Posted by
Message
tigersfan1989
LSU Fan
Louisiana
Member since Oct 2018
171 posts

Does it ever make sense to pay off your home mortgage early?
After looking into Dave Ramsey and other financial gurus I always see recommending paying off your home early. After thinking about it, I really can't think of one scenario where this would be beneficial besides the fact your mortgage rate is below market average returns which you could always refinance. Ramsey says start paying extra on your home mortgage after saving 15% of income towards retirement. To me if you have the discipline to save 15% towards retirement shouldn't you have already learned the discipline to direct any extra monthly cash flow into the market instead of going toward the mortgage? Am I missing something by not paying the home off early?


PearlJam
Auburn Fan
NotBeardEaves
Member since Aug 2014
13507 posts

re: Does it ever make sense to pay off your home mortgage early?
He places a high value on reducing risk and debt equals risk. His philosophy is that most American consumers have become so accustomed and normalized to large debt loads, that we fail to properly account for risk.

I'm not advocating his system, but just explaining what you might be missing with respect to the reasons for his advice.

Generally speaking, investing the extra income will often produce a better net gain over early mortgage payoff. The difference in most cases probably isn't that significant.
This post was edited on 2/11 at 4:49 pm


jimbeam
USA Fan
University of LSU
Member since Oct 2011
59286 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

Ramsey says start paying extra on your home mortgage after saving 15% of income towards retirement.
Thats gonna be a no for me dog.


Replies (0)
Replies (0)
121
Lsutiger2424
LSU Fan
Member since Dec 2016
610 posts

re: Does it ever make sense to pay off your home mortgage early?
I questioned this a couple of months ago and got a lot of help here.

I decided to not pay off my mortgage and instead trade plus collect dividends with the money I would have paid it off with.

For this year I will roughly pay $2400 in interest on my loan. All I have to do to off-set the cost is make more than 2400 in my brokerage account and it would be worth it. Plus keeping a long term loan on your credit helps your score tremendously.


gpburdell
Georgia Tech Fan
ATL
Member since Jun 2015
612 posts

re: Does it ever make sense to pay off your home mortgage early?
Depends on what kind of "sense" you are talking about.

If you mean from a pure financial sense, then no assuming you take the extra and money and invest it. Though we're in a period of relatively low rates. Interest rates were over 8% in 2000 and even reached 18% in the mid 80s. At 8%, I'd take the safe bet and pay extra to the mortgage.

I'm single w/ no kids. If I was married with kids then maybe it does make sense to pay off the mortgage asap. That way losing the roof over your heads isn't a risk. I've had this discussion many times with co-workers and friends. Most of the ones that have kids would rather pay down the mortgage.

I don't plan to pay off my mortgage early. However, if I received a large sum of money (inheritance etc) that would let me pay off the mortgage completely then I would highly consider that.

In that scenario, that would free up a significant amount of money every month for investing. This is not the same as paying extra to the principal for the next 10-20 years or whatever.


Replies (0)
Replies (0)
130
Niner
Auburn Fan
Member since Apr 2019
623 posts

re: Does it ever make sense to pay off your home mortgage early?
CFP® practitioner here.

There is a ton to be said on this subject but to your question, yes, a diversified moderately aggressive portfolio should absolutely earn more than the average 30-yr mortgage rate right over 30 years.

Does that mean I always recommend investing what you would pay down on the mortgage? No. A lot more factors come into play than this one aspect.

I'll also say this, not once has a client regretted paying down their mortgage faster - regardless of what the market did during that time.

EDIT: people also never seem to take into account how the equity in their home grows (or drops) in addition to the guaranteed 3.5% or 4% you get if you pay off your mortgage today. You're buying an asset.
This post was edited on 2/11 at 6:02 pm


Replies (0)
Replies (0)
141
Huey Lewis
LSU Fan
BR
Member since Oct 2013
3101 posts

re: Does it ever make sense to pay off your home mortgage early?
With historical mortgage rates, yes. With mortgage rates under 4% I say no.


