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Pay Off Mortgage Early or Invest?

Written by Nickel - 424 Comments

Should you pay off your mortgage early? Or should you focus on investing with your spare cash? This is one of the most hotly debated topics in personal finance, with vocal proponents on both sides. Today, I thought I’d take a look at this issue from both angles and then share our approach with you.

Why you should pay off your mortgage early

One of the biggest advantages of paying off your mortgage early is peace of mind. Once you’ve paid it off, you’ll wake up every morning and fall asleep every night knowing that the roof over your head is 100% yours. For many people, you can’t put a price on that sort of security.

Beyond the comfort/security aspect, paying off your mortgage early is a bit like locking in a guaranteed investment return. For every dollar that you pay early, you’re “earning” the interest that you would’ve otherwise paid on it over the balance of the loan period. This sounds great, right? Well…

The flip side of the “guaranteed investment return” argument is that mortgage interest rates are often quite low, and interest payments on a mortgage are also tax deductible (for those that itemize). These factors make early payments lose a bit of their luster.

Another advantage of paying off your mortgage early is that doing so protects you from yourself. While paying the minimum on your mortgage and investing the difference might sound like a great idea, there are no guarantees that you’ll actually follow through on the second part of the equation.

To see how long it might take you to payoff your mortgage, there’s a mortgage payoff calculator at this site for mortgage calculators

Why you shouldn’t pay off your mortgage early

The biggest downside to paying off your mortgage early is the (potentially large) opportunity cost that you’ll face. By this I mean that you’ll be giving up investment returns that might significantly outpace your mortgage interest rate.

In other words, why pay off a 5% mortgage when you could be earning 8-10% on that money? Of course, one only has to look at the past year to know the answer… Those sort of returns aren’t guaranteed, whereas the mortgage savings are.

Another important point to consider is the effect of inflation. Over time, inflation erodes the value of the dollar. This means that your future mortgage payments will effectively cost less than they do now, as the money you’ll be sending in won’t be worth as much in terms of “real” buying power.

What are we doing?

Instead of pretending to know what’s best in your situation, I though I’d tell you what we’re doing. We’ve actually gone back and forth on this issue, but ultimately decided to do a bit of both. And yes, I know that answer is a total cop-out, but it is what it is.

We are currently in the fortunate position of being able to max out our retirement accounts while having enough left over to put some extra cash toward our mortgage and to work on building up a non-retirement portfolio, so… That’s exactly what we’re doing. I view it as a bit of extra diversification.

A bit over a year ago, we refinanced from a 30 year fixed rate mortgage down to a 15 year fixed rate mortgage. In doing so, we cut our time horizon in half. Beyond that, we’ve been sending in an extra principal payment every month, further reducing the time until we’re mortgage-free.

Admittedly, this hasn’t been an easy decision for us, and we’re still tempted to waver at times. After all, now is a great time to refinance, and I also suspect that there’s a good bit of inflation looming just around the corner.

Given the above, we’ve been tempted to refinance into a rock bottom 30 year fixed rate mortgage and pay it off as slowly as possible while we focus on building our investment portfolio. However, a wise man recently reminded me that “pigs get fat, but hogs get slaughtered.” In other words, it pays to be greedy, but not too greedy. In the end, we opted to stay the course.

What about you?

Where do you stand on the mortgage pre-payment issue? Are you looking to get out of debt come hell or high water? Or are you paying off your mortgage on schedule while focusing on your investments?

Published on May 15th, 2009
Modified on June 23rd, 2011 - 424 Comments
Filed under: Debt Reduction, House & Home, Mortgages, Real Estate

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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424 Responses to “Pay Off Mortgage Early or Invest?”

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  1. 1
    Matt Says:

    Using mortgage proceeds to invest in the stock market could make sense for the reasons you give. But it doesn’t make sense to invest mortgage proceeds in bonds, CD’s, or other low-return investments because the marginal return (if any) isn’t worth the risk. In practice, this means your investment portfolio should be 100% stocks until you’re out of mortgage debt. Only after that does it make sense to hold the ‘diversified portfolio of stocks and bonds’ the experts talk about.

