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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Thanks Elisa! It’s definitely a tough situation.
Student loans at 3% sounds amazing! Mine were between 6.8% and 9% I believe!
This is such a tough decision since there are so many factors and no “correct” answer, as you pointed out. We’ve been rounding up payments on our house that is now a rental, but we don’t really plan to pay it off early. We’re just waiting for the market to rebound so we can sell it. When we actually buy a house in California, we would like to make a big down payment to try to avoid a jumbo loan, so I’m not sure how motivated we would be to pay it off early.
Sounds like you have a good plan Jessica!
We were fully self-employed when we bought our current home in late 2012, and we just had to show proof like normal of our bank accounts and income and put 20% down.
As for paying it off early…that’s tougher. We paid our first home off as quickly as possible because I hate debt and the mortgage started off at $92,000. So it wasn’t affecting our everyday life to just kill the mortgage.
But our current mortgage is now around $199,000. We’d feel the hit of overpayment. Right now, we are fully funding our 2 Roth IRA’s instead and use about $2500-$5000 a year on vacationing and fun travel. We figure we need to invest something in our youths so to speak. Paying off our mortgage in 25 more years may sting a little, but that still means we’ll own at least two homes outright by age 57. We’ll also know that we had many adventures while our bodies weren’t aching every day…a current lower back issue is making me even more aware that aging is going to feel sucky and I want to do it all while I still can, lol.
BUT, if we could pay off this mortgage years faster without feeling it much, we will. The last two years have just not been amazing for income goals.
That’s good to hear Crystal! I have heard stories from other self-employed people and they’ve said in the past few years that it’s been getting more and more tough.
Dan – I can definitely see where you are coming from. You have a very low interest rate so investing instead makes sense.
Good plan Catherine!
Honestly, I like the thoughts of following in your footsteps and going back to renting!
Haha I am looking forward to owning again one day soon! 🙂
Definitely not paying ours off early. We locked a 30 year at 3.25 plus get a tax discount on the interest. We’ll keep plugging that money elsewhere.
Sounds like a good plan Adam!
If you have proof of income and cash reserves, low debt, and good credit, you won’t have a problem getting a mortgage. I would love our home paid off early, and we do pay some extra every month, but it’s just not the smartest move right now when we are in a high tax bracket. We need to put as much as possible into my solo 401k and we are putting lots of money into rentals right now. I never think it’s a bad idea to pay off any debt early, though. You never hear anyone with a paid off house wish they hadn’t paid it off.
Good to hear! I don’t know why I kept finding scary stories online about self-employment and mortgages.
Your cash is not completely locked up if you prepay. You can recast even if you can’t refinance. https://nicoleandmaggie.wordpress.com/2012/11/05/november-mortgage-update-under-100k-and-playing-with-amortization/
Interesting! I didn’t know this.
I think you have clear reasons not to pay off your mortgage first. I would do the same!
I would love to have our mortgage paid off just for the extra cash flow each month. Think of the things we could do with an extra $1500/month! We have ten years left on our mortgage … if we stay put.
10 years isn’t too long! You got this 🙂
I was self employed when we bought our home and the bank did not give us a hard time about having a larger down payment. We paid the 20% without hassle but I did need to prove that I had been successfully self employed for the last two years — they wouldn’t even consider the loan before then. In the weeks leading up to closing they also made me provide proof of every deposit into my checking over $100. After the whole fiasco I switched jobs so I was no longer “self employed”. While I don’t plan to move for a very long while, the hassle wasn’t worth being able to make my own hours.
In other news, I wouldn’t mind paying off my mortgage early but it’s not really a goal of ours. I don’t see it as “debt”. We have savings to cover our butts should one of us get fired plus another fund to save for our future but yeah, I feel my money is better spent elsewhere.
Good post 🙂
Nice to hear about another self-employed person getting a mortgage. Providing proof for every deposit would definitely be tedious!
We paid our mortgage off in 5 years so just this past year and it was the best thing we did for ourselves financially. It may not be for everyone but it works for us. It was a sure win… we knew the rate, we paid it. No worries of renewing he mortgage and interest rates going up. We also balanced this with investing our retirement savings. I think putting all the eggs in one basket would not be something for us. Now that the mortgage is gone we can actively invest as much as we want. We are still under 40 and just had our first child. It’s a great feeling.
Wow awesome job!
We are also business owners and have had a harder time getting a home loan, but it wasn’t impossible since we are in our 3rd home now. But after the mortgage crisis the banks definitely got stricter in giving out home loans and I know we had to pay a little higher interest rate on our current home. I think with interest rates being low that you might want to try and see if you qualify and put down the amount of money you have saved. We always have thought paying off our house is the best way to go since you wouldn’t have to pay all that interest. Your post was a good reminder to keep making extra on that monthly payment! thanks!