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're pretty sure that we want to buy the next house next year, and we're still not sure if we want to get into the rental business. We are currently saving for the next house and will have enough saved for the next down payment and also enough to pay off our current house completely.
Good point Jake!
That's awesome what just $50 will do!
We're doing a little bit of this, a little bit of that. For us, diversification is important.
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I agree, diversification is important!
If you're going to turn it inso a rental, I absolutely would NOT pay it off early. If you're going to live in it, then yes, I would!
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Thanks Jenny!
Sorry, I should have made it clearer in the post. We would only pay off our current house if we decided to keep it and rent it out. If we decide to sell it then we would never even think about trying to pay it off quickly!
We would do that, but the thought of having two mortgages sounds scary!
I agree Shannon!
Michelle, you are in a win-win situation. If you DO pay it off early (whether you keep it or rent it out), you will be able to rebuild your savings again by not having a mortgage or by having renters pay you. If you DON'T pay it off, you have that money to invest in something else. (If you didn't have your side income though, I would not pay it off early if I wasn't going to live in it. Sure it's scary having 2 mortgages, but I would be getting $ from renters.)
Currently in my mortgage, I'm paying off slowly because it's more principle now than interest (hmm truthfully, i'm just low on the funds haha). When I first had my mortgage though, I put lots extra towards principle.
Thanks Dai!
I forget how old you are exactly, but if you could pay off your current house, rent it, then buy your long term house and pay it off in five years, you'd be in such a good position at such an early age. You could invest, buy more real estate, no limits to what you could do. I've never heard anyone say they sure wished they hadn't paid off their house. Everyone I know who owns a house outright is ecstatic about it.
I agree Kim! I would be so ecstatic and the feeling would be awesome 🙂
I think there are good arguments for either side of the debate. Right now we're saving for an investment property down payment, which would bring in some extra cash for us (and help us pay down out mortgage faster).
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I agree, it's hard to decide.
I own my house free-and-clear (as well as no other debts). I know it's not the most optimal thing to do as far as leveraging money and maximizing returns, but there is a LOT to be said for the peace of mind not having to make rent/mortgage payments. I built my house in 2005 (23 at the time) and in 2009 my business got absolutely hammered with the economic downturn. Having that free-and-clear house was a lifesaver. If I had any sort of mortgage payment I almost certainly would have lost my house like many others did during the downturn.
"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 do keep a good amount of cash handy, but for my true emergency fund I have a HELOC on my house. I have a 3.74% rate, it cost me absolutely nothing to set up, and I only pay interest on the amount I use. So, it's not like having that money in my house makes it completely inaccessible.
I get a kick out of it when people tell me "but you're missing out on the mortgage interest deduction!" For some reason spending a dollar to save a quarter isn't too appealing to me. I'd rather keep the whole dollar.
With that said, I don't think there is a right or wrong answer as to whether it's better to pay off a mortgage early or try to invest that money elsewhere. First, it is a personal choice. (How much is peace of mind and being completely debt free worth to you?) Second, you can only see if you made the best decision in hindsight. If you pay your house off early rather than investing in the stock market, and the stock market decides to have a correction for the rest of the year, then you made the right decision. If the stock market goes up more than the rate of your loan, then you made the wrong decision. Sadly, you don't get to know beforehand which is the right decision.
I especially agree with you about the mortgage interest deduction argument If that's a person's only argument, I don't see the point.
That's awesome Glen!
I'm with you on this. I would definitely keep the money invested in housing in some way. You could get a bigger house and for me, as I'm older, I might buy another place to rent out. I totally agree with making the most of the low interest rates right now.
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Thanks Rosemary!
I just wrote on this as well. Basically, I'm going to pay the mortgage down with 50% of my extra income, and put 50% away in investments and other savings. That way I'm not sinking all my cash into real estate, but instead taking a more balanced approach.
It seems like everyone is writing about this right now! haha it must be a hot topic 🙂 We're going to take a more balance approach as well.
We are getting a pretty low rate too, so we are just taking it month by month. I'm of mixed minds about paying it down in advance, mostly because I want to keep some assets liquid "just in case" and we never seem to get past that emergency fund savings…
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I'm with you on this 🙂