  2. 2
    Nickel Says:

    Matt: The vehicle doesn’t technically matter as long as it outperforms the mortgage interest rate. Going “all in” on equities will raise your expected average rate of return, but will also create a very volatile (risky) portfolio.

    Look at it this way… Back in the early 1980s, CDs were paying 10-12%. I know this, because I was heading into middle school around that time and I bought some with the money I was saving for college. Now, I’m not suggesting that 10-12% CDs are just around the corner, but think of the (guaranteed) killing that you could make if they were.

  3. 3
    Frank Curmudgeon Says:

    Depending on your tax situation, you might be able to buy municipal bonds with a higher after-tax return than the mortgage rate right now.

  4. 4
    Corporate Barbarian Says:

    To us, mortgage = debt, and we wanted to rid ourselves of all debt. It’s a great feeling having one less monthly payment, and a big one at that. You can go through all of the analysis that you’re missing out on tax deductible interest, or the opportunity cost to your missed investments, but each extra principal payment brought us closer to financial freedom. I don’t regret the decision at all.

  5. 5
    Baker @ ManVsDebt Says:

    This is a great overview of the issue. I don’t own a home, nor do I invest, however you asked my opinion (at the end of the post) so here it is.

    When I hear people talk about this issue, I always like backing into the question. By that I mean examining on whether or not you would borrow additional money on your house to invest in the stock market or bond markets.

    For most, the answer would be no. I understand you always are going to need more motivation to change than to not change. But for me, I can’t imagine myself doing that, so I would primarily focus on the mortgage debt first.

    Maybe my tune will change in 2-5 years once I’m faced with the issue head on! Hopefully, I’ll be lucky to be in your situation Nickel. A little for everyone!

  6. 6
    Mike Says:

    I was laid off in 2002 and was looking at a prolonged unemployment. Salaries in my profession were plummeting. I ended up being unemployed for about 18 months with a salary about 50%.

    I had the cash available from a great contract the previous year. I looked at how many months of house payments that cash would make vs. paying it off. I considered the interest part of the payments as a waste of cash at the time and paid it off.

    Piece of mind has value…

    Now I am probably saving about 50% between various retirement & personal accounts. Savings can build fast if your not sending it to someone else, and you maintain your same lifestyle.

  7. 7
    Stacey Says:

    I think it’s important to realize that these two goals aren’t mutually exclusive. What’s the point of paying off the mortgage if you’ll be 55 with no investments when it’s paid off?

    We ran the numbers and are working to pay off the mortgage and hit semi-retirement in the same year. It worked out to be a 60/40 split, with 60% of our extra money going towards investments and 40% towards the mortgage. Of course, paying off the mortgage also reduces the amount of cash flow needed – which made our investment goals just a bit more reachable! We’ll run the numbers again once a year to make sure we’re still on track.

  8. 8
    adrock Says:

    We bought a house last month and decided to make a sizable extra principal payment each month (effectively making our 30 yr into a 15yr). Rationale behind the extra payment is that it forces us to remain frugal with our discretionary spending. If the money isn’t there to spend, it becomes a mentality. Whereas if we put the money in the market, its doesn’t have the same effect as being “gone”. We can alway close out positions. Our hope is that it reigns in our pattern of spending earlier in our careers, putting us on the path to financial independence down the road.

  9. 9
    Christine Says:

    Another advantage of paying off/down your primary residence mortgage that many overlook is asset protection, meaning that, in some states, the equity in your home is protected in the event of a lawsuit (like in Florida). So, someone may sue you and may get your non-retirement bank accounts/investments, but the equity in your home cannot be touched. It is different in every state and there are certain limits, etc., but it is worth looking in to.

