m here to tell you that once I learned to stop living out of fear of the unknown future, it really opened me up to start succeeding financially. I’m not trying to lay some new age BS on you. It’s just that fear generally keeps people from making the investments (whether securities or career or education, etc.) that lead to greater financial freedom. IMO, calculated risk, via investment, home ownership, and yes, even taking on debt for the right reasons, is a critical part of growing your wealth.

  18. 1. I don’t have a mortgage because I’ve been digging myself out of a horrible mess of debt. It’s all documented on my own blog. Including my savings plan to save up my emergency fund and a downpayment on a house. It’s not like I haven’t been trying. I suppose you’d like me to have taken out a mortgage like a lot of other did under terms that I simply couldn’t afford? Like an ARM at subprime rates with a monthly payment that would swallow an entire paycheck every month?

    2. Can we bring a little reason to this whole discussion of paying down a mortgage? There are two possible approaches to paying it down. The first is a full-onslaught “pay-every-penny” approach. The second is to pay one or two extra payments a year, to shorten the duration of the mortgage while also not shortchanging the need to save and invest. I’ve said elsewhere that I advocate the extra payment or two a year approach, not the pay-every-penny approach.

    3. @20BigOnes: You make a huge invalid assumption that I don’t want to save money in equities. I’m saving money in equities every month.

    I am really starting to get offended and attacked here, by JLP and other, like I am somehow unreasonably adverse to being in debt. I KNOW that I am going to have to take on debt to ever own a house, and I don’t have expectations of paying it off in 4-8 years. I would like to pay it off in 15-22 years. I would NOT be doing this and sacrificing savings (Yes, in equities too, spare me the lecture that there are high-yield savings accounts since equities are too rich for my blood.) If you’ve got a problem with that, too bad. I’m doing the best I can. If you’d like to actually know something about my situation, I invite you to read my blog at


  19. Here, I’ll give you the cliffs notes pointers to recent posts where I talk about how I’m saving money:

    In addition to this I make a monthly contribution to a Roth IRA.

    And here you can get a fairly succinct description of my big picture.

    Finally, here you can see the big thing that really motivates me to be out of debt (and why it may be irrelevant for me to buy a house):

    I am NOT obsessed with this mortgage topic. In fact I have several other priorities ahead of a mortgage. I just have a countering point of view to the idea that it’s never good to pay the darn thing off.


  20. What most people seem to forget is that owning a home outright does in fact have its own risks as well. If something drastic were to happen (such as Katrina, tornado, fire, etc.) and the insurance company either underpays or, worst case, goes under before you get paid, you are now out a house (and all the equity.) You are dependent upon the insurance company for getting the place either rebuilt or at least get the money to purchase another house. In the meantime you may have to tap your 401(k) and IRA to get by, thus reducing your retirement funds (and creating more long term risk.)

    The second risk that no one seems to realize is that if you are paying your house as fast as possible, you are not putting the money away for investing. This means less liquidity in case something were to happen before it is paid off. So, if you get the 15 year mortgage, pay extra to the mortgage, and something happens when you have 3 years left to pay it off, you now have less money available that is liquid to pay the mortgage payments. Furthermore, you have less money to pay a higher minimum payment that you would not have on a 30 year mortgage. Finally, if you are unable to make the payments due to lack of income, you cannot tap into the equity of the home because of a poor debt/income ratio. This means that the only way to avoid a forclosure would be to sell the house.

    Debt does not necessarily mean high risk, and investing in index funds over a long period is less risky than your home. Think about it…when was the last time the S&P 500 went to zero? How many homes in New Orleans went to zero worth?

    It seems that from a mathmatical point of view, your lowest risk comes from when your liquid assets are greater than your mortgage. You now have the best of both worlds, and the 30 year mortgage along with the investment of the difference gets you to that lowest risk point fastest.

  21. Steve, I’d argue that you’re right, but only if you do something intelligent with your liquid assets. You have to be making a better interest rate than you’re losing with the mortgage in order to have that be the best option. And certainly, many people do that. As my financial advisor says, any debt that you’re making money on is good debt, and you want as much of it as you possible can have.

