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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We paid off our first mortgage early and it felt AWESOME! We put the extra into savings etc. It was really nice to know that if either of us lost our job etc, we'd still be okay!
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That's great! I bet the feeling is awesome.
My husband is 9 years older than me and I don't work but am blessed to stay at home. He is paying off the house so he can make sure it's one less expense that I need to worry about if he dies first. We would both love another house, but we are keeping this, paying it off,and traveling.
If you can pay it off within a YEAR, I would totally be paying it off! I'm assuming that your next house will be bigger and so utilities, property taxes, and everything would probably be more. You're also paying PMI now on your current house, which is expensive. If you pay off your current mortgage and then turn around and sell the house, that's sort of like a 1-year CD paying your interest rate. If you don't pay it off, I would at least pay it down so you have enough equity to refinance and get a lower rate.
Disclaimer: I'm paying off my mortgage aggressively and should have it gone within 3-5 years. I think it's a little bigger than your guys' mortgage though! (It's just over $240k right now and I've paid down over $40k in the last 10 months.)
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Haha yes your mortgage is bigger than our current house. We live in the Midwest so housing is cheap, and our house is worth around $130K
"You're also paying PMI now on your current house, which is expensive."
PMI can be removed when the loan balance is at/below 78% of the purchase price.
Are you still paying PMI even though you have a big chunk of the mortgage paid off now? If so, check with your bank because you should be able to get those PMI premiums removed.
Travis, thanks for stopping by! And we haven't paid off a big chunk of the mortgage yet.
If you are an emotional person then pay it off. If you are logical, then invest what you would use yo pay it off. If you would spend the investment money then pay the mortgage off rather than pretend you will invest.
I agree Lance 🙂
The problem for most couples is that one is more emotional and one is more logical. 😉 Oh well, that makes for a good team.
Haha yes Christie, me and W balance each other out 🙂
I don't have a mortgage, but I would not pay it off early. It's less definite, but I feel I'd be giving up a lot of upside investing in higher risk/higher return vehicles. That is scarier to me than having mortgage debt. If I could, I would lock in a mortgage at these crazy low rates and keep it for 30 years. In another climate my decision might be different, though – it's all about the spread between the mortgage interest rate and the return you're likely to get for the amount of risk you want to take.
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I agree Emily. Thanks for stopping by!
How funny, Johnny Moneyseed just posted something similar – I think it might just come down to personal preference since I think both ways are financially responsible actions. I think if I were already allocating a lot towards retirement and investing, then I might take a dual approach with extra income and put a portion of it towards extra payment and the other towards investing. But I think it's just a matter of what works for you! 🙂
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Haha I noticed that too! It's a great topic.
I've accelerated my mortgage payments (biweekly vs monthly, plus an extra 20%) in spite of the fact that my rate is reasonably low, but I thinking I might not bump it up the acceleration any further than I already have. As it stands it would be in my best interest to save/invest any extra money going forward because I'm more likely to get a better return on it through investing than what I'm paying on my mortgage. That and my financial position is not very liquid at all; almost everything I have is locked into either my mortgage or retirement savings. If I was sitting with a healthy investment account I would probably look more seriously at paying my house off earlier.
If you're serious about considering paying your mortgage off, I really wouldn't give the tax break given to your mortgage interest any consideration. Which is better: paying ~60% of the interest, or paying 0% of the interest?
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I definitely don't plan on giving it any consideration, but it seems like a lot of people do!
I assume that you have enough in equity to use as a down payment on the next house, especially if you are close to paying it off. I would say no and invest the money you would use to pay it off. If you sell your home next year, you still shouldn't have to use any money for a down payment since you will have it from the home sale.
We plan on moving next year, so we are building our down payment fund and not paying down the mortgage aggressively.
We haven't started aggressively paying down our current mortgage yet, only the normal monthly payment plus a very small amount extra occasionally.
We are building up our down payment fund as well. Can't wait until we get to that point.
I won't overpay my rental mortgage since the rate is super low and more than covered by rents, and then I bought my home cash to feel really at home. Best of both worlds!
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Good for you Pauline 🙂 It's a tough decision!
Although I am paying off my mortgage a little early, I don't like it. My home is worth a lot of money and I want to access it to invest elsewhere. So I established a line of credit and will use those funds for investing from time to time. I will always have some debt, but I expect to earn more than it costs me.
That's great!
I agree! It is a lot easier to attack debt.
I agree Dianne!
We recently refinanced our mortgage and are paying it off slowly, which I am comfortable doing. I think it's comes to down to personal choice. If having this debt weighs you down, then eliminating your mortgage might be the right choice for you. At the same time, since you plan to buy a new home in a year – you may be better off using the extra payments to pay more down on a future home so you can pay that home off more than quickly than a home you plan to sell or rent. The great thing is you are fortunate to have options! 🙂
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Thanks Shannon!
We paid off our first house super fast because I hate debt and having two mortgages just scared me. Now we may start paying off our current mortgage too, but we aren't set on that 100% since we also want to invest more in stocks and maybe another rental property…we'll see. Do what feels right for you two. Good luck!
Having two mortgages scares me also, and that's why I keep thinking about this! Thanks Crystal!
I agree!