I will have paid off one of my student loans next month, by living frugally for 1,5 yrs. I managed to stay on the frugal track because of this goal. If I hadn’t set up this goal, I would probably have spent at least 75% of that money on crap. Therefore, for me, I avoided interest payment of around 2,5% (student loans are extremly low interest in Sweden) but missed interest income of 0,25*8% = 2%.

of course people should do the raw number calculation of whether what they can afford extra towards paying mortgage off really yields anything in the end versus investing the money. They also should take into consideration if they will be able to sell the house in order to tap the equity and buy a different house for cheaper, in an area they want to live in; whether they will be able to get a HELOC down the road at a higher interest rate if they have no income stream; the cost of reverse mortgages which gives far less value than the actual equity in the house; the depreciation of the home equity not earning any interest; the housing market in the area, whether it is and will be flat, appreciating, or depreciating. People really need to stop thinking of a mortgage as some readily accessible pile of cash: it simply is not.

In other words, your reasoning is much too simple. Paying off your mortgage or investing is about allocating your money towards one end or the other. Your argument that not paying your mortgage down early means you pay more interest to bank ignores many facets of the debate. If your money can be put to work earning a higher rate than you are paying in mortgage interest, you would actually be making money, no matter how much you pay in interest.

In fact, if I have a low interest mortgage or student loan and I can invest my money elsewhere for a higher return, I will always come out ahead in the long run. Period. The numbers do not lie.

Whether one believes that their investments outside the mortgage/student loan can appreciate at a higher rate than what they are paying on that loan is a personal exercise. Could go either way.

Simply looking at the total amount of interest you pay to the bank and declaring that you are smarter because you ended up paying less interest is misguided. You need to look at your whole financial picture to figure out if prepaying your mortgage is/was a smart move or not.

Aside from my belief that I will outperform my mortgage rate over the long haul, I am also a big fan of “huge cash cushions”. I’m not talking E-Funds here. I’m talking “HUGE CASH CUSHIONS”. The kind that let you start a business, buy an investment property, etc. That makes me smile.

A paid off mortgage? Sounds like I own a poorly performing, illiquid asset.

The main idea behind paying off your mortgage early is being able to allocate more of your income to your gain rather than the bank.

If you pay off a mortgage over 30 years, you are sending thousands upon thousands of dollars in interest to the bank. That is money that is gone forever. However, whatever you pay in principal often does come back to you in the form of equity when you sell your home. If you pay off your mortgage early, you are effectively paying less interest to the bank which is like a 0% return.

So ultimately, paying off your mortgage early is really about being able to allocate more of your money towards your own investments that earn you money rather than flush them away to a bank.

If you want to have flexibility in your net worth, then don’t pay off your mortgage. If you want to be richer in net worth on paper, but not have the flexibility to tap the equity from your home, then pay off your mortgage early. I for one would rather invest the money elsewhere.

I ran some numbers on my earlier scenario about paying off my house in eight years to the exclusion of all other retirement savings or investments. Basically I wanted to see if it was better to go all out and pay off the mortgage in eight years and then invest all that money that was going towards the mortgage payment or just go with a 15 yr. mortgage and invest a little on the side. The interesting thing is that they both came out to be roughly the same totals after 15 years!

So I guess it really does come down to personal preference…. I am still leaning towards the prepay option because it eliminates a major “have to pay” in my life and would give me far more options in terms of career and lifestyle. Of course either option requires discipline because you wouldn’t want to go out and blow all the newly available money after paying off the mortgage. The plan only works out if you can devote a good chunk of that money towards retirement.

In response to the other posters comments about hitting the maximums for retirement savings, that is true. For 401Ks it is currently $15,500 a year and $5,000 per person for Roth IRA’s. Of course you could always invest the rest of the money in taxable accounts.

The other argument usually made against paying off the mortgage early is losing the tax deduction but if you max out your 401K contributions after paying off the mortgage, it would help ease that blow.

One point that hasn’t been made yet is that all these comments are applicable specifically in the US where the norm is 30 year fixed rate mortgages with deductible interest.

In other countries or if you have a non-traditional mortgage in the US the situation can be very different.

Personally, I belong to the “pay off debt” school regardless. I’m not a fan of spending money in order to have a small portion of it returned to me in the form of a tax deduction. (Kind of reminds me of white bread. Let’s take out the fiber, the vitamins, etc. and return a small portion of the cheapest vitamins to you in synthetic form and we’ll call it enriched.)

I also think that a bird in the hand is worth 2 in the bush. People are very fond of saying that you can get a higher return by investing but, unless there’s a guarantee, you might invest and (gasp!) lose money. (I know that’s never happened to anybody who reads this blog :) LOL)When you pay down on the mortgage you know where that money is going and can figure out exactly how much money in interest costs you’re saving.

If you don’t have a 30 year fixed rate mortgage I think it’s even more important to pay down as fast as possible. Your interest rate could go up or you could have a balloon payment payable and for some unforeseen reason not be able to refinance (say your spouse just unexpectedly got downsized out of a job s/he’d had for 20 years).

The dollar is not in great shape against other currencies, gold is over $800/oz, China is hinting that they’ll take their money out of US$ and invest it in other currencies instead, Citi has an $11 billion write down. Should I go on?