Replies (0)
Replies (0)
90
PEPE
Member since Jun 2018
6486 posts

re: Does it ever make sense to pay off your home mortgage early?
Ramsey's advice is often built to factor in human frailty, not perfect mathematics.

A shrewd investor can probably make a better ROI with investing the money, but the average person is an idiot when it comes to money and his advice is designed to help the average person.


marchballer
Stanford Fan
The Greatest Country on Earth
Member since Aug 2008
3861 posts

re: Does it ever make sense to pay off your home mortgage early?
I realize the numbers say to not pay it off but in the back of my mind, I hate the idea of having a mortgage to worry about. If the market tanks, and I lost my job that is an added stressor. I'd rather pay it off and focus on my next financial goal in life retirement.

So I think it comes down to how risk-averse you are.


kywildcatfanone
Kentucky Fan
Wildcat Country!
Member since Oct 2012
68037 posts
 Online 

re: Does it ever make sense to pay off your home mortgage early?
quote:

He places a high value on reducing risk and debt equals risk. His philosophy is that most American consumers have become so accustomed and normalized to large debt loads, that we fail to properly account for risk.

I'm not advocating his system, but just explaining what you might be missing with respect to the reasons for his advice.

Generally speaking, investing the extra income will often produce a better net gain over early mortgage payoff. The difference in most cases probably isn't that significant.


This on the Dave Ramsey front. I used his process to get out of debt, and it worked well.

But as far as paying off the mortgage, it's a huge peace of mind to not have a mortgage, and that is worth some amount of money.


TD SponsorTD Fan
USA
Member since 2001
Thank you for supporting our sponsors
Advertisement
stewie
Central Florida Fan
Member since Jan 2006
3498 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

that is worth some amount of money.


Priceless until you can’t afford it


Replies (0)
Replies (0)
10
WM88
LSU Fan
West Monroe
Member since Aug 2004
1210 posts

re: Does it ever make sense to pay off your home mortgage early?
The obvious answer is no. However, I paid off my house after about 8 years in it.

I live in a dump compared to the posters here but I would do nothing different.

The peace of mind of owning my house far outweighs what I *might* make in the market.

I save about 50 percent of my income now. If I were to lose my job tomorrow, I could live 10 years on liquid assets.


OleVaught14
Member since Jun 2019
433 posts
 Online 

re: Does it ever make sense to pay off your home mortgage early?
quote:

The peace of mind of owning my house far outweighs what I *might* make in the market.


Yep, a lot of people are willing to leave some money on the table to have peace of mind of not losing their home if poop hits the fan.


Replies (0)
Replies (0)
50
buckeye_vol
Ohio State Fan
Member since Jul 2014
32454 posts
 Online 

re: Does it ever make sense to pay off your home mortgage early?
quote:

I realize the numbers say to not pay it off but in the back of my mind, I hate the idea of having a mortgage to worry about. If the market tanks, and I lost my job that is an added stressor.
I completely understand this POV, and personally think that provided that all benefits and drawbacks of the various alternatives are considered, there is no “wrong” answer for a person who decides one is better than the other.

I agree with you that while having no debt absolutely reduces stress and risk, especially if there is financial hardship (e.g., job loss) which favors getting rid of it as quickly as possible.

However, what I think gets overlooked is that in that repayment phrase before its paid off, the opposite holds true and there is increased risk and the stressors or financial hardship are heightened if paying off early due to illiquidity and an inability (unless a mortgage can be recasted) or a fixed payment loan no matter how much extra has been paid off.

For example, if you had a $300,000 loan with a 4% interest rate ($1432.25 fixed payment) and put an extra $800 per month toward the principal, you would basically pay it off in 15 years and save over $98,500 in interest. But what if a financial hardship occurred 125 months into repayment after you put $100,000 extra towards repayment? You’re still on the hook for $1,400 per month, and despite having almost $124,000 in extra equity, it’s illiquid and you have access to it, unless maybe you take out a home equity loan or line of credit, which is counter to the point of getting rid of debt. So for those 15 years until it’s paid off, all of that extra $ put towards the principal is extra $ you don’t have access to in an emergency while still having to pay the original payment amount.