  10. 10
    Nickel Says:

    Interesting point, Christine. I had never thought about that.

  11. 11
    RD @ money blog Says:

    For me the tipping point is if one can earn more than the after tax rate of mortgage however I was unaware of asset protection bough up by Christine, so I have to give this another thought…

  12. 12
    Stephen Says:

    We decided to do a bit of both as well. We’re on track to pay our 30-year mortgage off in 15 years or less, but we’re saving at the same time.

    Bi-weekly payments brought our 30-year to about 22.5 years, and we’re throwing in some extra each month towards the principal to bring it closer to 15 years.

  13. 13
    Dave Says:

    Mike hit the nail on the head. Not having to pay a mortgage is called “imputed income” and it isn’t taxed. For example, how much money do you have to earn every month to pay your mortgage? Say your payment is $1,000. If you are in the 25% tax bracket, you have to earn $1,333 to see $1,000 after taxes. So NOT having to pay $1,000 a month is like earning $1,333 tax free. (The government hasn’t caught on to taxing this “imputed income…..yet! LOL!”) This “imputed income” combined with the increasing value of your home (and yes, homes will again start to increase, at least the rate of inflation) would bring in as good or better return than stocks. Here is a Scott Burns article that explains the concept:


  14. 14
    Ben Says:

    We’re doing both just as Nickel outlines above. We max out our IRA, and then put the rest toward extra principle on our mortgage. Personally, in this economic climate, there is more of an emotional pull to enjoy a mortgage hanging over my head.

  15. 15
    GM Says:

    I like the idea of having the money in an safe(er)investment that offers a return equal to the interest rate or better. With the CD rates being low, an investment in a muni would offer a return close to the interest rate on the mortgage.

    That way the earnings on the investment are not taxed, you have the advantage of itemized deductions and in the event of a job loss or some other traumatic event, you can cash in your investment and pay off your mortgage.

    Additionally, you will need less of the amount invested to pay off your mortgage every month since the principal outstanding will reduce every month. So as you pay off your mortgage, this in essence becomes a nest egg.

    Of course one should have the amount needed to pay off the mortgage at hand in the first place and secondly have a disciplined approach never to touch this money for anything else.

  16. 16
    Matt Jabs Says:

    A few things:

    1. It is VERY attractive for me to pay off my mortgage early so I no longer have the payment. This would allow me to “semi-retire” and work at whatever job I wanted, however often I wanted.

    2. RANT **Inflation wouldn’t factor in nearly as much if our gov’t didn’t run the largest counterfeit operation in the history of the world – aka, they just print money whenever they want for all the wrong reasons** RANT OVER.

    3. Taking into account my point #1 above, I see myself being torn between choosing to completely pay it off early or do as Nickel suggests and do both. Pay off mortgage in around 7 years while maxing out retirement contributions.

    When it’s all said & done I’m going to say I would definitely lean toward having it paid off within 10 years, thus eliminating the huge interest amounts most home owners pay. In doing so, I would also prefer to max out my savings contributions along the way.

    I will let you know for sure once I pay off my $12,000 left in high interest consumer debt, which will take me another 6 – 12 months…Lord willing.

  17. 17
    Lance Says:

    Dave — I don’t think that’s an example of imputed income. Having fewer expenses per month doesn’t mean you’re earning more money, it means you don’t _have_ to earn as much money. That is, without a $1,000/mo loan payment you would be able to survive with a $1,333/mo lower salary.

    Or you could continue earning the $1,333, pay taxes, and invest the remaining $1,000. Which brings us to the question under debate.

  18. 18
    Rosa Says:

    We do both – we’re actually refinancing right now from a 30- to a 15-year mortgage, and if we continue to pay at our current rate we’ll be done in a total of about 15 years over both (the new mortgage is 2% lower than our current rate, so even with fees & taxes it’s going to save us quite a bit of money). That will put us completely out of debt before age 45.

