We try to avoid one-size fits all declarations like “you should always pay down your mortgage early” or “you should never pay down your mortgage early.” I am perpetually surprised at how much people seem impassioned about this topic.
When it comes to mortgage debt, it is not at all black and white.
A particular commenter on MMM’s forum has really been bugging me lately. Every time someone wants to talk about the pros of paying your mortgage down early, he counters with the reasons why this is a dumb idea and people are prolonging their retirement dreams by doing it. Each and every time. Why is it his mission to talk people out of doing this? Are they paying him mortgage interest? Other forum members share some of his views and almost to the point of harassment, barrage the opposition with negative reasoning. Why do they seem so angry that other people want to pay off their mortgage early? Showing people the probable optimal math is one thing, but let each make an informed decision based on all of their circumstances (not yours – or his, in this case).
However much you want to highlight the reasons why taking on a mortgage may be ideal for your situation, hello – it’s still debt! It’s an obligation to the bank to continue making payments on a loan for the pleasure of living in your house. Let’s face it. It’s not actually your house until the mortgage note is paid in full. Even then, you have to continue to pay taxes or else you could lose your house. We understand that in the U.S. it seems like low mortgage interest rates are the norm and they certainly have been for almost a decade, but it hasn’t always been this way and it certainly won’t continue forever.
We have shared that one of our early retirement goals is to pay off our mortgage early and save over $40,000 in interest in the process. We have been pleased that some of our fellow PF bloggers have similar views on the subject. Sure we are also saving for our retirement by filling up our gap-year savings bucket and our traditional retirement savings bucket, but we feel that paying down our mortgage early as well is a good strategy for our situation.
The bottom line is under some circumstances, paying off your mortgage early does not make financial sense and in some circumstances, it does.
It’s a little more complicated than just – is your interest rate lower than the earnings you may make by investing those funds instead? Hey, half the Need2Save team is a super-math-nerd (I love you honey!), so we don’t dispute the math that if you invested your money instead of paying extra, you probably will make more vs. saving on the interest in today’s low interest environment. Probably is a key word here. There are no guarantees about market performance but if you have a fixed mortgage, your interest costs are certain.
We want to lay out more details about our views on the matter in defense of both sides of the argument. The core debate here assumes that you have extra money after paying your basic living costs and you are deciding between paying down your mortgage early and investing this money instead.
SOUND REASONS TO NOT PAY DOWN YOUR MORTGAGE EARLY
- You haven’t maxed out your retirement savings contributions yet (especially if you are foregoing company match at your workplace)
- You still have other non-deductible consumer debt (credit cards, personal loans, or car loans)
- You plan to sell your house very soon so long-term saving on interest will be unrealized
- You don’t have sufficient emergency funds and other liquid assets to tide you over if one of you lost your job or became seriously ill
- You enjoy the full mortgage tax deduction for the interest that you pay*
- You are confident your investments can earn more than the amount you pay in interest (here’s the math angle, assuming you have a low-interest rate and markets perform well)
- You have a long horizon until you plan to stop working
- You are comfortable with debt
- You are comfortable with leveraging debt and taking financial risks
- You are not planning on Roth conversions in early retirement and have other options for health insurance before Medicare becomes available to you (perhaps you will have retiree health insurance, TRICARE, or Medicare if you are permanently disabled and under age 65)
- You paid at least 20% down and aren’t paying PMI (Private Mortgage Insurance is extra mortgage insurance when your down payment is less than 20%. PMI protects the bank and does nothing to help you personally)**
SOUND REASONS TO PAY DOWN YOUR MORTGAGE EARLY
- You are already maxing out all the tax advantaged retirement savings you can, including getting the full company match at your workplace, if available
- Your assets are diversified. You have other non-housing assets and investments and paying down your mortgage is not your only financial goal
- You do not realize the full tax break on mortgage interest*
- You plan to retire early and are planning to perform a Roth conversion ladder to convert pre-tax retirement savings into Roth retirement savings and pay as little income taxes during the process as possible (your retirement income would need to be much larger if you needed to continue to pay a mortgage payment in addition to doing Roth conversions). This becomes even more important the closer you are to pulling the trigger on early retirement
- You expect to use the marketplace for healthcare insurance before becoming eligible for Medicare and you want to limit your income to qualify for ACA subsidies (assuming they or similar credits/subsidies continue to exist in some form)
- You are not that comfortable with maintaining debt and want the satisfaction of knowing that you do not owe the bank (sleep better at night factor)
- You have an ample emergency fund or other liquid assets and could live on one or no salary for an extended period if you lost your job(s)***
- You want to get out from under PMI**
- You are not subject to pre-payment penalties (now-a-days most U.S. mortgages are not subject to this. However, once-upon-a-time it was more prevalent)
- You will be paying for college and are pretty certain the schools your child will be applying to require only FAFSA disclosures (no alternate parental asset forms like the CSS or similar which factor in equity in your primary home)
*We must elaborate more on the mortgage interest deduction because we feel this is vastly over-played by the real-estate and mortgage industries. The mortgage interest deduction can be meaningless or significantly diminished on both ends of the income spectrum. If you are in the very lowest income brackets, you perhaps pay no income tax (or very low income tax) so the interest deduction is little-to-no value to you. On the other end, if you are in one of the highest income brackets, you may be subject to the interest deduction phase-out rules. Lastly, at any income level, if your mortgage is rather small and your interest payments and property taxes (and other allowable deductions) are below the standard deductions that you qualify for, the standard deduction is better for you and therefore, the mortgage interest is again meaningless to your personal tax situation. I also think that many people fail to fully take into consideration the decreasing interest deduction over the life of the loan. You may cross over from deductible to non-deductible territory mid loan.
