Scott Hanselman

I'm not so sure that would halt the economy. It might scale back Starbucks plans for growth back to only having one Starbucks per city block rather than two per blog.

Go for it Scott ! Pay off that mortgage ! I use to be a financial advisor before start my Micro-ISV. Now, I write financial applications and seminars to help people get out of debt.

Your 99% of people owing on the home is close, the surveys suggest it is closer to about 97%. 3% of Americans own their home free and clear.

I love your blog and thanks for all of your wisdom.

I'm all for paying off your mortgage early, but, of course, it depends on what the interest rate of your mortgage.

Also, the one thing that worries me a bit is that the mortgage company doesn't care that you're paying off early. If for some reason you can't make a payment, they probably don't care that you've already paid more ahead of time... they could still foreclose, etc.

If you are really risk adverse, you might be able to beat the interest on your mortgage with something like a CD or a money market.

(I'm not a financial advisor, but I play one on TV.)

Oh yeah!!! I couldn't agree more. My wife and I paid off our home this year and are now completely debt free. There is definitely a mentality that a home mortgage is a necessary thing, but I think you hit it on the head. Its amazing how many times you will talk to someone, and they will say they are 'debt free', but then they say they still have 27 years left on their home mortgage. Its like people don't even consider it debt anymore.

Debt is bondage as far as I'm concerned. My wife and I paid off our home this year, and it does make you feel free.

Scott -- Actually why have a mortgage? It would be better to rent than have a mortgage. In most situations you can get a better return from the savings between rent and a mortgage payment (along with property taxes, maintenance, and other ownership demands). I think in some ways the idea to own your home is a half myth created by the mortgage companies. I do believe there are reasons to own but if you are looking to get the most out of your money long term than renting might be better.

1b) peace of mind from being debt free.

as far as the 'stop consuming' bit ... i'm one of those people. just about everything i own could fit in a mid sized car. this doesn't exactly map up with small business taxes though. it's really hard for me to spend money to get the tax deduction.

I've had these same thoughts Scott. But what about the argument that the $10,000 in your hands now is worth more than the $10,000 you'll have to pay over 30 year (you wont be able to buy as much stuff with $10,000 in 2030, as you can in 2006)?

I'm not offering that as a definitive reason not to pay off, I'm throwing it out there so someone can dismiss it.

I did what you are thinking about doing six years ago. It has greatly increased the amount of time I have for reading books.

Scott: A good idea to look into, vis a vis your notion of making an extra payment, is a bi-weekly payment structure on your mortgage. We switched to this schedule and shaved about 8 years off the amortization time frame for our loan. You get the benefits of paying the note off more quickly, paying much less interest over the life of the loan, and smoothing out your cash flow (as most people get paid every two weeks).

Now I know why I like this blog so much! :) Good thoughts Scott.

Right on Scott! There is a whole network of Personal Finance bloggers out there that have debated this point, (and many others related to PF). We pay extra towards our mortgage every month on top of investing the max in our 401K and maxing out a ROTH. We've been doing this for quite a while (I'm 34) and plan to continue. We still consume things, but AFTER we've met all of our savings goals. (And the only debt we have is the pesky mortgage). Even with doing this, we still have plenty of money left over for things like dual flat panels, Ipod, etc etc. (I love electronics almost as much as you do!!)

Glad to see the post on this! Maybe we can get hanselman.com converted in to a PF blog! :)

Reason NOT to pay off the mortgage -- you have the typical American credit card debt. Paying off higher interest rate credit cards (or car loan) in my mind should have priority over extra mortgage payments. Otherwise, I totally agree with you.

I had a girlfriend that kept paying extra on her 7% mortgage, while she had 19% and higher loans outstanding. It drove me nuts.

If you're getting 1/3 back as a tax writeoff, then a 6% mortgage is actually a 4% loan. If you don't like risk, you can get municipal (tax-free) bonds at better than 4%, and they'll move upward as interest rates rise. Selling the bond later and putting the proceeds against your mortgage would put you well ahead of where paying the mortgage directly would.

If you can handle very low risk, buying a market index fund and holding it for 10 years is about as safe an investment as you can make. The market's never been down in any 10 year period in the history of the market, and returns average upward of 7%. If you sell those shares post-retirement in lower income years, you can do it gradually and pay less tax. If you don't have a 401(k) you can also defer some more taxes and invest through a Roth IRA.

That mortgage is the cheapest loan you'll ever have. Paying it off early will earn you far less money than just about any investment.

