Let’s chat a little bit about mortgages, shall we? Made popular in the U.S. in the depression days (“depression”, not “recession”), mortgages are a fairly recent concept for Americans. Before that, YOU ACTUALLY HAD TO HAVE THE MONEY TO BUY A HOME! WOW! No, seriously. You didn’t own a home unless you could buy it in full. Crazy, right? But mortgages were introduced to help out wanna-be homeowners get into a house without having the full amount right away. Though, these were much more conservative than out modern mortgages. You were typically required to pay 50% down, sometimes more, and the terms were as long as 5 years.
Today, the typical term is the 30-year mortgage, which gets refinanced often, and repaid slowly. Mortgages are seen as the norm, and if you don’t have one, you’re weird. According to the Federal Reserve, the outstanding mortgage debt in the U.S. was about $82 Billion back in 1950. Today? Around $13+ Trillion. Sounds financially savvy, right? Now, I know there are reasons to keep your mortgage, and plenty of reason to kill your mortgage, but which ones are better in the end? Let’s look at the options:
Reasons To Keep Your Mortgage
- For the awesome tax breaks! When you buy a home, it comes loaded with a sweet package of tax breaks to keep more money away from the government and put more money into the hands of those oh-so-generous bankers. You can currently deduct the interest paid on your mortgage, your real estate taxes, points paid on the mortgage, mortgage insurance paid and even more if you have a small business.
- Low interest rate can be beaten by your investments. This is the classic argument against paying down your mortgage early. In today’s current low-interest-rate environment, you can lock in a 3.25% mortgage and put all your extra money into index funds and RIDE THE STOCK MARKET WAVE! If you can rake in more than your mortgage rate in annual returns on your investments, then you win!
- Keep a high credit score. Keeping your largest debt account in good standing is sure to keep the credit police at bay and help keep your credit score high enough to continue to borrow MILLIONS!
Reasons To Pay Off Your Mortgage Early
- Tax deductions are a bad investment. The answer to #1 from above. Tax breaks aren’t all what they’re cracked up to be.
- You are wasting money on interest. Sure, you may be able to beat your interest rate with your investments, but do remember, mortgage loans are amortized, and a lot of times they front load the interest. Investing your money will *hopefully* beat your interest rate return, but paying down your mortgage is a guaranteed return. It’s a sure bet.
- You don’t own your home. When you have a mortgage, it’s because someone else owns your home besides you. Sure, you can paint the walls, landscape the place and call it your “home”, but while you are still paying the bank every month, they know who’s really in charge. The only way to truly own your home is to pay it off, burn your mortgage and never borrow again.
- Debt sucks. Nothing feels worse than owing someone money. Well, you know, besides everything that does feel worse. Either way, debt sucks and getting out of it as fast as possible will get you to freedom sooner!
So, Which One Is Better?
Of course, the controversy on the decision to pay off the mortgage or not. The “keep your mortgage forever and ever” crowd will tell you that putting all your money into your house is a risky investment. Real estate prices are too volatile to sink all of your money into it. Plus, with your super-low interest rate, you’re losing out on money that is invested in the stock market. The “Kill your mortgage with a machete” crowd will tell you that you should pay down your mortgage with every extra penny you can find. Scrimp, save, and aggressively pay down the principal to slash years and even decades off your mortgage, and save tens of thousands in interest. So, who’s right?
Both of them.
Here’s What We Are Doing
Paying off your mortgage early is a good idea, and investing instead of paying off your mortgage is good idea. So we’re going to split it right down the middle. Here’s our current financial goals and future plan for our mortgage payoff:
- Pay off the student loans. I set a goal to have these paid off by the end of the year, but had to put it on hold because I don’t feel comfortable with the size of our Emergency Fund at the moment. Once that’s in place, we’ll pay these off with the quickness!
- Increase our investments. I’m paying in 6% to get the max employer match in my work’s 401k plan, and that’s it. I’d love to ramp that up to at least 15% of my gross pay, with the extra 9% going into our Roth IRA, which should max it out.
- Start a college fund. I WILL start this very soon (probably this month), but won’t be contributing much until I increase my income. I would like to put away $200 a month in this.
- Pay down the mortgage.
Once we get to step 4 (and you’ll notice these look very similar to Dave Ramsey’s baby steps, and they are), we are going to take any and ALL extra monies and split them between pre-tax investments and mortgage principal. I want the best of both worlds. I can get my “better gains” by investing in the stock market in funds and other securities that will hopefully net me a better gain than my 3.25% mortgage. I can also start paying down the mortgage early, savings myself interest in the long run, building equity faster, and ultimately taking years off the life of my mortgage (sounds kinda evil, huh? Shortening the life span of my debt. Mwuahahahaha!).
We will be diversified in our investments. Half into the stock market and half into real estate. Sounds like a balanced portfolio to me 🙂
Let’s Throw a Wrench Into The Mix
We have MIP (mortgage insurance) on our FHA loan. This sucks. To get rid of it, we need to pay our mortgage principal down 22%. So, before I split between investing and mortgage payoff, I am going to throw ALL extra money at the mortgage until that stupid insurance is gone. Then I’ll truly start my “step 4”. I’m excited for this plan. Sure, it might be a few years, but I am optimistic that I can work hard at these goals and hopefully exceed my expectations. I haven’t set dates on these yet because my future income is uncertain, but I wanted to set a priority list so my money knows where to go when I get there.
Comments: What do you think of my evil master plan? Should I pay off my mortgage early? Or should I leave it and invest? What are YOU going to do with your mortgage? Anyone just going to skip all this crap and buy a house with cash moneyz?!