In uncertain times I want to reduce or eliminate all possible debt and have as much control over my life as possible.

Right now we have a fully paid home in a community where we plan to retire and are renting a relatively inexpensive apartment in the city where we currently work. If everything were to go sour, we could leave the city and live at extremely reduced cost in our paid-for home. We couldn’t continue to save for our dream acreage and future career change or put away a bunch of money for retirement, but we could manage for at least 2 years *even if we didn’t have jobs for that length of time* and *without* any type of government assistance.

That is peace of mind I didn’t have a year ago, when I still had a mortgage!

I wanted to point out that the reason Dave Ramsey (and other well known financial advisors) offer advice like “pay off your debts first” is because they are trying to offer the most generalized advice possible. They offer advice that will benefit everyone even if they have higher opportunity costs.

No one is going to come back to them and say “Hey you told me to pay off my debts and I did. I wish I hadn’t done that.”

Always keep in mind where the advice is coming from, evaluate the reasons why they offer that advice and then see if it would be suitable for your situation.

But I know everyone has their own opinions, and I have yet to convince anyone :-)

Thus I have 12 years to go on a 15 year mortgage that’s less than 5%. The emergency fund is primarily invested in an international bond fund yielding over 6.5% (because the US$ has been devaluing significantly in the past 4 years) and the rest of the taxable funds are in various stocks. My own track record for the past 15 years of stock investing has consistently beat the S&P500, so I’m not interested in index funds.

However, I work with people daily regarding debt, and although people “should” separate their debt from their emotions, for the vast majority of people, it simply isn’t a possibility.

Now, I have no debt except for mortgage debt. Logically, I know that my mortgage interest is 4.5% and I could invest my extra money and earn 9% instead of paying extra towards the mortgage. But I also know myself well, and hate debt of any kind, and therefore pay extra on the mortgage.

I suppose what I’m trying to say here is that while Jen states “…their(sic)is psycohological effect of paying off a mortgage makes no sense to me.”, it does make sense to a lot of other people, and to denigrate it by impplying that it’s wrong does an injustice to TSD discussion that one option is not more right than the other, but rather a personal choice.

If you are the type of person to get below-average returns, by freaking out and selling low and buying high, paying off the mortgage will give you the better payoff and give you time to practice investing with smaller amounts of money.

Another issue is that if you invest the money, you can always use it to pay off the house. It will cost whatever fees your broker charges to sell off your stocks or mutual fund or to clean out your savings account or whatever, generally a minimal amount.

If you pay off the house, you can generally get that equity back out of the house by getting a loan of some kind, but the fees for this are huge, and it’s a bigger hassle. (And therefore less tempting for frivolous things!)

Either way, you are most likely to really need the money right when it’s hard to get. If you lose your job in a recession, you may no longer qualify to get a loan based on your equity, and the stock market may have plummeted, so your investments are at their lowest.

I would never hold off on eight years of retirement investing to pay off a mortgage early, for so many reasons. 1) Although you will have more money to invest later, you may hit up against limits to how much you can invest tax-free. 2) Investing should be as long-term as possible; waiting eight years significantly increases your volatility. 3) It’s good to think of investing for a retirement as a baseline habit that you try to always do no matter what (once you can afford to eat, live indoors, and take care of medical issues).

I’m the type who really wants my mortgage paid off but thinks she can do better with investing. I tell myself I can pay off my house when I have enough (especially if my lender is annoying me), or start pulling my house payments out of my investments when I have enough. I’ve sort of compromised on the pay-early vs. invest question by refinancing two years into a 30-year loan at 8.25% and with a big PMI payment to a 15-year loan at 6.675% with a low PMI payment. So I’m paying it off in 17 years instead of 30.

Further, people should separate their debt from their emotions. Saying that their is psychological effect of paying off a mortgage makes no sense to me.

I could have put every extra dollar into paying off my mortgage, but I invested it instead. Now I have enough money that if I had to or wanted to, I could just write a check for the amount I owe on my house, but instead, I’ll keep it invested and use it to earn even more money. My net worth is positive long before it would be if I just paid off my house.

Say you buy a $100,000 house and put down $10,000 as a down payment. If the bank has to foreclose before you’ve paid down much of the principal, they have to recover $90,000 after transaction costs and closing costs (and a possible drop in the housing market). Not likely. If you put down $20,000, they have a much better chance of recovering the remaining $80,000. This is why banks require that you pay PMI if you take out a loan of more than 80% of the home’s value.

In other words: Would I borrow money at 4% to invest?

Answer: Hell yes! That is what is called “leverage”. Look it up. It’s essentially what you do when you take out a mortgage. Also, 4% is cheap money, I’d get as much as I could.

See, this is why Dave Ramsey is an idiot in my book. His philosophy treats finance as black and white.

Finance is not black and white! The sooner people realize this, the sooner they would stop quoting the asinine things that Dave Ramsey says.

The real answer to your question there is “It depends.” Personally, I would jump on chance to borrow money @ 4%. As far as Keri’s situation, as long as the payments on the student loans weren’t a huge burden, I would stick to the minimums and start saving for other things. 4% is the cheapest money Keri will ever get a chance to borrow, you may as well *leverage* it while you can. Go ahead and build up an emergency fund, save for a house, start a business, whatever.