Paying off Your Mortgage ASAP: Yes or No?
Jul. 10. 2014
When I first got into real estate, I would sit across the table as my buyer signed all 3 million closing papers for their first home. There came that point where we would make a joke about the “no pay no stay” document and usually a comment of how great of an interest rate they got. (I got into real estate when the market was crappy and interest rates were in the 2% realm for some!!)
Another discussion that always popped up in regards to mortgage payments, taxes, insurance and interest was the “if you make two extra payments a year it knocks down about 7yrs of interest.”
So SHOULD YOU or SHOULD YOU NOT pay off that mortgage early? And should you take that money and invest it?
Here are some pros and cons to both, and perhaps you can figure what works best for you.
WHY YOU SHOULD PAY OFF YOUR MORTGAGE QUICKLY:
1. Peace of Mind. Waking up everyday and knowing you own your home out right is a pretty good feeling, may take a while to get there, but it sure will be nice once the bank doesn’t own it.
2. Guaranteed investment return. Paying off that debt early is as if you are earning the interest you would have otherwise paid on it.
3. If you didn’t put 20% down, then you should definitely pay down your loan to the 80% loan to value ratio to avoid that monthly mortgage insurance premium–that will definitely save you money in the long run!
4. And for those of you who usually say you are going to do something….but then well, aren’t so great with the follow through. You may say “I am going to just make minimum payments, let this extra money snowball and invest it” but the ACTUAL chances of you actually doing that are slim to none. So perhaps you are only doing yourself a favor by paying down your mortgage because you wouldn’t have done something smart with the money anyway?
WHY YOU SHOULD NOT PAY OFF YOUR MORTGAGE QUICKLY:
1. If you bought your home at a time with a really great interest rate (or re-financed) the downside to paying off that mortgage is the opportunity cost. You could possibly be giving up investment returns that are better than your mortgage interest rates (you just have to do a little research).
2. And of course there is INFLATION! Consider it. Inflation erodes the value of the dollar. So basically your future mortgage payments will cost less than they do now and the money you are sending in won’t be worth much in terms of “real” buying power.
3. The other thing to factor in are the unfortunate “what if’s.” I would hate for any of this to happen. But if something bad does happen (job loss, crazy medical expenses), what can the bank take?–your home that they still own, right? That’s ok–because you still have a stockpile of money in accounts earning interest. If you had paid off that home that’s all you have, and in turn you will most likely need to sell it to get the money from it or pull an equity loan and borrow against it. HOWEVER if your money was earning 8% in an index fund or retirement account you may have the extra funds necessary to still live and maintain the lifestyle needed. Just a thought.
And a few cool links I thought may be helpful mortgage payoff calculator HERE.
And I also found this article/info graphic of best places to invest. Ummm, so glad I am in Tx (though this vouches for Houston mainly, it was still interesting).
Hope you found this little read interesting, I know it isn’t as exciting as my tips on online dating profiles, but I am busy these days and real estate consumes my mind! Thanks for reading.
–Ashley Brinkman Realtor, ABR, GRI Realty Austin 512.665.8787