Currently, one of our main goals is to save for a down payment for our next house. Due to this, we have been wondering about how much exactly we should save.
With our first house we didn’t put down 20% and had to pay PMI (big mistake), so we will definitely put down at least 20% on our next house.
Also, we are self-employed and I have heard that most self-employed people have to put around 25% to 30% down (and sometimes even 35%!) because banks want to see more upfront from small business owners.
Now, that’s a lot of money!
This has got us thinking. While we are aiming for 30% or more, at what point should we stop saving for our down payment and ramp up our retirement savings instead? Yes, we are still saving for retirement, but should we be saving more?
In the personal finance world, the decision seems to be split. Some are all about paying off a mortgage quickly, whereas others don’t think that’s a good idea. There is no right or wrong answer, which makes the decision a little more difficult.
Of course, I do realize that this is a good situation to be in, so I am not complaining. However, how do you decide what is best for you?
Below are positives and negatives of paying off your mortgage early or even buying your house upfront with cash.
Related content: How can I pay off my 30 year mortgage in 10 years?
Positive – Your house will be paid off early!
Of course, this is the biggest positive.
Your house will be paid off, you will be able to free up some cash each month, and you won’t have to worry about paying for a roof over your head each month.
Not having that huge amount of debt hanging over your head would be a wonderful feeling. Life would probably be a little less stressful and you may feel more financially independent.
Negative – Your money may do better if it’s invested in a different way.
While paying off your mortgage early can feel great and be a big accomplishment, mortgage interest rates right now are low.
You may do better by investing your money in other ways and earning a higher return. This can mean investing in certain companies, paying off high interest rate debt, investing in passive income, and more.
Positive – You can earn a guaranteed return by paying off your mortgage early.
On the flip side, by paying off your mortgage early, you can earn a guaranteed return.
Other investments most likely will mean that a return is not guaranteed (unless we are talking about paying off other debt), whereas when paying off your mortgage early, you will be certain what your return is.
Negative – A lot of your money is in one place if you pay off your mortgage early.
This is one big reason why I’m not sure if paying off your mortgage early is a good idea. If you have other investments and are on track for retirement, then by all means go for paying off your mortgage early.
However, if you don’t have much saved, then having everything you own in one place may not be a good idea.
Also, since all of your money is tied up with your house, it might be hard to get money if you end up needing it. Having at least some liquid money is a good idea.
Positive – You don’t have to deal with the hassle of getting a mortgage if you pay in cash.
If you have enough cash, then you might be able to skip the whole process of getting a mortgage.
Skipping a mortgage can be a positive for many reasons. Sellers love cash buyers, as it makes the buying process easier on them since they don’t have to wait for a mortgage to go through. This means you may get a discount if you buy 100% in cash or your offer may be chosen over others.
Also, if you are self-employed, skipping the mortgage process can be a good thing. I’ve heard stories of self-employed people trying to get a mortgage and it sounds like it’s a very difficult thing to do.
Are you wanting to pay off your mortgage early? Why or why not?
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I can’t wait to pay off my mortgage! It’s mostly about the security of ownership but also about the debt. While there’s debt, the bank has the controlling interest regardless of your equity.
The other thing to consider is any possible tax advantages in paying it off early versus putting that money into a retirement fund or other investment vehicle. It’s probably only a consideration if you have a high tax bill, worth thinking about though.
In the end, I reckon your home is more than just an investment so emotions will come into play somewhere along the decision making process. Take your time and you’ll come to the right conclusion.
Yes, I’m definitely leaning towards paying off our next home quickly. We only paid the minimum monthly payments with our last house but that was because we knew it wasn’t our forever home.
I think it’s probably best to get rid of debt as quickly as possible. As soon as that monthly repayment is gone that’s less money that you need to sustain your lifestyle. Another thing to consider is the interest rate. If interest rates are significantly lower than the rate of return on your money elsewhere than it might be worth investing rather than paying down the mortgage too quickly. In Australia, we have great tax advantages for investment properties but not for your primary place of residence so it’s best to get rid of the home mortgage as quickly as possible.
I agree! I would want it gone.
