Should we pay off our house early? What about the next house? Don’t worry guys, we haven’t bought our next house just yet. We’re keeping our current one for at least another 12 months.
However, we have been thinking about whether we should pay off our current house quickly (we have been debating whether we want to rent it out or not – if we decide to sell then we of course wouldn’t pay off the current house quickly) and even whether or not we should pay off our next house quickly as well.
Our income has increased by a lot over the past couple of years, and I talked about this in my post from last week Financial Goals and Increased Income – Many Changes. Because of the increased income, it is hard not to think about just throwing everything extra (after student loans and retirement) towards our mortgage.
We’ve been making around $8,000 extra each month because of all of our side hustles, and it’s hard to not want to pay down all debt, regardless if someone thinks that it is good or bad debt.
Earlier this month, Holly made a post about how she wrote a check for $8,700 so that they could pay down their mortgage a little more quickly. Most people were extremely happy for her and her family, but of course there are others out there who would rather pay down their mortgages slowly. Crystal also recently made a post about how they paid off their first house recently, WOOHOOO!
I have calculated it over and over again, and we could pay off our current house early next year if we wanted to. WHATTT? Then why would you even want to buy a second house?!
This is something that I’ve/we’ve been asked often. We love our house, but we bought it when we were 20 years old. It’s a great home, but we bought it knowing full well that it was only a starter home for us.
Anyway, I do have my Finance MBA and realize that I should be using debt to my advantage, such as with taking advantage of historically low interest rates (boy, do I sound like a commercial). But there’s that nagging inside my head that keeps saying “MORTGAGES ARE DIFFERENT! Pay that baby off!”
Advantages of Paying off Your Mortgage Early
The main advantage is that if I pay off my mortgage, at that point it would mean that we would have no other debt. That just sounds awesome.
And, I’m the type of person who keeps a large amount in our emergency fund. Even though we will probably never have to tap into it, I still want it. I like the comfort of knowing that it’s there, and that if something did come up, I wouldn’t have to run around with my head chopped off trying to solve whatever went wrong.
And this is how I see paying off our mortgage early. I see freedom, comfort and everything else. Yes, I do realize that paying off our next house completely is years away (hopefully less than 5 years from the purchase date though) and that there are other costs of having a home such as property taxes and home insurance which will still need to be paid even though we would no longer have a house payment. However, having a big chunk completely eliminated from our budget every month sounds nice.
Once my student loans are gone, which should be next month, then I of course want somewhere else to shovel my money. We do have car loans, but that is at a low rate (much lower than our mortgage), and I’m not worried at all about paying those off. I am not saying that I want to shovel 100% of all leftover money towards paying off our next house quickly. We would still save for retirement and other fun things, but we would also make extra payments as much as we can as well.
If you have a high interest rate on your mortgage, it is probably worth it to pay off your loan as well or at least get it refinanced. However, it doesn’t seem like I hear about too many people with high interest rates on their mortgage these days though.
Advantages of Paying off Your Mortgage Slowly
There are many advantages of paying off your mortgage slowly or just making the normal payment every month. You can invest your extra cash elsewhere and earn a higher rate since today’s interest rates are very low, especially when you factor in inflation. If you have a fixed rate loan, then a $1,000 payment today will still be a $1,000 payment 30 years from, but with inflation 30 years from now, $1,000 will be nowhere near the amount that it is worth today.
If you don’t pay off your mortgage quickly and put it in other investments, then all of your money won’t be tied into one thing, which is real estate. This point doesn’t really apply to us, as we would be working on paying it off quickly, but we would still aim to be saving for retirement at a larger rate. But for others who shovel 100% of their money towards their mortgage, this could be a problem if they needed a large chunk of change at the last second. Then there is of course the tax factor and how you can deduct interest expense as well.
If you have loans at a high interest rate (or anything higher than your mortgage), are not saving for retirement at all, have no emergency fund and so on, then making mortgage repayment your priority might not be the best option. Pay off those high interest loans!
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I think a lot of it comes down to what your current interest rate is and where the money would go otherwise. If all the extra mortgage money would go toward investments that are likely to earn 2x the mortgage interest rate, it's tougher to justify paying it off. But if a good chunk of that money might slip through the cracks and get spent (not invested), then you're better paying it off than "wasting".
Well we haven't bought the next house yet, but I'm assuming that the interest rate would be less than 4% (hopefully they are still low next year!).
If you have a high interest rate mortgage, refinance to a lower interest rate if you can. If you have a low interest rate mortgage, it makes more sense to invest your money elsewhere, because you'll likely get a better return than you would on paying extra on the mortgage.
