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SHOULD I Pay Off My Mortgage? What Are the Pros & Cons?

cuban smokes

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So, I'm looking at possibly paying off my mortgage but I'm not really the 'finance' guy.

I can pay it off; that's not the issue.

The question is, SHOULD I pay it off & what are the 'pros' and the 'cons' to paying off a mortgage?

Please chime in with opinions & if we have any real estate folks here that would be cool too :mrgreen:
 

Can you make more money than the cost of carrying the mortgage? The mortgage deduction is gone for most people, so that takes away the great incentive to carry a mortgage, but not the only reason.

Time value of money, a very important concept to understand.
 

so, I guess you are referring to mortgage payment, property taxes, insurance, etc. ?
 

I had the same dilema a few years ago. Many will say not to, as you will loose the tax relief a mortgage provides. However, you can not put a price on the peace of mind having your home paid off. I chose the latter, and have never regretted the decision. Not having that mortgage has allowed me to save a considerable sum, and allowed me to travel extensively. Its a personal financial decision, one that many others can only envy, either way I wish you best of luck.
 

The mortgage interest deduction and property tax deduction was NEVER a good reason to buy a house. Owning a house, an asset most likely to increase in value, IS a good idea. If the money you would use to pay off the mortgage earns you more than the mortgage interest costs then there's no reason to pay off the mortgage. If the income rate and the interest rate are roughly the same or your money is earning less than the interest rate you should pay off your house. If you are heading for retirement you should DEFINITELY pay off your house.
 

My house has been paid off for a good decade now and there is nothing quite like the peace of mind that gives you. And the extra money each month that you keep in your pocket is a real bonus that can elevate your standard of living.
 
cuban smokes said:
so, I guess you are referring to mortgage payment, property taxes, insurance, etc. ?
Click to expand...

No, you are still going to have to pay for property taxes and insurance. Can you make more money by utilizing the funds you would use to pay off a mortgage on a different investment. If yes, then you shouldn't pay off the mortgage, if no, then it is worth considering. You are paying the bank to give you that money and amortization means the early years you are paying more in interest than later years. If you are in the first 5-7 years of a mortgage, then your payment is still mostly interest.

Have someone help you with the math scenarios. Plenty of mortgages, time left in the mortgage, etc. which you haven't shared, so still somewhat a vague question.
 

The only down side to paying it off is your impound account is really handy. The bank pays your homeowners insurance and taxes so you don't have to remember to do it. And if you forget, here in California they go ape **** on fines and penalties.

Bottom line if you are paying, say $300 a month on interest which you can't write off due to the standard deduction, AND and $300 on equity and $200 on impounds, you pay it off and could pay your bank account back in a few years or just add the $600 into your spendable income. Equity + Interest (you are still stuck with paying taxes and insurance yourself)

I hope this make sense.

And don't forget the grinning satisfaction of owning it free and clear!
 

Since he didn't ask whether he should get a mortgage and he already owns a home, your first sentence doesn't apply. The rest is a rephrasing of what I said.

As for heading for retirement, it isn't 'DEFINITELY' that you should pay off the house, the same criteria can apply. I literally ask that question of my financial advisor and for my situation we went back to the same answer of is the money doing better than the cost of carrying the mortgage. For me, the answer is yes, I'm making more than the cost of carrying the mortgage.
 

Never heard of an impound account, do you mean escrow?

If you are below the standard deduction, you can't write off anything. It is an either or. Most people will be taking the standard deduction now that it is so high which means that most people won't be itemizing. If you itemize less than the standard deduction, the government is perfectly happy to allow you to claim less than the standard. This changes the math for the question the OP asked about paying off a mortgage. Still might not change the answer, but it is worth considering whether a mortgage suits ones overall financial picture.
 
Depends...what are your other debts and what are your plans once you pay off the mortgage. If you have any credit cards, you should pay those off first. Then any cars/vehicles/RV loans. Stealing a chapter from Dave Ramsey, if you dont have an emergency savings, you should do that next. And then...yes...after you have paid ofall other higher interest debt, paid yourself (savings and investments), and built an emergency fund, then you should by all means pay off your home and live debt free.
 
It's a matter of which good is better..both are generally good so it's not a big deal either way.

Usually the interest on a home, because it's so secure compared to other loans, is very low. Because it's so low, the cost of using their money is low, so it's fine to carry a mortgage in many cases, if the extra income helps and is something you are living on, or investing at higher rates than the loan.
If you would just be putting that money in savings if not paying off the house, then you may consider paying off the house instead, since you'll at least save on that interest.
As long as you have emergency funding, savings, (edit Vance reminder: and don't have any other high interest debt!) AND can pay off the house, it should be fine either way.

Remember, the worst case scenario you really need some money, you can probably get a loan against your paid-off house again at a low rate, so you aren't making decisions that you have to live with forever anyway, so no worries.
 

If you can pay off your mortgage i would. You would be better off putting that money into a mutual fund or roth ira.
it will be off more in the long run than paying on your mortgage.

A mortgage is not an asset. It is a loss of income actually.
if you can pay it off and not hurt yourself and you are able to recoup the money in s reasonable amount of time
then i very much would pay it off.
 