You should read Dave Ramsey. His plan, in a nutshell:
~get $1000 saved up
~start paying off credit cards, etc
~get 3 months salary saved up
~pay more into retirement
~start paying off mortgage
~retire early =)

Scott, I think that this is more an issue of risk, comfort level and discipline than anything else. There is no correct answer or absolute right or wrong with this. Assuming that someone isn't in over their heads with what they can service (pay) on a monthly basis, some people still loose sleep over the fact that they owe money to someone else while other are quite comfortable with the idea. Those in the former category will do well to pay off a mortgage early while those in the later category may have other options.

My wife and are are in the 28% tax bracket and have about a 5.5% fixed 30 year loan on our house. (We are only a few years into it.) We have enough savings that we could pay off about 1/2 of our loan but instead we choose to invest that elsewhere mainly in a reasonable spread of mutual funds. Over the past few years, we have averaged about %15 in the market. In addition, each month we put the equivalent of about 60% of our mortgage payment into into our investment account.

Now I know that the 15% will go up and down but I strongly believe that it will average above the 5.5% that we are paying on our mortgage. for now, we are comfortable with the added risk that we are assuming. If we loose a significant amount in the market, we would have been better off putting all of our excess money into our mortgage. We don't believe this will happen and sleep soundly at night.

"I wonder if a significant number of folks stopped drinking Frappacinos and put the extra money on their mortages if the economy would grind to a halt."

A Grinding Halt.
1) Cuz of the debt/economic factors you point out.
2) Cuz all those people would looze their caffeine buzz... and Gross Domestic 'output' would tank ;)

Good post. The paragraph that starts "These resonate with me" was kind of hard to parse because of spelling and punctuation errors.

I think theres something to be said for having a mortgage rather than paying it off. If you own your home, thats a great investment, but its also not very liquid. If you were to need cash quickly, you can't sell or refinance fast, but you can cash out mutual funds or stocks. Also, as someone else mentioned, if you have your home nearly paid off and you start missing payments for whatever reason, you will have a higher chance of being foreclosed on, whereas if you still have almost a full mortgage, they can simply add more to the end of the loan.

You never really own your home anyways. The government can always confiscate your property if you don't pay your taxes and sometimes even if you do (eminent domain). In the end, it still comes down to who has more guns. :)

Personally, I've decided not to buy (again) until I'm fairly certain I'm in the house I intend to retire in. Given my penchant for moving around, I've found it is wiser to rent, especially in NJ, where I can get a place for rent that I couldn't possibly afford to buy. :) But yeah, I know, this is only marginally on topic, so I'll stop now...

I think Andrew R. makes some good points. ... I'm not rich, so I won't give any financial advice.

But, I did read a good book recently, entitled "The Millionaire Next Door," which studied common traits/practices of Americans who have earned a lot of wealth. You might find it interesting (and it's a light read) -- I trust the advice of wealthy people more than random financial advisors. The wealthy recommend 1) get a "small," reasonable mortgage and 2) rather than pay off the second-cheapest loan you'll get, invest the money elsewhere, epecially if you have 20+ years to go.

Don - I'm not sure about the concern about foreclosure. If I've never missed a payment, why would starting to double up on payments make me more likely to miss one and be at risk for foreclosure?

Ben - As to liquidity, a paid off house is actually pretty liquid in that you can get an equity line of credit in a few hours.

Ambrose and the renters - Why not buy a house, start a holding company to own the house then rent from myself? Paying rent just makes another fellow who DID pay off his house rich.

Daniel - a lot of this decision to get "agile" with regard to $ was as a result of Dave Ramsey's book (and my wife's MBA).

Brian - a mortgage with tax-deducible interest IS a low interest loan, but it's a loan with a VERY long lifetime. It's not a 4% loan over a year, or even 5 (usually). 30 years is nuts and why pay $200000 in interest for a $100000 house?

Joshua - I hear you about the present vs. future value of money, but the money spent paying off a house still is "there" as equity and arguably a modest appreciation, especially on a house that increases its value tax free, is a better than 4% investment.

"a mortgage with tax-deducible interest IS a low interest loan, but it's a loan with a VERY long lifetime. It's not a 4% loan over a year, or even 5 (usually). 30 years is nuts"

If you invest that extra money at better than 4% instead of paying early on the mortgage, you can turn around and pay the mortgage off earlier using that money than you can by paying the mortgage all along.

If you have to pay the AMT (lots of tech folks in California do) then paying off your mortgage is bad because the AMT tax is at 26% and goes to 28% and one of the few things you can deduct from your AMT Adjusted Gross Income is your mortgage interest. You can't deduct state or property taxes which in Califonia can easily set you into the AMT zone.