Another interesting point to take in: By NOT paying off your mortgage early, you’re actually locking in to a non-inflation adjusting cost that will actually seem to decrease as time goes on. For example: If you have some bill right now that is $200, we know that with 3% inflation and the Rule of 72 that in 72/3 = 24 years that bill should increase to $400 due to inflation. However if you’ve got a 30 year fixed mortgage, your bill will always be the same: $1,000 now or $1,000 in 24 years. That means your mortgage will effectively “feel” like half of all your other expenses.
That is something I was thinking about as well. $1,000 30 years from now won’t feel like a lot of money at all.
Peace of mind is high on our agenda. Get rid of the debt as quickly as possible as money in your pocket gives you lots of options.
I agree! The peace of mind has to feel good.
We are definitely paying our mortgage off early. We pay a few hundred extra bucks faithfully every month. I don’t mind any potential returns I lose on that money- I want my mortgage gone.
I think we will end up doing the same as well.
My dream is to pay off my mortgage. I want my only housing expense to be property taxes and homeowners insurance.
Right now this is only something I can only dream about since my financial life is a complete disaster.
I’m sorry Lynn. I hope you can improve your situation soon.
We are absolutely trying to get our mortgage paid off early, actually by summer of next year. Once we do, we plan to take the money we save on that mortgage payment and invest it elsewhere. Since it’s only a year or so away, I don’t think we’ll miss out on that much investment earnings if we had invested it elsewhere.
I’m just having a hard time with having debt of any kind lately.
Wow that is awesome Robin!
35% does sound like a lot depending on how much the house is. I’m aiming for at least 20% though when I buy a house because I don’t to deal with PMI but I honestly don’t know if I would try to pay my mortgage off early or not. It would heavily depend how long I anticipate staying in the home. I love the pros and cons though, and I’m sure you’ll do what’s best for you. Good luck!
Thanks!
I go back and forth. I was a big NOT to pay off mortgage guy until last Oct when oil went down to $45/bbl. Now, I wish I had my house paid off. But, I think it is important how one goes about paying off the house. If I do it, it will be in one giant lump sum, not in huge sporadic payments. Yes, I’m going to throw a couple hundred bucks at it every month, but when the big payoff comes, it will be one big payment. Why? Cash = choices.
Yeah, I go back and forth as well. It’s not an easy choice.
While it would be great to not have a mortgage, we’ll focus on saving for retirement, first. We have a good rate – 3.5% – and since I work part-time, I don’t get the benefit of a 401K match. As a result we have to save more for retirement on our own. If we reach our retirement savings goals early, then we’ll look at paying off the mortgage faster.
Great plan Amy!
Interest rates in Canada are stupid low right now so it definitely makes more sense to invest your money. That being said, if paying off your mortgage faster makes you sleep better at night, then do it!
This is why the decision is so hard!
I think it should be a different answer for everyone, but for most people, it makes sense to ensure that at least 15% of the income is going into retirement, and THEN start attacking the mortgage. Run the figures to see where you are on your retirement horizon versus how much you’re going to need in retirement at the rate your investments are averaging. Most people underestimate how much they’re going to need in retirement. Also, mammy wait until later in life to start saving for retirement, so they’re further behind anyway. For the people that are a year away from paying off the house, it might not be a problem, but a significant delay in investing for retirement will cause someone in their 50s to wish they had put away more, earlier. And neither should happen until there is at least5 to 8 months of living expenses saved up in a fairly liquid form, too fight of job loss, illness, other unexpected expenses that would otherwise cause additional mortgage debt.
Yes, ensuring that retirement is on track is very important.
Because we don’t see this home as our long term residence and we have such a low mortgage rate, we have no interest in paying it off early. We are using our extra money to invest outside of the home in the hopes of not only getting a better return than our mortgage rate, but also to diversify our investments.
I think this is a great reason to not pay off your mortgage quickly. I would do the same!
We are definitely on team pay your house off early! We have additional principal payments on auto pilot and any extra money that we can squeeze out of our budget goes to the mortgage as well. We just simply hate debt and want absolutely no parts of being in debt not even what many consider “good” debt,
Good job!
It’s a tough decision!