It's not worth paying down our mortgage because...

[TBH]

I feel like this is one of those things people say all the time. Usually they're people who are not good with money, so it's not as if they'd be saving they extra money if they didn't put it toward a mortgage. So the argument that they'd get a higher return elsewhere doesn't apply. They're often also the people who refinance as often as possible, usually to pay off credit cards. It's something people say to make them feel better about repeatedly re-starting the 30-year clock.

"It's not worth paying down our mortgage because we're going to move before the 30 years is up."

But...if you sell the house, you would get back the extra equity. If you move every 5-7 years, that's fine, but wouldn't you like to have a bigger down payment on your next place?

"It's not worth paying extra on the mortgage because we're underwater on it."

But...you still owe the money, no matter how much your house is worth. Unless you're planning to default on your loan, the value of the house doesn't really have any bearing on whether you should pay off your debt. In fact, if you're underwater, maybe you should pay MORE so you're not underwater and you will have the option to sell if you need to.

Am I missing something? Aside from the argument that you can get a better rate of return investing extra money in the stock market rather than paying down a mortgage, are there other reasons why you shouldn't pay extra on a mortgage? Yes, yes, of course you have to make sure you have a fully funded emergency fund and your retirement savings are healthy, but after that, why not pay extra?

[DiscounThem]

If you need other reason, I think the more you pay down towards your mortgage, you will get less on the mortgage interest deduction for your tax. But again, that all depends on your income level.

[kork13]

If you need other reason, I think the more you pay down towards your mortgage, you will get less on the mortgage interest deduction for your tax. But again, that all depends on your income level.

I will never understand this reasoning.... Would you prefer to pay $100 in interest charges in order to be able to get $25 back as a tax deduction? I'd rather just not pay the $100 in the first place!!

[jpg7n16]

Aside from the argument that you can get a better rate of return investing extra money in the stock market rather than paying down a mortgage, are there other reasons why you shouldn't pay extra on a mortgage?

I agree with you on your 1st two points. Paying down your loan is not a black hole that you'll never see again.

I think that's the main reason to not pay down. If you can tolerate the risk, at today's mortgage rates there is significant upside in taking the money you could use to pay extra on your home, and invest it instead.

Yes, yes, of course you have to make sure you have a fully funded emergency fund and your retirement savings are healthy, but after that, why not pay extra?

Another legitimate reason (besides opportunity cost) is liquidity.

In the event that you run into a financial emergency, you cannot borrow against your equity (unless you had set it up in advance with a HELOC). In many cases, people do not have access to the equity at all. And if your emergency requires more than a 6 mo EF, where can you turn to for funds? You cannot get approved for a 2nd mortgage, because you have no income. You may get foreclosed on, or take on significant CC debt, or some other financial error like cashing out a retirement account.

If you had instead built up taxable liquid savings in a brokerage account in addition to the EF money, you could access those funds to cover the cost of living in an abnormally long financial emergency.

---

"Because we're gonna move" - makes no sense
"Because I'm upside down" - makes no sense
"Because the interest is tax-deductible" -- is only half of the argument

The interest deduction only means that the debt costs less, making it easier to earn more on investments.

If your mortgage is 5% and wasn't deductible, to make investing a better option, you'd have to get more than 5% (after tax). Which is possible, but takes a bit more risk. However if you get to deduct 25% fed and 5% state taxes, your 5% is really only 3.5% -- which is much easier to outperform with investments.

[BuckyBadger]

There are a few reasons that I do not prepay my mortgage.

Liquidy is an important one. It's a lot easier to take money out of an investment account than out of my house should something terrible happen.

Inflation hedge is another one. In 30 years, my $1800 mortgage payment is going to be peanuts.

The tax deduction thing certainly isn't enough on its own to not pay a mortgage, but it is certainly one of the ingredients that -- overall -- might push one toward not paying off a mortgage. After the tax deduction, my mortgage is at an equivalent rate of barely 2%. Over 30 years, investing that extra money will do a hell of a lot better than 2%.

So please don't paint with such a broad brush. Some of us choose not to prepay our mortgage for reasons that make a lot of sense. And to us, the financial benefit of carrying a mortgage is more important than the emotional desire to not have a mortgage.

So let's not judge people for being rational. alright?

[Goldy1]

We paid our mortgage off early. I am 37 and my husband is 41. In a nutshell, we turned a 30 year mortgage into a 15 and we paid it off about a month ago.

My brick very updated 18000 square foot home is possibly worth $175000 probably not more. It was purchased for $155,000 in 1997. WE put in 60 grand in improvements since we bought the place as well. Ye it sucks we'd get less for it than what we paid for it plus improvements cost.
I don't know why we paid it off early. I know the whole thing about making more in stocks, but that's a gamble. I guess instead of fancy vacations(I actually don't think spending money on expereinces like vacations is bad bc I still remember my childhood travels fondly but just sayin) and driving used cars around a very long time we put down more money. I think our mortgage was like $725 a month and we would put down like a grand a month, and a couple times we slapped down a few thousand just to chip at it.
We still put in for retirement. I don' feel totally more financially secure with no mortgage versus like 60 grand left to pay, but it sure beats being uspside down without equity I can tell ya.
We did it never making more than probably 60 grand or 70 grand between me and my husband combined. Most my friends have bought up to the 300K homes. Not gonna do that. If we ever move I don't wanna take on another mortgage more than a small amount if any, but if we move to a nicer city(mine is fine tho) we'd have to spend more for the same house.