    At the same time, we both contribute to 401ks and Roths. Plus a 529 for the kid – we treat the retirement and college accounts as monthly bills, along with monthly charitable donations & utilities.

    This lets us balance the insecurity of the stock market against the known cost of our mortgage. Plus, it means if one of the tactics turns out to be better than the other, we didnt’ miss out completely.

    I’m not sure about the psychological benefit of not having a mortgage – we will still have taxes & insurance to pay when the debt is gone, so we’ll either have to self-escrow or pay biannually anyway.

  19. 19
    Undertrader Says:

    I paid off both of my houses and here’s why:

    1) The stock market was tanking and there was no way I was going to be making a 10% return anytime soon without day trading, which I could do, but I’d rather play video games and go bike riding.

    2) I lowered my monthly expenses by $2000. That’s $2000 extra per month in my pocket while I have 2 paid for houses. That’s the most important thing to me. I could lose my job and have the market tank and go get a job at McDonalds and still be able to live in my 1900 sq ft house and pay all my bills with no problem at all. If I can make 10% on my investment cash, I can effectively retire.

    While everyone always says, “You could make more if you invest the cash!” Sure, you COULD make more, but you may not and then where are you? Without money and without your home potentially, which is what a good chunk of the country is looking at. My family is going through this recession and laughing. Our monthly bills including food come to less than $1000 a month with 2 incomes and 2 paid for homes, one of which is being rented by someone who lost their home that is bringing us $1500 a month. We could retire right now and have $500 cash extra a month and the stock market and recession wouldn’t affect us in any way at all.

    Now, with no bills, we can take that $2000 a month and do whatever we want with it, throw it in a Roth IRA, go on a cruise, buy a car with cash at the end of the year. It opens up so many opportunities and lowers your risk to the point where the current economic situation doesn’t matter. We can leave our investments and know we don’t need to sell our stock for the next 30 years, well after this recession is over.

    Pay off the mortgage if you can, the peace of mind is worth it.

    – Undertrader

  20. 20
    haus Says:

    I understand that the market has underperformed & there is no gaurantee of a higher return than your current mortgage rate. Let’s say you have a 30-year fixed rate loan for $200,000 at 6.0% and you have an extra $1,000 that you want to either a) apply to your principal or b) invest. If you happen to be sitting at year 5 of your mortgage when you have this $1,000 bonus, then you could pre-pay the mortgage and save over $3,400 in interest and immediately increase the equity in your home by $1,000. But if you invested that same $1,000 and happened to get an average of 8% growth over the next 25 years, then you’d have an investment account worth about $6,800.

    I’m investing the cash; isn’t having an investment portfolio that exceeds your mortgage the same as having it paid off? With the added bonus of higher returns.

  21. 21
    Rosa Says:

    Undertrader,the big issue is that the house is not easily convertible into cash, especially right now – if you lost your job and moved to get a new one, you’d be paying living expenses in the new place while trying to sell the old one. Being a landlord is like getting a second job, except if you get fed up or have a health crisis or something, you can’t just quit – it takes some untangling.

    Even if you don’t “make more money” on your investments (something that depends a lot on luck and market timing for both stocks & the house) for a lot of people the agility is important.

  22. 22
    Jim Says:

    We’re working on paying off our home early. The primary reason is the security we’ll have once we own our home debt free. But we made sure we had a good emergency fund first and that we also fully fund our Roth IRAs annually. IMO Paying down a mortgage should come after paying off other debts, building emergency fund and saving for retirement.

  23. 23
    Matt Jabs Says:


    I totally agree, this is exactly what I have planned. Everything in balance & moderation.