  22. I put my mortgage on a 15 year mortgage. It is a trade off for my risk adverse wife. My wife hates debt so much that she wants me to pay off zero interest purchases early! Paying off the mortgage early gives her a peace of mind that a slighty higher net worth will not achieve. Investing is not a purely logical exercise. Paying off the mortgage meets my wife’s emotional need for security as she defines it so it is well worth it for us.

    Also, in 12 years, I will be 55 with a paid off house, college paid off (hopefully!), and solid retirement savings. AT that point I will feel secure enough to do whatever I want workwise: retire, keep working, take an easier job, travel, whatever. With no mortgage and no 529 payment, I will feel free as a bird.

  23. I have removed the original post from my blog, which was a link to the article plus a short comment about how I liked the idea and would feel free to not have a mortgage payment.

    I am not speaking about mortgages in JLP’s blog again.


  24. Asset allocation/risk view:

    I’ve probably said this before, but a mortgage is a negative bond. If you own a GNMA fund, you might even be paying yourself (and a middleman).

    So, if you pay down your mortgage, you might need less bonds/money market/emergency funds and can put more in stocks.

    It all depends upon your ability to weather risky situations. There’s lots of factors here (income, age, emotional risk tolerance, etc…).

  25. Since this post is based on my original post on 5 reasons to pay off your mortgage, I think I’ll jump into the fray here!

    Not everyone is going to take their “extra” money and invest. In fact, the vast majority of folks are paying off their mortgage (and hopefully their credit card bills, but certainly not always) and happily spending the rest on whatever catches their eyes. If they have money in a 401(k), they are already unusual. To assume that folks will take their spare cash (if they have any) and invest in something other than what the local bank offers them is … REALLY unusual.

    The mortgage is tangible. The house is tangible. If it’s not the ‘best’ investment, it sure beats the heck out of having no investments of any kind!

    I’m absolutely not against investing — as long as you are also paying off the mortgage as quickly as possible. After all, there’s lots of time for investing, with money that really is “spare cash”, if you get that mortgage deep six-ed as soon as possible.

  26. If you have a 30 year amortized loan then you are not saving only the interest by paying off your loan you are saving the Net Present Value of the
    actual payments which include principal portion.

    If you have a 125,000 loan at 6.65% then your payment is around $800 principal and interest. So in terms of cash flow by not making the $800 x 12 payments of $9,600 you are giving yourself an immediate return $9,600 on your $125,000 loan which equals. Let’s assume you are in year 10 of your mortgage…your principal balance is around 108,000 now. Your annual payments are still $9600. So your return based on cash flow is 9600/108000 or almost 9%. At year 15 your principal balance is approx 92000. Your return then is $9600/92000 or 10.4%. These are risk free rates of savings. Therefore…when your principal balance falls to the level where to total of your annual payments produces a risk free rate of return…THEN if you have the proceeds…PAY OFF THE MORTGAGE.

  27. It only makes sense if you can not make more than your mortgage rate. Otherwise, why pay it off early? If you have refinanced during the last 5 years, it is possible that your mortgage rate is lower than some online banking’s saving’s rate. In that case, why not have your money earn more money by not paying the mortgage off early?

  28. There is also the “fiction” or “possible fiction” of your home interest being tax deductible. Most of us currently pay, or will be paying, AMT, which pretty much eliminates many tax deductions. If you are paying AMT (last year my bill was almost 10K) then you are taking too many deductions on your federal taxes. Since you cannot get rid of state income taxes, or real estate taxes, reducing your other tax deductions (you can’t pay off your little children so mortgage interest will have to do) will “save” (i.e. cause your AMT burden to be less) you money. This should also be a consideration when calculating the value of paying off a mortgage vs investments. Investing the money (assuming you max out on 401ks & IRAs) potentially creates an income taxable event while paying off the mortgage reduces not only liabilities (interest) but also reduces the amount of AMT one may pay (especially those with either high mortgage balances, in high state or real estate tax states, or some combination of those)which is in essence a double tax.

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