Actually, Yahoo claims that only about 60% of "residential properties" have a mortgage:

According to a 2001 study by the Census Bureau and the Department of Housing and Urban Development (HUD), "nearly 40 percent of all residential properties in the United States, owner-occupied and rental units, are not mortgaged but are owned free and clear."
http://ask.yahoo.com/20060314.html

Whether one should pay off their mortgage early mostly depends on interest rate and how much financial discipline the mortgagor has. The reasons given for paying off a mortgage early really apply to people with poor financial discipline:

1. You want more than anything to be 100% debt free.
Why? If I have the ability to borrow lots of money at low interest rates and invest it wisely, I definitely want to borrow a lot. If my habits include spending excessively on luxury items that depreciate quickly then for my financial health, I should minimize my debt.

2. You want to have more choices and options for your future and no debt gives you this option.
If I have good financial discipline then my borrowing more means I have more money to make good investments. No debt means less money and less investment choices.

3. You want to retire early. With no mortgage payment, you can save up for retirement faster and quit sooner.
Again, I can invest more money if I borrow more money. If I decide to retire and simplify my life, I can gradually liquidate my investments and pay off my debts. If I accumulate more debt and invest well, I can retire even EARLIER.

4. You want a guaranteed rate of return. Paying off your mortgage guarantees you that savings rate. Investing in the stock market can never guarantee you anything.
If my mortgage interest rate is low enough, I can be confident that I can do better in the stock market, though I agree there is no guarantee.

7. You are disciplined enough that once you have paid off your mortgage, you will invest the same payments into a retirement fund until you have enough to meet your retirement needs. (Remember, with no mortgage, your required retirement income will be greatly reduced.
If you are this disciplined, you can also try to get a low mortgage interest rate and invest wisely so your return in the market outweighs your mortgage rate.

I don't thing that debt is necessarily a bad thing. Running up excessive credit card debt and taking out high interest rate loans to pay for luxury cars, vacations, and an elite lifestyles is poor financial discipline. Getting loans at a reasonable interest rate so you can use money to invest wisely in the market can be very beneficial.

Before making a decision on whether to take out a loan or pay off in advance, you need to really make sure you can make wise decisions with extra money in your bank account.

E.g., I purchased a new car two years ago. It would have been wise for me to by a one or two year old car at the time, but the deals on used cars weren't very good and I got a fantastic deal on a new one. I borrowed most of the money to pay for it at a rate of 2.9% APR. I could pay off the loan in an instant, but I have a bank account that is giving me an annual interest rate above 4%. I'd be an idiot to pay anything above my required monthly payments on my car loan.

One word, Scott: spread. The point is, if you can make a higher rate of return on your investments (on average) than your mortgage interest rate, then you're financially better off carrying a mortgage.

1. I can't argue with this. It's purely a matter of personal values.

2. How does it give you more choices and options? If you can pay off your house, you always have the option of doing so. I would argue that real estate is less liquid than many other investments meaning you've reduced your choices.

3. But most people (rightly) think of retirement as a level of net worth. Paying off your house does not suddenly increase your net worth.

4. Frankly, I think this is a repeat of 1.

I tried this, and ran into an interesting problem.

I overpaid my mortgage regular -- paying $1000/month when the actual bill was $780. After about 5 years of a 15 year mortgage, I had it about 2/3rds paid off.

Then I lost my job (9/11). Since I had been putting my extra cash into the mortgage, I had very little savings. And, of course, regardless of how much equity you have in your home (Over $200,000 considering the appreciation on the condo), no one will give you a loan unless you have a job.

I would rather have a 15 year mortgage than a 30 year one. While the monthly would be more, the increase won't break you but you will save a TON on interest of the years.


I don't agree that renting is better than owning a home. This makes sense only in cities where home prices went through the roof while rents are still low... like in San Diego. Rent money is money that went bye bye with no tax benefits. A home appreciates over time and this is money that's working for you. When you retire sell your home and move into a lower cost cityor home or start a reverse mortgage where the lender would send you a monthly check.

abdu

Did anyone notice the post by James Curran. He is the perfect example of why you would not want to pay off your home early. Imagine now if James had instead of paying off his loan early took those extra payments and put them even in a conservative savings account earning him 4% he would have had the extra money available to him immediately plus he would have been making money on his money instead of the bank doing that. Plus don't forget that he can't write off those extra payments that he made to the bank. A while back I was thinking about the same thing and I stumbled upob this simple little powerpoint presentation that really makes it very clear. But the one thing to stress is that this is only for those that are disciplined and can set the money aside to let it work for them rather than just squander it away. Have fun!

