Should you really be concerned about paying off your mortgage early? In this article, I share a few reasons why I think that’s a bad move.
At the outset, I must confess – I am no advocate of debt. But when it comes to mortgage debt, it’s not something I’m totally against.
However, debt is debt. So if you disagree me, that’s okay. I definitely believe an argument can be made there.
This is also something that I have struggled with personally, but I have come to the conclusion that paying off a mortgage early is not a priority in most cases.
Instead, what you should focus on are the following:
- Living below your means
- Paying off other debt
- Saving for emergencies
- Saving for retirement
- Saving for college
If you are able to do all of the above (and you do them right), then I would consider paying off a mortgage early. But what I find is that – most of the time – people aren’t doing those things, so paying off a mortgage early won’t apply.
Let’s look at each in detail.
Living below your means
Living below your means is the key to freeing up your hard-earned cash. You can basically give yourself a raise simply by cutting back on expenses: the less outcome you have, the more income, basically.
This is the first step towards getting your finances on the right track. Once this is achieved, all other things are made possible.
If you live beyond your means (paycheck to paycheck), you basically have no extra cash to pay off your mortgage (even if you wanted to).
However, if you used all your extra cash to pay off your mortgage, you wouldn’t have anything left for more important things, like paying off other debts.
Paying off other debt
People with a mortgage generally have pretty low interest rates, around 3 to 5 percent, usually, and that’s pretty good.
If you have credit card debt, or student loan debt, you’re looking at significantly higher interest rates when compared to a mortgage in most cases.
You’re better off taking the extra cash and paying off all other debt before paying more on the house – you will save on interest rates, and you will eventual free up even more money when you are out of debt completely. This frees up even more money for you to do the next important thing, like save an emergency fund.
Saving for emergencies
Once you have all debt paid for (except the house), you can save a ton of money fast.
Most financial experts recommend 3 to 6 months of expenses in savings – this is generally 10 to 15 thousand dollars for most people.
The key to having an emergency fund in place like this is that it will keep you afloat incase of an emergency (job loss, medical bills, car and house repairs are a few examples of what might constitute an emergency).
If any of these things happen, you will have an asset to keep you whole, and you won’t have to rack up debt in order to pay for things that come up.
When an emergency happens – and it will – write the check, and start saving again until your emergency fund is back where it needs to be.
If you tie all your money up paying extra on a house, you will likely not be able to save for emergencies. And if you have no money saved for emergencies, you will be in a bad spot once one occurs.
That’s why you don’t want to put all your extra money in your house if you have no emergency fund. In the event you have an emergency, you can’t take back the money you’ve put into your house; that’s why a house is considered a non-liquid asset.
To help fund emergencies, you want a liquid asset that you can access as quick as possible – a fully funded emergency fund is how you do that.
Saving for retirement
After you have no debt (except the house) and a fully funded emergency fund, you’ll want to then save for retirement before you think about paying more on your house.
There are a couple reasons for that: (1) Your paid off house is not going to feed you at retirement, and (2) The extra money can be better invested elsewhere.
If you tie up all your extra money in your house, you’ll have no money to invest for retirement.
Just $100 a month for 40 years will make you a millionaire, so it’s important that you start early.
What good is a paid off house valued at $150k at retirement, when you could have a million dollars instead?
Once again, a paid off house is not going to feed you at retirement – it’s not going to pay your kids’ college tuition, either.
Saving for college
Another thing to consider before paying off your house is saving for kids’ college.
If you don’t have kids, and don’t plan on having kids, perhaps this doesn’t apply, but for me this was something I had to think very seriously about.
Similar to retirement savings, college savings will give you better returns than a paid off house will.
ESAs and 529 plans are two great ways to get exposure to stock market returns that will allow you to save tens to hundreds of thousands of dollars relatively quickly.
Assuming the same returns as with retirement, $100 a month for 18 years will get a child $75k plus for college.
However, if you take your extra money and put it towards your house, you may not have any left to save for your kids’ college, and that’s a bad move.
The kind of returns you will get from the stock market is something you don’t want to miss out on.
For more information on these principles, check out Dave Ramsey’s book – The Total Money Makeover.
Most people live beyond their means; they live paycheck to paycheck, they overspend, and they’re slaves to debt.
Most people will not have enough money to retire because they simply didn’t save for retirement.
Most people won’t be able to pay for their kids’ college because they were too busy paying for all kinds of other things.
So, don’t let paying down your house be an obstacle for you. Remember, your house is not going to feed you at retirement.
The good news is that not paying your mortgage off early is not the end of the world. You are still paying down your mortgage with each passing month. As long as you don’t keep refinancing, or worse – reverse finance it, your mortgage will eventually go away.
So long as you can get it paid off around the time you retire, I’d say you’re in good shape. And that should be the goal.
In the meantime, reducing your cost of living, while saving and investing, is going to set you up way better than paying off your house will.