  24. 24
    Ashley Says:

    Here’s why I’m working furiously on paying my house off:
    A year ago, my neighbor’s tree fell on my house. My home-owner’s insurance sent me a draw of $20K to start repairs, with the “carrot” of $12K when the repairs were complete. The check was made out to me and the bank that owns my mortgage. The bank’s policy is to release $10K and then when the repairs are 50% complete, they will send another check for $5K and at 90% completion, they will send the last $5K draw.
    I have tried explaining to the bank that I can’t possibly get the job 90% done with only $15K. Like they care. So every extra penny I have is going into getting my house to 90% completion so that I can get the rest of the repair money so that I can get it 100% completion so that insurance will send me the rest of the money.
    So, eventually, I will end up with my house repaired and an extra $12K check. But I vowed when this is over that I will never owe a dime to anyone again. If another tree falls on my house, the insurance checks will be made out to me and only me to do with as I feel best.

  25. 25
    AG Says:

    Quite popular concern, wonderfully and timely handled.

    It may have a little off-track experience here as I have a car loan at present. I had this same question in my mind for days and I decided to go with following strategy:

    1) accumulate enough for my emergency funds
    2) start paying double the monthly minimum towards car loan
    3) create a simple CD Ladder with what I am left with

    Definitely stocks might also be a great place to park some of your money but I am considering to think stocks a little later.

  26. 26
    B7 Says:

    Like some other commenters, I would say both. And, the allocation of money and effort depends on your goals. If you just want to retire on Social Security (good luck!), then it is OK to invest mostly on paying off the mortgage.

    However, if you want to be rich, happy and wealthy, you need to become a successful investor. So most of the time and energy should be focussed on investing.

  27. 27
    BuffetFan Says:

    For my mother and for most people, who have better things to do then spend all their time on stock market timing. I recommend this:

    1. Build 3 months of emergency funds
    2. Pay off all high interest credit card debts
    3. Build 6 months of emergency funds
    4. Pay off all car loans
    5. Build 1 1/2 to 2 years of emergency funds
    6. Invest in the most solid returns with the lowest risk – payoff your mortgage or save for 20% down payment on a house.
    7. Invest money you can afford to loose 50% of in stocks.

    Do this and you’ll sleep better and retired better then the majority of the people.

  28. 28
    JerryB Says:

    I have less than $35k left on my mortgage. Once my car was paid off that money snowballed into my house payment. I now pay $1000 to the principal every month.
    With luck I’ll even have my Roth IRA fully funded by the end of June. Right now my intent is to have that money accrue in my mutual fund and use that to fully fund my 2010 Roth in early January. I know doing it this way doesn’t allow for dollar cost averaging, but my track record for years previous has left a serious dent in my retirement investments.

  29. 29
    Mary Says:

    Is anyone aware of an on-line calculator or software package that can help us weigh all of the variable in our particular situation? We are pretty balanced right now between very conservative investments and property, with our $100K mortage (5% fixed 15 year) being our only debt. My husband wants to pay off the mortgage as CDs mature.

  30. 30
    Michael Harr @ Wealth...Uncomplicated Says:

    @Nickel – I wrote an extensive piece on this subject to finally disprove the myth that keeping a mortgage and investing the difference is smart. I’ll leave it here for your readers at the end, but your strategy is exactly where it needs to be. Max out tax-favored retirement accounts, payoff the mortgage, then enjoy your freedom. From a behavioral perspective, keeping a mortgage doesn’t work; from a mathematical perspective, keeping a mortgage doesn’t work; from an environmental (externalities) perspective, keeping a mortgage doesn’t work. Here’s the analysis:


  31. 31
    DDFD at DivorcedDadFrugalDad Says:

    Paying off the mortgage early removes one of the greatest tax deductions people have– mortgage interest.

    Invest the extra money and use it as a fall back to pay the mortgage in an emergency.

  32. 32
    Michael @ The Life Insurance Insider Says:

    We just paid ours off. The hard thing is placing a value on is the risk that you remove from your life. If I got laid off then I don’t have to worry about that mortgage payment and we can cut our discretionary expenses way back. Most banks don’t like it when you try to cut back on your mortgage payments.