Start reading at page 9 and continue through to 15:
http://www.wlgweb.com/bpm/page9.html

I am no expert on mortgages (I'm not fortunate enough to have one just yet), but I have been reading up on how mortgages, house buying/selling, etc work. Just recently finished reading "Mortgages for Dummies", and while it is a Dummies book, it was very good and clearly explained things in common terms.

It talks about early pay-off and makes a few good points. For one, a house is an investment, just like stocks, bonds, or anything else. Its value will change over time. In most places, housing is safer and has higher returns than other things like stocks. Stocks can give a good return, but are more volitile and could end up losing. While things like bonds/CDs have a lower rate of return. The housing market can be a safe in-between, where it pays well, but is more secure. So if you manage to pay your house off early, could then buy a second house and sublet it. You won't get the tax benefits, but would be getting money to help with the mortgage from the renters and would be a good investment.

There are a lot of pro's/con's, but that was one that came to mind.

DSP has it right. Paying your mortgage off early is very fiscally conservative. A debt free policy is very fiscally safe, as is putting your money in only low yield FDIC insured Savings Accounts or Cash Deposits. It is also a good way to avoid building wealth. Interest rates are at an all time low and you are far better off putting your money into a decent investment than paying off your mortgage. The tax deduction on your interest effectively cuts a 6% interest rate to ~4%. Even a less-than-savvy investor can beat that. I think it's good to have some cash equity in your house (I like the somewhat arbitrary 20% number myself), but by paying off your mortgage early you tie up your investing power and lose the ability to build wealth.

I think that the one step that James missed when paying down his mortgage early was that he didn't secure a home equity line of credit. I've had one sitting out there for years. I've never touched it and have continued to accelerate payments on our mortgage. So, if I lose my job I can always draw on the equity line if I burn through all of my emergency funds. Obviously this is worst case scenario. My only point is that I don't think it was necessarily a bad thing that James paid down his mortgage, he just didn't account for a soft enough cushion to land on if he was to lose his job.

Bottom line though: Get the home equity line of credit while you still have a job, because, like James mentions, no one wants to talk to you when you are unemployed. (And getting a home equity line of credit these days can be done without costing a cent)

That's a very interesting point that I've actually thought about myself. If you can somehow make double payments on a 30 year mortgage you could get it paid off in something like 10 years. You want to pay off as much as possible every month, because otherwise by only making the minimum payment you are paying off the interest the first 15 years of the total 30 years. Banks make a killing off of mortgage interest, but yet they can't afford to lower the interest rates???

What has not been mentioned here? : how about paying %20 of the loan so you avoid paying Mortgage Insurance Premiums? That much payoff we can certainly agree upon?

A reason to stay in the owning game : it is all about the quality of the residence/neighbors. If I could get an apartment with nice construction where my car and my person would be treated with respect, I would do it. It gets hard to find that. I buy my condos to stay out of ghetto situations. Your mileage may vary of course.

Paying off a morgage early kills your cash flow, it's dumb. Morgages are leveraged investments, where else can you take 5k, secure a 200k asset, rent it out to make the payments, and enjoy the appreciation on a 200k asset? If you invest 5k in stocks, and get 10% return, you made 500 bucks, if you invest 5k as a downpayment on a house, and it appreciates 10%, you made 20k.

Paying off a house early is a great way to tie up all your money and stay poor. Having 50k tied up one house, is simply a bad investment approach. A real investor would have 5k tied up in 10 houses full of renters. Use your extra money to maintain cashflow to cover payments between renters, and let the renters pay off all your morgages while you enjoy the appreciation on the houses.

Debt is only bad if it's debt on a depreciating asset, like a car, a boat, a tv, but debt on appreciating assets like houses, is good debt, you get to use someone else's capital, pay a small interest, and keep all the appreciation yourself. There's a reason real estate is one of the classic avenues to wealth.

I think the crux is risk aversion (and how long you have till you want to retire).

There is a very solid argument for taking out as much mortgage as you can possibly qualify for. This is particularly true in hot markets (like Scott's).

Almost the entire beauty of a mortgage (in my opinion) is that you are building wealth on someone else's money.

While a 6% loan is really a 4% loan after the write off, (very cheap money), by the time you factor appreciation into it (Say 8% as a very conservative Portland-ish number) you are making a net gain off someone else's (the Bank's, aka "The Man's") money.

If in addition to this, you feed your 401-k, maybe an IRA and your emergency savings with the money you have left over, you end up in a position where you are building wealth not only off your assets, but someone else's too.