I agree 🙂
If I were in your shoes and had the opportunity to pay off my mortgage next year. I would do it! Then you will have more extra money to do what you wish. There is just something about having a paid for home. I may be a bit biased because I paid mine off a few years ago.
I like the thought of a paid off home as well 🙂
We don't have a mortgage yet, so I'm just speculating what we would do. I don't think that paying off the mortgage has to be all or nothing. I think we would pay an additional amount towards the mortgage, while also putting more into retirement/investments. I know, that's not a very definitive answer : )
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I agree, I'm with ya 🙂
There are a lot of pros for paying off your house and not many cons. Luckily, you don't have to pick between investing and prepaying your mortgage. You can do both!
That is what we do- we pay our house off quicker than we have to, but we don't sacrifice our other saving and investing to do so.
This is what we plan on doing as well. Attack both investing/saving and paying off the future house 🙂
I have a paid off home. It is great. It allows me to do lots of things my friends can't do (like travel). It also helps alot because we have a kid and the cost of day care is pretty much like having a mortgage payment. I know you are getting married soonish, but after that the talk about when to have kids will come about. Kids are really expensive. I know I was told this, but it is true. Our little boy is pretty healthy but has still cost us $10K in medical bills the past two years because he has had chronic ear infections (I'll take those over what other parents have had to deal with).
Of course the finance geek in me says keep the low rate mortgage invest the difference and profit! In the end I'll default to what I usually say when giving advice… you have to do what makes you feel comfortable.
We've already talked about kids and plan on waiting at least another 5 years 🙂 We've already talked about everything, getting married for us is pretty much just a piece of paper to legalize everything haha
And I agree, we'll have to see what we feel the most comfortable with.
If we were in the position to pay off our mortgage early, assuming we were already maxing out our retirement, then I would totally go for it. We're in no rush to pay it off early, but if you can then why not. Once you do get it paid off it opens up so many other possibilities for you.
I agree John!
Well, I have no future, but my wife and I are probably very close to being ready to buy a home. For us, I think we would find a nice place that we could completely afford without any issues, but then do a 15 or 20 year mortgage. That way we'd be throwing extra money at it, but not so much that we'd call it "paying the mortgage off early."
I will pay my house off as early as I can. That will mean debt-freedom and will feel like a big weight has been lifted off my shoulders. That may not be the proper thing to do according to the financial gurus but without debt I will feel more free. Not sure what I will do with the extra money every month yet but I still have a long way to go and will determine how I am going to cross that bridge when I can see it approaching.
I can't wait until mine is paid off 🙂
My wife is in the process of applying and starting grad school for clinical psych. Because of this, she has not yet started her "career" job, and a decent amount of time will be spent in school the next few years. While most phd programs do offer you 30-35k/year (and no tuition), they only take about 2-3% of applicants. What I'm getting at is that managing our cash flow is very important for the next 5-10 years, so I do not plan on paying down more than the minimum, even if I have "extra" cash laying around. I personally hate this question but it does get a lot of response/traffic so I also have written about it and got a fiery resopnse when I took a stand that you should NOT pay it down fast 😉 PF bloggers (and others) have strong opinions about it, but honestly, as I told a friend recently, it's up to each individual and I personally have little opinion about what people do with their own money.
I agree with you. It's up to each person individually. For us, it has a lot to do with the fact that soon we will both have commission or freelance based income.
As you probably knew, you will get a lot of different opinions on the topic. But I say go with your gut instinct and do what feels right for you. For me, that is getting rid of all of the debt as quickly as possible….it just feels better. I know there are a lot of avenues that have a possibility of a greater return, but why not take a guaranteed return when you can and relieve that stress from your life? A bird in the hand is better than two in the bush, make hay while the sun is shining, and all that nonsense. 🙂
We're in the "pay it off" camp. Just not having that thing hanging over our heads brings much more peace of mind, at least for us, than we would have if we were making money through investing.
I think I'm in the pay it off camp also 🙂
I think it depends on the situation and interest rate. If your interest rate is above 5% then I can see why trying to pay down your debt early is beneficial. If it is lower then the benefits seem less as you can take that additional money and possibly invest it in something that can earn you more than the interest rate you are paying on your house. We want to pay ours down quickly because we want enough equity in our house so we can move. We are not happy where we live but since we bought the house the market has dropped.
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I agree Alan. Thanks for stopping by 🙂
I think we will take a multi strategy approach. Save for retirement, invest in a taxable account, and pay off mortgage. We do want to pay off our house early when we have one though. But I don't think we will take the gun ho approach and pay it off asap.
Same here!
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