    Sure historically, you can earn more than the low interest you usually pay on your mortgage, but investment returns that earn more than 5-6% per year usually have some sort of investment risk involved whereas your mortgage interest is locked in.

  33. 33
    Michael Harr @ Wealth...Uncomplicated Says:

    @ Michael – Quantifying risk is a function of standard deviation and can be accomplished through Monte Carlo Analysis. For those that are unfamiliar with these types of analyses, you essentially enter the expected rate of return along with the standard deviation. As an example, if you have a portfolio that is expected to return 8% annually over the long haul, and has a 14% standard deviation rate (meaning that in most years the return will be between -6% and +22%), you can determine the probability of your investments paying off. These programs will run through anywhere from 10,000 to 1,000,000 hypothetical series of returns to spit out a simple percentage probability of achieving success. In the case of paying off a mortgage versus keeping the mortgage and investing the savings, we find that paying a mortgage off makes sense based on the variability of investment returns each year–not to mention behavioral and environmental factors specific to the individual/family. If you want to grab some software, Money Tree Software is one of the better (and least expensive) providers.

    At any rate, you 100% did the right thing in paying off the mortgage.

    If you want to see the analysis, the link is somewhere in one of the comments I made above.

  34. 34
    Michael Harr @ Wealth...Uncomplicated Says:

    @DDFD – If someone is pursuing this strategy that you advocate, then placing money aside in an emergency fund would negate the premium returns that make this myth go. While you might put a portion of this aside, when the markets drop like a rock, your core investment fund will look like less of a safety net and more of a fire pit fueled by your hard earned cash. The risk/return metrics just don’t add up.

    The tax deduction is a pittance compared to the multitude of risks endured over the course of a 15 or 30 year mortgage.

  35. 35
    Paul Says:

    In some of the comments, there seems to be some confusion regarding taxes and comparing pre-paying a mortgaage to a taxable investment. If the investment is taxable compare your mortgage rate to the expected rate of return (obiviously everyone needs to do there own risk adjustment). But DON’T adjust your mortgage interest rate for taxes unless you also adjust the investment rate of return.

  36. 36
    BuffetFan Says:

    If you have to ask all these questions about taxes and details about where to better invest your money. Look at comment number 27 and do it. You’ll be much happier. This is from someone who timed the market well in 2000 and 2007.

    My mother’s home is paid off before retirement and her stock portfolio didn’t take the loss in the recent down turn. She’s got her son to manage her money instead of leaving it to a financial advisor. I was hired as a financial advisor for Ameriprise but couldn’t bring myself to sell junk to people. So I had to end that career quickly. Most financial advisors follow computer based allocation and don’t take market condition into account nor do they have the time to manage every account. Stock is very risky and you’re more likely to loose money if you don’t time the market right. Please take it from someone who’s very good with the stock market but won’t sell bad advice for money. See comment 27.

  37. 37
    Brent Says:

    I’d pay my house off 110 times out of 100.

    Strange things happen when the house is paid off. You can deal with job layoffs, bad economy, emergencies, building wealth, giving and saving at a much higher rate than if you have a mortgage. Another thing that happens when you don’t have a mortgage is you don’t get foreclosed on.

    To many people forget to take risk into the equation when talking about paying off the home or not. You always hear why wouldn’t I invest my money to get 10% back instead of 5%? Once you take risk and inflation into account the difference is very small.

    You should be putting 15% into retirement and saving for kids college but after that anything left should go to paying the house off.

    I’m not this far yet as we’re still paying off debt, only a couple months left though.

  38. 38
    Ken Says:

    Leaving aside the psychological aspects of paying off a mortgage sooner (peace of mind, additional discipline), I think that you have to look at not paying off a mortgage and investing the cash NOT used for extra principal as similar to extra leverage in a portfolio. That is, the expected rate of return on your assets and risk will be magnified with borrowed money. As you pay down your mortgage, you deleverage and your expected rate of return and risk decrease. A lot people, including me, are more comfortable with lower risk, but should realize that this comes with a lower expected rate of return. The discipline in early payments, i.e. lower consumption, can eventually result in a re boost of return (not rate, but total return) once a mortgage is paid off and the mortgage payments redirected to a higher level of investment, at a lower leverage.