To me, it makes sense to leverage cheap money. It makes more sense to me because I'm not afraid to sell and move every few years as I find the right deal. Sure, the whole market appreciates but not all at the same rate. There's always a good deal if you are willing to search it out.

If our next house proves to be our last, I hope to be able to pay it off via other wealth building vehicles I have been using in lieu of paying off my mortgage early. (I still make bigger mortgage payments than I have to, but I am in now way feeling compelled to make it all go away.)

I don't like stupid debt. I do think there is very smart debt to be had and it generally involves leveraging your position with someone else's money.

Doesn't all this talk about leveraged debt assume that the housing market will continue to appreciate?

In Australia, interest on a home loan (for your primary residence) is not tax deductible, so its ALWAYS a good idea to pay off the loan more quickly. (Note that you don't pay any capital gains tax when you sell your primary residence - so any increase in value is tax free).

DSP and Anon have it right. If all you want is no-risk, then by all means pay off every debt. But if you want your assets to work for you, debt can provide you with greater leverage to do so. Incidentally, the reason by debt is often used in concert with the term 'leverage' is that it acts as a lever -- e.g. it multiplies the results of your efforts. This, of course, is a double-edged sword. If you have a lot of debt and your investments turn south, the debt's leverage will make the losses hurt more. When your investments go up, funding them further with debt makes you win more. As many have said, it's largely a question of acceptable risk. And this is largely a matter of personal preference and where you are in your life. A 20-something person should have a much higher risk tolerance than a 50-something hoping to retire next year. In almost every case, the 20-something would be much better off investing in 401k, IRAs, paying off any car loans, credit card debts, or even investing in rental properties than paying down extra on their 6% mortgage. If they do manage to pay off the 30-year note by the time they're, say, 35, then when they go talk to a financial advisor the first advice they're likely to get is "Great, let's take out a mortgage so you'll have some money to invest so you can start earning more."

My $.03 (.02, tax deductible)

Scott, in the comments you wrote, "Doesn't all this talk about leveraged debt assume that the housing market will continue to appreciate?"

You made the same assumption when you wrote, "Joshua - I hear you about the present vs. future value of money, but the money spent paying off a house still is "there" as equity and arguably a modest appreciation, especially on a house that increases its value tax free, is a better than 4% investment."

Over 10 year periods, the stock market has higher real returns than any other asset class (after inflation and taxes), including housing. That's held true since the 1920s when they started officially tracking stock market data.

Scott,

After "owning" three homes, one in rent for awhile, I would propose just working through the best case scenerios (easy and fun), then working through the numbers on the worst case scenarios (scary yet important). If your strategy will survive a worst case scenario, then by all means go for it. I've seen a lot of weird things happen in real estate over time. Today's situation, on average, has everyone sitting out there on the cliff as it quickly erodes from under them. Trust me, I used to work at Centex Home Equity, where they made a business of lending to higher credit risks. The smart thing is not to spend too much time determining what you can do with your situation, just what you can cope with given changes in the entire economy and mortgage market.

I see the great advantage of equity as 1. Better resale income, 2. Better cushion against deflation, 3. More flexibility to make a profit if resale costs are high, 4. Opportunity to refinance for lower costs if you have to put the property in rent (very important as cash flow is king in this situation - and ongoing repair costs can be sizable).

Final word for what it's worth. My parents managed to pay off their house in record time. This was on a lower middle-income. They were able to invest in a lot of home improvement and later the family survived a major calamity. They sent both their kids to college. I don't think they could have done that with a "spend all the debt you can get" mentality that is common today.

Good luck!

Anon(Ramon) and others have it exactly right. The use of a mortgage loan is all about leverage: your ability to use a mortgage to fully realize the appreciation on a much bigger asset than you could afford if you were paying cash. You pay nominal (~4%) interest on the loan amount and get some percentage (appreciation - your guess is as good as mine?) of the full home value for it! Plus, you actually get to enjoy living in the house, a comfort that stocks don't offer.

Yes, it's best if home prices continue to rise, but I assume the mortgage strategy probably works out (depending on loan & house values) even across dips in housing prices - ie. assuming you hold for long enough.

This is very different than, say, a car loan - which is about borrowing money so you can fully realize the DEpreciation of a much bigger asset than you should be able to afford. Now you're weighed down by two expenses, and all you got was a few extra conveniences during your commute...

Another reason to consider not paying off you mortgage is if you believe that inflation is inevitable due to the Federal Reserve's policy of flooding cash into the system (to keep the good times rolling), the federal governments deficit spending, our countries trade imbalance, and a nonexistent savings rate; then you will end up paying future mortgage payments with cheaper dollars than the dollars you are using today.