**We would accelerate mortgage payments to get out from under PMI and then re-evaluate whether continuing to pay early is a good idea or if you need to scale this back to accomplish other financial goals based on the additional factors mentioned above.
***Consider the overall size of your mortgage. The smaller your mortgage, the more likely you can continue to make payments if one of you loses a job or becomes disabled. If your mortgage is very high – you may be forced to downsize if you can’t keep up with the minimum payments and a significant amount of your assets are locked up in your house. Some people suggest using a HELOC to borrow against the value of your house under these circumstances.
OTHER IMPORTANT FACTORS TO CONSIDER:
- Are you a single or dual income household?
- How close are you to retiring and what is your retirement income strategy (do you have a pension, social security income, will you be drawing down all pre-tax, all post-tax or a combination of pre and post-tax retirement accounts?). If you need to tap into the equity in your house to pay for retirement then this should be something you consider.
- Do you plan to continue to own the current house or do you plan to sell it?
- Do you want to continue to live there or rent it out for income potential?
- Do you have enough equity already in your house that if you sold it and bought something smaller in cash – you could reach your FIRE goals sooner?
- What type of mortgage do you have? Is it interest only? Is it adjustable or fixed?
- What is the housing market like in your area? Are home prices rising, falling, or staying flat?
- What is your job situation like? Is it possible you may need to or want to relocate for work?
- Are you dealing with a significant medical issue for someone in the family that may require additional resources in the short-term?
Home ownership is not for everyone. Perhaps renting for some time (or forever) would be better for you? We are certainly rethinking how long we may go as renters instead of homeowners once we get to FIRE. Even after considering the potential tax savings on interest, it may be possible to rent for much less than owning a home in some areas. We recently met up with Mrs. WOW from WafflesOnWednesdays when she was visting on the East Coast. For the area they live in on the West Coast (LA), it sure seems that renting is the way to go and they recently posted about it here. When you rent, you avoid paying property taxes, insurance, and maintenance costs. Plus, renting sometimes comes with perks like access to a community pool, fitness center, even shuttle service to other amenities.
Maybe you want to be in perpetual travel mode and are okay with short-term or long-term rentals as you move around or you plan to live in an RV. Renting provides you more flexibility and mobility (assuming you don’t drag too much stuff around with you each time). In addition, when you rent long-term, someone else is responsible for the property when you are out globe-trotting.
This whole conversation reminds me of my dad. He was a realtor. He made his living on other people buying and selling homes. Did he own? You guessed it. He in fact rented. His income was very ‘lumpy’ as a realtor and sharing rent with others made sense for him and kept his expenses low as a single person.
We really value non-threatening, open dialogue in this community. We try to encourage one-another and not try to make others feel stupid or inferior simply because their saving strategies and priorities are different from ours. We certainly aren’t here to judge your choices because we don’t like to judge and because we don’t know what all of your personal and financial circumstances are. We share details about our situation and strategies to help others who may be in similar circumstances and to solicit feedback on how we can make our plans stronger.
You may fall in the ‘pay down early is glorious and satisfying,’ ‘don’t pay down, invest your extra cash instead ,’ or ‘no way, we are renters for life’ camp. All choices are fine with us. We’ll celebrate your financial successes regardless and promise to leave out the raging negativity! Are you with us?
Tell us. Have we missed any considerations in the pros and cons list? Have you encountered this “all-knowing, mortgages are king” philosophy?