  39. 39
    Spending It Says:

    This post presents a great question — one that has crossed my mind a few times. I just made a post on our blog about this topic, with a link to this article, to build on the discussion. Cheers!

  40. 40
    Matt Jabs Says:

    @Brent – Amen, amen, amen!

    Since it’s publishing I have been kicking around this debate within my own mind (see comments #16 & #23 above).

    The more I debate it w/myself the more I conclude, “Self. You should pay off that mortgage and experience true freedom from debt.”

    My self finally agrees with me. ;-) Looks like it is settled.

    Thanks for bringing it up Nickel.

  41. 41
    GR Says:

    My wife and I like a balanced approach and therefore put money into the following; mortgage prepayment, 401k, 529, money market. Why? We don’t know what the future holds.

    When we were paying down our mortgage, all the ‘professionals’ advised against this, saying ‘cash is king’. I think they meant ‘debt is king’, which we disagree with. What allowed us to afford extra mortgage payments was the fact that we bought a small house (could have gone big). With a lower monthly payment we paid off 100k of principal much easier than otherwise. After 3 years we were in a position to buy a much nicer home. If we bought the big house first it would have been much more difficult to pay down the principal, since the interest portion of the load would have been prohibitive. Imagine where we’d be if we bought a large home on an interest only mortgage? Not that my point here is revolutionary, but note that the real estate ‘professionals’ would never be heard iterating such advice. In fact, if you were to listen to a ‘professionals’ advice, then do the opposite, you’d probably be in a better financial position.

    From a diversification point of view, paying down the mortgage seemed quite clever, considering the direction the DOW has taken. But we didn’t know this would happen while cutting those checks, so deserve no credit for ‘predicting the future’.

    We also invested in our 401k, which took a beating, but since we also have liquid assets as a safety net, we don’t need to take this out and get hit with a loss/penalties.

    So on a high level, diversify. On a lower level, diversify (no individual stocks). It’s easy, it’s boring but it’s working very well for us.

    And yes, cash is king, if it’s going into your pocket and not the banks.

  42. 42
    Joe Bleaux Says:

    I agree with Ric Edelman, the CPA Journal, and the Journal of Financial Planning . In mine and I believe most cases, the opportunity costs, loss of flexibility, and loss of liquidity are overwhelming bad reasons to invest in your mortgage. Particularly so when rates are so low – mortgages are the cheapest financing around. With a 30-year fixed rate of 5%, my real interest rate is just above 3%.

    Debt is a tool like any other – it can be used effectively or abused to evil ends. So many of the comments here reflect a belief that debt is bad in and of itself. Generally debts are good if used to acquire generally appreciating assets, such as education (student loans) and real estate (mortgages).

  43. 43
    JFP Says:

    I don’t care what the Journal of Financial Planning says. For most people, my advice would be, Pay off your house. When people say, “When you run the numbers, etc.,” my response is, “You tell me the numbers you’re running, and I’ll tell you the numbers you’re ignoring.”

    Here are some of the numbers these people are ignoring:
    1. Probability that you will lose your job.
    2. Probability that you will have a major medical problem.
    3. Probability that you will invest in a ponzi scheme.
    4. Probability that you will have some hassle from your bank (see #24 above).

    For these factors, it is much better to have your house paid off when dealing with them, and over the course of a thirty-year mortgage, they become rather likely to happen. And so for most people the answer will be, Pay off your house.

    I admit that if you are unlikely to lose your job or can easily get another one, go right ahead and invest instead.

  44. 44
    Chris Says:

    JFP hit it right on the head. There are many hidden risks involved that are difficult to mathematically factor in. In the end you have to learn as much as you can and go with a plan that allows you to sleep comfortably at night.

