One of the most popular topics I discuss with clients revolves around whether someone should pay off a mortgage early. My initial response usually goes something like – “Odds are the numbers are going to show it makes sense to maintain a mortgage, but paying off housing debt is often a personal decision.” I was reminded of this topic recently by a great Twitter thread from Mark Allan Bovair. I couldn’t figure out how to link the thread here, so I thought I would bullet point some of his primary points.
- Cash is king. Every extra payment turns your liquid cash into illiquid equity in your home. You go from infinite options to limited ones if you need access to cash.
- Paying off your mortgage is a bad investment. Most mortgages are below 4% right now. Putting the extra money toward your house means you admit you cannot get a long-term investment return of at least 4% elsewhere. Even with the Dot Com bubble and the Great Recession, the S&P500 has averaged nearly 6% annually over the last 20 years.
- You still have lots of other housing-related bills once you pay off your house. Taxes, insurance, maintenance costs, assessments, HOA fees, and more. There is no fully escaping housing costs, unless you go full blown militia (I dealt with a few when I lived in Michigan. Don’t follow that path!).
- Home equity cannot be accessed if you lose your job. You can tap your 401k, IRA, HSA and more. However, lenders want you to have income to give you a home equity loan.
- Homes typically increase in value. His example was if you put $10,000 down on a $200,000 house and 10 years later it is worth $300,000. Your down payment has now increased 10X. If you made an extra $40,000 in payments, that is only a 2X return on your investment.
- On the flip side, if we have another 2008 where housing prices crash or you have to walk away for some reason, you are only out the $10,000 down payment. However, if you made those extra $40,000 in payments, you may be out of those too.
Mark also addressed some of the most common arguments about why to pay off a mortgage early. Here are some of the highlights:
- Having no mortgage is a nice peace of mind. However, having a $200,000 mortgage along with $200,000 in the bank is also a pretty damn secure feeling too.
- Getting rid of interest is always a popular theme. Let’s say you paid an extra $5,000 toward your mortgage. This may reduce your interest by $200 a year for the remainder of the loan. Would you give someone $5,000 now to receive $200 every year for the next 30 years?
- If you invested that same $5,000 and received 4% return every year, it would be worth $16,200 in 30 years. Compounding works more magic here than on the straight interest of a mortgage.
- Do NOT consider putting any money toward paying off a mortgage early unless you have no credit card debt, are maxing out your 401k, IRA and HSA contributions, and have a nice emergency savings account balance.
Again, you can search on Twitter for his original thread as he addresses quite a few of the responses to his original posts. His final comment was exactly what I deal with – it really comes down to a personal/psychological decision of paying off a mortgage early. Some people are okay with this type of debt (me) and others hate any debt (a close relative of mine). Regardless, these are some of the highlights I consider anytime a client asks me about whether they should pay off a mortgage early. There really is no wrong answer, just the one that is right for you.