I paid off mine last Dec, 30 year loan, done in 8 years 8 months. I saved on interest, and I only have my car loan left. It feels good, I upped my 401(k) and have increased my cash position. When I retire, the house will be rented which will be a great assist.

Drawback being no more interest write off for my taxes, but I abhor debt and I feel much better not having this monkey on my back.

I was able to put about 60% cash down on the new car. I plan on putting some money into my Roth in a few months, and then I got to spend some money on the house...new roof, new double paned picture window, rip out the 70's era Brady Bunch carpeting, etc.
 

I love Dave Ramsey. We followed his plant and got ourselves out of debt. We still follow his methods today.
However in this case i think Ramsey would agree to pay off the mortgage if possible.
Why? you free up 1k plus dollars. then you can add that back to your other stuff and pay it off quicker.

that 1k is their emergancy fund in 1 month.

that is the only reason i suggest paying it off first.
it opens up a huge amount of disposable income.
 

the interest deduction is not worth the other money you are making off your investments.
when you go to rent it then there is more tax deductions there than the mortgage interest.

I never considered buying a house for a mortgage deduction.
 

I closed on the property in early 2003, a good 4 years plus before the local market peaked so, I didn't get completely screwed :mrgreen:

After the 2008 'crash' I refinanced around 2011 so, about 7 years ago; this dropped my monthly payment by about $250

So, here are the percentages on my current monthly note:
46 % = Interest
26% = Principal
28% = Escrow (taxes, insurance)

Does that paint a clearer picture?
 
cuban smokes said:
so, I guess you are referring to mortgage payment, property taxes, insurance, etc. ?
Click to expand...

You will still have property insurance and taxes. The difference is it will be up to you to make sure they get paid.
 

everything is paid except the house note & I have some guitars that I could sale for $$$ but I would have to locate buyers

the market for selling (guitars) hasn't been very good the past few years; even now it sucks :lol:
 

Maybe. Here an impound account is held by the bank and financed from your monthly payment and is used to pay your home's taxes and insurance. I think it's just another term for the same thing.
 
It depends on how far off the mortgage payoff is. If it is paid off over the course of a few years, Id bet he would say emergency fund first...THEN throw everything you have at the mortgage. Cuz...you just never know when an emergency hits and if you dont have the emergency fund, not only are you not paying off the mortgage but you MIGHT need to go into debt to pay for the emergency.
 
cuban smokes said:
everything is paid except the house note & I have some guitars that I could sale for $$$ but I would have to locate buyers

the market for selling (guitars) hasn't been very good the past few years; even now it sucks :lol:
Click to expand...
I think the experts would say keep the guitars, build an emergency fund, pay savings, then max out what you can to pay off the house.
 

Yes. If you pay it off, 46% of what you are paying now goes in your pocket.
And 26% can go back monthly to your savings account or not.
And 28% is "overhead" which you are pretty much stuck with.
 

It's hard to say. Without seeing your tax return, we can't know what if any tax benefits you get from the mortgage interest deduction and so can't determine the bottom line cost of borrowing. It's a safe bet after the changes the mortgage costs you the stated interest rate, so that's what you save by paying it off.

Several people have already said the question is what is the best use of the amount of the payoff. If you pay it off, you avoid the net interest charges - that's your investment 'return.' If you invest it, you get what you get, depending on where you invest the money and how well those investments do. If you knew what your return would be from investing, the choice is that easy - compare the interest rate on your mortgage to your rate of return on your investments, pick the higher one. Easy!

I'll just add, though, that the 'return' from paying off your mortgage is a risk free rate of return, safer even than investing in Treasury bonds - you WILL avoid the interest payments on your mortgage, period. It's not really apples to apples to compare that to a risky investment like the stock market, which might go years with a negative return. So it's a question of expected returns and your risk tolerance. If you're a long term investor and make good choices, likely investing it will produce better returns long term, but it's risky.

Bottom line is I've always advised nearly everyone to pay off the mortgage if they can if for no other reason being debt free allows you to weather adverse events much better - job loss, expensive illness leading to loss of work, etc., and a risk free return of 5% or whatever is a pretty damn good return in this environment.

The necessary (IMO) step 2 is setting up a plan to save at least most (better ALL) of the former mortgage payment, as opposed to using the savings to buy more crap. People made ends meet with a mortgage, and can do it without it, so it's a good time to make a commitment to saving money with monthly goals, either through work or some other routine method such as writing a monthly check to Schwab or Vanguard or wherever. People who wait till the end of the year and aren't disciplined find out that it's often all been spent, and they've ratcheted up their expected monthly spending, which is...bad.
 

I say, if you can, pay it off, and here is why.
With your numbers I will use a payment of $1000 per month,
interest =$460
Principal =$260
Taxes/ins=$280
With the mortgage paid off, your monthly outlay drops $720 per month,
The funds can then be applied to a 401 K and possibly reduce your taxable income,
Since the reduction comes off of the highest portion of taxable income, thus reducing the cost of the savings.
Most important, is having the flexibility with your money.
 
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