[Blessed]

Lets just say first off math is NOT my strong point. Unless the reason is to stay liquid I don't think any of the reasons are real valid or at least were not for us. Now Like I said math is not my strong point and I am a security freak. I find a big sense of security in having a paid off home.I like knowing if there was a job loss or a major life changing illness there is not a mortgage hanging over our heads. I have to say when we traded up in home it was darn fun getting to just get a cashiers check for it.

[Petunia 100]

But...you still owe the money, no matter how much your house is worth. Unless you're planning to default on your loan, the value of the house doesn't really have any bearing on whether you should pay off your debt. In fact, if you're underwater, maybe you should pay MORE so you're not underwater and you will have the option to sell if you need to.

You're overlooking the option to keep your underwater house as a rental and move. In that situation, cash is much more beneficial.

Take someone like me. Zillow says my home is worth 114k, I owe 179k. So, if I need or want to move for whatever reason, I need to cough up 65k + selling costs to get out from under. That's a tall order. Paying down my loan 10k (for example) wouldn't help much. However, if I opted to keep it as a rental, an extra 10k in the bank would help a lot.

[MonkeyMama]

OP makes good points.

Statistically, it is better *not* to prepay your mortgage, but only if you have the discipline to save and invest. Few in our culture have this discipline. Most hear "it is better not to pre-pay and not to put money down" and run with that, though they don't save anything. Which means every moron on the street has told me I Was a moron to put 25% down on my house or to prepay a few dollars here and there. Ha! (These were all people who ended up foreclosed and bankrupt).

That said, I know plenty of financially savvy types who did never prepay a dime on their mortgage, and who did quite well. To be fair, these are people who paid off their mortgage in 15-20 years and were mortgage-free well before retirement. The tendency is to just lump sum it at the end, since they have saved and invested so much. Liquidity, inflation, tax breaks, and higher investment returns all worked to their advantage. I am sure there are plenty of people on SA who *get this* and work it to their advantage. It's just the population at large that is another story. {I've had many clients ask me if they should lump sum their mortgage at the end - honestly I could usually flip a coin. It's all going to principal at that point, and their mortgage payment is usually like less than 5% of their income. It's not like paying off their mortgage at that point is life-changing. IT's not that the people who chose to pay them off are more savvy or better off - but these are people who were conservative all along}.

As with anything, I am pretty middle of the road. I have watched a LOT of people put all their eggs in one basket (put 0-down on homes and lose it all in the stock market and in rental properties - this is just the other extreme). I personally max out our retirement and have all our other ducks in a row before extra mortgage payments. When my spouse works, 100% of his income goes to the mortgage. This means we will pay off in 3-15 years. The 15-year projection is just based on current economy and circumstances. If spouse found work, we'd pay it off lightning fast. I think it is very different if you can just get it done in a few years. But since I am looking at a 15-year time-frame, I just can't put every spare dime to a mortgage for 15 years - I would be so out of balance financially in every other area. For 2-3 years, whatever. There is great benefit to just being done and mortgage free on the very young side. But there are always going to be risks and trade-offs no matter what you decide.

[Goldy1]

We had a kid late;at 33 and 38 and even tho we had modest income it sure frees up more being childfree esp with me having worked. Now with me at home, the cash isn't flowin in like it used to be. That helped us pay it off. Now when I return to work I'll likely spend a lot more money on supporting my child. What was a lot of money to me then just isn't now.
I can see this is one reason waiting for kids was nice but I waited bc I wasn't emotionally mature (or maybe I was mature, mature enuf to know I wasn't ready, now I am) not bc of cash.

[Goldy1]

money in stock market or in equity;it's a win win as long as its invested wisely whatever that means I suppose. Our jobs are insecure so for me it means more to have equity. If jobs were secure, i'd be ok with the stocks.

[dczech09]

One thing that was not mentioned about the mortage tax deduction argument:

That deduction only factors in when you itemize. The majority of filers take the standard deduction, so the mortgage tax deduction would not even factor in.

So either way you look it, the mortage tax deduction is almost a dead argument. The only point that makes sense is that it effectively lowers the cost of debt, however that decrease in the cost of debt is only temporary as the tax deduction amount is decreasing as the mortgage decreases.

As for moving in 5 years- I do not buy that argument. Remember, if you pay extra on a mortgage, you reduce debt and increase equity. It is a complete shift on the balance sheet. And that shift will carry forward when you move into a different house.

And "...because I am underwater." Who are we kidding? That is a worthless argument and is really just a poor excuse like "I don't have a lot of money because I don't have a six figure income."

[crazyliblady]

Paying Down Mortgage

I totally agree with paying down the mortgage. I have actually heard personal finance people say to not pay it off early, because of losing the tax deduction, but if you don't have enough things to itemize, this does not wash. T he dh and I are right now paying some cc and medical bills. After we get that paid off, I am going to divide that between accumulating more in regular savings and putting a little extra on the mortgage.

[chrisburke21]

Its not worth paying

It sounds like you have a pretty good grasp on the factors involved. You just need to see what makes sense to you, your personal finance philosophies, and then create your plan based on that. If you are strictly looking at the numbers to make your decision run some test scenarios and see what works best for you.

[Ramose]

If you are happy to take the risk on stocks etc. then you should do that because you probably would get a higher return. Just make sure that you have enough for a small emergency.