So in the risk (and potential problems) you’re trying to avoid by getting rid of the debt, is elevated until that debt is gone. Again, nothing wrong with choosing that option, but I think people who talk about those benefits of getting rid of debt need to be aware that the illiquidity of that decision has its own problems.


igoringa
LSU Fan
Tejas
Member since Jun 2007
11105 posts

re: Does it ever make sense to pay off your home mortgage early?
I agree Ofcourse paying off mortgage is not economically optimal but if you have a 4% mortgage and have maxed out your tax deferral accounts - a 4 percent after tax return is not horrible along with piece of mind.

Disclosure - I could pay off mortgage today but haven’t and won’t - I just dont think it is as doomsday as some think to do it


buckeye_vol
Ohio State Fan
Member since Jul 2014
32454 posts
 Online 

re: Does it ever make sense to pay off your home mortgage early?
quote:

a 4 percent after tax return is not horrible along with piece of mind.
Sure. And because the rate is fixed and putting extra toward the loan results in a fixed rate of return, we can essentially say that the RATE OF RETURN is risk-free.

My issue is that I think people think that this is the same as a RISK-FREE rate of return, when in reality this basically refers to one type of financial risk (interest rate risk); however, because they’re fixed-payment loans for an asset that cannot be bought and sold with immediacy, it has especially high liquidity risk. So it’s not only not risk-free, I’m not even sure that the rate are high enough to offer a reasonable liquidity premium.

Regardless, I think that this discussion only
considers liquidity risk under one scenario (after debt is paid off) when it’s at its lowest that favors one option (getting rid of that debt quickly), but ignores that the same option likely also increases liquidity risk to its highest levels for a period of time (before its paid off; fixed-payments; going to an illiquid asset and not to a liquid one).

And frankly I think it’s a little problematic that the Dave Ramsey approach, and the debate about it, has happened at this particular in point in time after a black-swan event (housing crash) that provides justification for one side of the argument that was followed by a market that has had unusually high risk-adjusted returns that has provided justification to the other side of the argument. So these two extremes have led to and unnecessary extremes in the debate when there is large area in the middle (put some towards both) and everybody is probably best off somewhere in that middle area.
This post was edited on 2/12 at 12:53 am


Replies (0)
Replies (0)
00
notsince98
Missouri Fan
KC, MO
Member since Oct 2012
11506 posts

re: Does it ever make sense to pay off your home mortgage early?
Financial freedom and discretionary budget have a value to every single person. What is that value to you? That will determine when and where it makes sense.


Replies (0)
Replies (0)
20
PUB
New Orleans
Member since Sep 2017
4332 posts

re: Does it ever make sense to pay off your home mortgage early?
Horrible mistake over the past decade was paying off a 3% mortgage when the market averages 20% + every year.


Replies (0)
Replies (0)
10
notsince98
Missouri Fan
KC, MO
Member since Oct 2012
11506 posts

re: Does it ever make sense to pay off your home mortgage early?
quote:

I realize the numbers say to not pay it off but in the back of my mind, I hate the idea of having a mortgage to worry about. If the market tanks, and I lost my job that is an added stressor. I'd rather pay it off and focus on my next financial goal in life retirement.


It also reduces the stress of having to land a job meeting certain income requirements. When you lose a job and you have no mortgage payment, you can almost do anything to get by until you find what you want.

And related to that, when you have no mortgage and you feel like changing careers, there is no significant income limitation. You can likely go try any career you have always wanted to try and live stress free financially.


Replies (0)
Replies (0)
21
21JumpStreet
Texas Tech Fan
Member since Jul 2012
11348 posts

re: Does it ever make sense to pay off your home mortgage early?
Yes, no debt


Page 1 2 3 4 5 6
Jump to page
first pageprev pagePage 1 of 6next pagelast page

Back to top

logoFollow TigerDroppings for LSU Football News
Follow us on Twitter, Facebook and Instagram to get the latest updates on LSU Football and Recruiting.

FacebookTwitterInstagram