  45. 45
    Super Saver Says:

    Our plan was to pay off our mortgage by retirement. However, when I took early retirement in 2007, we were only 4 years into a thirty year mortgage, and making payments to pay it off in 15 years. Unfortunately, I convinced my spouse to keep the mortgage to stay invested in the stock market. In hindsight, a bad decision :-(

    Last week, we decided to cash out most of our stock investments and pay off the mortgage. Our main reason was to reduce our monthly expenses and our retirement savings withdrawal rate. Even if the stock market goes up another 30% in the next two months, I believe that we have made the right decision for us :-)

  46. 46
    delete all debt Says:

    Just a quick note. We are paying off our mortgage early. The interest deduction on Schedule A of your 1040 is a prime example of negative cash flow. Give your mortgage holder $1,000 then take a deduction on your Schedule A, Form 1040. If you are in the 25% tax bracket you get a credit for $250.00, heck of a return on the $1,000 you gave the mortgage holder. Any deduction that you put on Schedule A, 1040 works exactly this way. You may not be able to itemize your deductions if you don’t have that large Mortgage Interest deduction. You will lose the Mortgage Interest deduction over time, not all at once. You are still better off getting rid of that large Mortgage Interest payment. There is not any better rate of return anywhere. Most investment interest is taxable; some dividends are not, etc and you can flip, flop, hedge, nudge and calculate until the cows come home but it just plain simple math. Have a great day -

  47. 47
    Joe Bleaux Says:

    @JFP – if you lose your job, you’ll want to have cash or liquid securities available. If you’ve put your cash into your house, you won’t be able to get it back out. The same is true if you have a major medical problem. Do you want to be forced into selling your house when the real estate market is low because you put all your cash into paying off your mortgage?

    The same is true in the bizarre case of the tree – don’t you want to have some money in a liquid account so you can cover this sort of contingency? Might it also make sense to pay for the repairs with a credit card (gasp!) so they can be completed and you can get your insurance payments and get on with your life?

  48. 48
    Michael Harr @ Wealth...Uncomplicated Says:

    @Joe Bleaux – the plan to payoff a mortgage early is only suggested if you already have an adequate emergency fund, no other debt, and are maxing out tax-favored savings options. Also, if you consider many have mortgage payments that suck 25% of their gross income away, you need only live in a paid off home for three years to have a rock solid emergency fund that would be equivalent of a full year of take-home pay.

    If you have a good income, no debt, decent emergency fund, and are saving like mad, paying off a mortgage is the best option.

  49. 49
    delete all debt Says:

    Interesting conversations.

    Yes you should have a “rainy day” fund. You can still get Home Equity Lines of Credit (HELOCs) despite al the hoopla (harder to get sure, but still out there) and have that as an emergency fund.

    Build up a whole life insurance policy and be your own bank.

    There is always a way with good planning, good discipline and good thoughts. Be positive and the world will be positive with you.

  50. 50
    AnnJo Says:

    Right now my HELOC rate is only 2.99% with a balance from recently paying off a small mortgage on a rental property, my home mortgage rate is 5.5% and the rates available for savings/CD investments are about 1.75%. Leaving my emergency fund aside, my extra cash right now is going to pay off my mortgage. But that’s because I’m hoping to retire in about three years, and want to reduce my after-retirement expenses; if I were a decade or two younger, I’d probably be putting that extra money into more stock investments. I guess.

    I do have some grave concerns about having a sizable amount of my net worth (40%) tied up in one asset, my home, and over 50% in real estate, but the current poltical climate is so hostile to business and growth, and likely to get worse before it gets better, that I’m just too nervous to put more money out there (in the market) to be seized. Of course, when hating business doesn’t work at turning things around, hating anybody with anything usually comes next, but if we truly are going down the Zimbabwe-style path, I’m not sure what can save us. There’s only so much you can worry about, though.

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