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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Thanks!
Paying mine off early isn't a focus…yet. I've got a pretty darn low interest rate and the "extra" money I have that could go towards paying it off faster is better suited for other goals right now. Down the road I'll make paying off the mortgage more of a priority, but right now it's just not that important.
I'm in the same position. Right now it's not a focus, but soon we won't have any debt.
Great post Michelle! I think people underestimate the psychological benefit of completely eliminating debt as quickly as possible. No debt = more freedom. That's why we are pushing to pay off our mortgage by the end of this year.
Thanks! And I agree.
Always a tough call that's a balance of emotions and financial goals.
You might want to take a look at your current amortization table for your mortgage. Maybe I missed it in the article, but you said you could pay it off in a year if you paid it down quickly. How long would it take to pay it off slowly? If you don't have more than a few years left then you are probably paying mostly principal and just a small amount of interest. If that is the case you might want to put the money to work elsewhere.
We don't have any equity right now, so we're looking to put every last penny we have into our condo and even borrow from my 401k and put that money into our home so we can get to 20% equity within the next month. We've started the refinance process and our new mortgage payment will be a huge drop from what it currently is, which nearly offsets the cost of the 401k loan. When my 401k loan is paid back in 5 years we should have a decent amount of equity in our condo, a mid to low 3% interest rate and after the refi we will be saving our extra money, so we should have a healthy down payment saved up. We plan on buying another place in roughly 5-6 years and renting our condo. At that time I don't think we will pay down our condo quickly, but I would definitely consider paying down the house quickly if the interest rate is high and simply for peace of mind.
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We bought our house 4 years ago with a 30 year loan. We have only made very minimal extra payments, so essentially there is still 26 years left on the loan if we don't make extra payments.
If I were in a home I'd want to stay in, I'd want to hurry up and pay it off. $1000 a month would go a long way to getting my retirement goals set up (since I'm a little behind in that department). Also, paying off the mortgage would mean less risk. I wouldn't have to work to pay bills, I could work because I want to and I could travel or go part time…something I can't do with a mortgage payment.
In my area, the average mortgage payment is 2k. What would you do with 2k a month. Then add all your utilities and taxes…ouch.
Just on my little condo alone…my mortgage interest was about 5500 and I have a nice interest rate…not great but I'm not willing to refinance because I hope to be moving….I hope to be moving next year and the cost outweighs any savings.
If I do end up having to keep it and rent it, then I will treat it like any debt and hurry up and pay it. But my hope is to sell it and run.
I just really don't see the advantages to keeping a mortgage payment…I'd rather give 5k to my favorite charity, than to some huge bank…and still get the right off.
I agree! Luckily our mortgage is less than $1,000 currently.
We should have the mortgage paid in full if all goes well with paperwork and red tape by the end of May or sometime in June. The money is saved. We just want to have no debt and then take that extra money every month and continue investing and see where life takes us. Nothing over the top, just simple.
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Wow that is awesome! 🙂
I think that paying off a home early is always a good idea. I listen to Dave Ramsey a lot, and he gets asked this question many times on his show.
I agree Nicole. Thanks for stopping by.
Just wanted to let you know that I linked to this post on my site here http://shopaholicsavers.com/?p=4505 because I thought this was a great post!
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Thanks so much 🙂
With an interest rate at 3.75% on a 30 year fixed loan through the VA I'm not concerned with paying our loan off early in the overall schemes of things at the moment. But I can certainly understand why people would to rid themselves of that debt.
There are positives for both ways, so that's what makes this decision a hard one 🙂
The next house will be a long time home, so no worries there 🙂
I agree, it would be nice to have the mortgage paid off.
We do have our house paid off completely. While some may argue that it is wiser to not tie up your cash in a house, we felt that the freedom of not having a mortgage was well worth it. We have no house payment and know that if anything happened, we would at least have our home….and the bank can never take it away. And that’s a pretty good feeling.
I am definitely with you on this!
I’m glad you discuss the pros and cons of this issue. It’s disconcerting when people characterize all debt as bad. Some debt is good, when it allows you to make investments you wouldn’t otherwise make. Like so many commenters mentioned, a mortgage less than 5% allows you to use your excess cash flow to invest in retirement accounts or the stock market, reap an average 10% return, and essentially keep the difference in yields. However, if you are sitting on a boatload of cash in your checking account earning less than 1%, use a good portion of it to pay down your debt.
More than anything, I think the idea of “owing” a bank or company just has a psychological stigma.
The wifey and I have not plans to pay off our house early at this point. We still have student loans and the rate we got is so low we can invest the money into something else. In the future we are thinking about the 15 year make and having it paid off but then we would have a better understand of how close we are to our financial goals. I like that you put the pros and cons to each.