Pay off mortgage or not?

quasifishAugust 3, 2006

I know all the arguments about why you should or shouldn't, but am trying to decide based on personal circumstances as to whether it's in my best interest to pay off the mortgage as soon as possible.

First off, I am fear driven. Been homeless twice due to tight housing/rental markets. Always paid rent and other bills on time, it was a matter of availability. We've been through routine lay offs every year or two, sometimes missing the cut, other times not. We've been through a seriously long extended layoff which left us financially drained. I never want to be in either of these situations again.

We are also in a high cost area, but bought the house before the last boom when things were still dirt cheap here. Even if we sold this house out of necessity, we could not afford to buy back into the market as our property tax controls keep our property taxes to 1/3 of what it would cost today to buy an identical house. Our house is very modest in size and is in a great location, there isn't anything cheaper in the area and what would be is unsafe. We have no intentions of selling this house at any point in the foreseeable future.

We currently have about 1 year's worth of living expenses put away in an easy to access account, perhaps a little bit more. DH has a 401k, but I don't see that as accessible even in a pinch as so much would be lost to penalties. As far as I'm concerned that money may as well not exist.

We have no CC debt. We have no car payments.

We are almost to a point with our mortgage that our itemized deductions (from all sources) will be less than the standard deduction. We are not getting a substancial tax break at all.

So after all that, here are the scenerios I've come up with- please share your thoughts:

1) Pay off the house ASAP. We're 4 years into a 30 year FRM and at our current rate would probably see payoff in about 6 years. This barring an extended unemployment or other financial disaster. However, in that case we can cut back to bare bones and live off savings for up to 1 year or so- assuming neither of us is working any at all. After a worst case scenerio, our focus would then be on building up that savings account again. Payoff is very appealling as it would remove the worries of job insecurities completely and our "1 year" emergency savings would become more like a "3 year" emergency savings without a house payment to consider.

2) Don't prepay the mortgage at all and instead invest what would have been the extra principal payment. The upside here is more accessible cash in case of an emergency. The downside is that being fear driven I would make very conservative investments until the house is paid off and those investments would be very unlikely to make more percentage-wise than we are paying on the mortgage.

3) Continuing prepaying the mortgage down to a certain dollar amount, and then go back to paying just the minimum and investing the difference (not as conservatively as with option 2, so could possibly make a higher % than the FRM). I haven't determine where this line would be, but a relatively low balance that we could generate cash and/or small loans to cover.

As things stand right now any future raises are to go directly into savings or investments of some kind, so even while prepaying the mortgage we should be able to save a bit more on the side.

Please give me your feedback and any ideas or thoughts you might have about this. I'm feeling very confused about which path to take- stay on the prepayment or do something different.

Thanks, I appreciate any input.


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If you have maximized 401k contributions then I would choose your option 1 in your situation.

    Bookmark   August 4, 2006 at 2:00AM
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If it really will put your mind at ease to get rid of the mortgage, and with the details you related, it is reasonable to pay off the mortgage ASAP. As you said, your investment comfort zone makes it unlikely that you'll get a better return on your money at least right now, and the stock market/bonds are not likely to be the wild bull ride they have been over the last several years. There is no perfect choice, but this sounds best for you.

    Bookmark   August 4, 2006 at 9:34AM
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What about paying down part of the principal and keeping some money on hand for emergency(-ies)? Wouldn't that be sort of like having the best of both worlds?

Whatever helps you sleep better at night - and avoid chewing those fingernails down to the quick (or should that be "quicks"?).

ole joyful

    Bookmark   August 4, 2006 at 3:41PM
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The OP said they already have an emergency fund. My assumption is that (s)he wouldn't liquidate it to pay off the mortgage.

    Bookmark   August 4, 2006 at 5:35PM
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Thanks for the feedback. After reading a few articles the last couple of days I've been feeling very confused and appreciate the affirmation that maybe there's no good choice and no bad choice- except not making a choice.

Joyful, do you mean pay less in additional principal and save the difference? The thought has crossed my mind somewhat, but I guess where I'm stuck is questioning if 1 year's living expenses is enough to have in the bank. Most people would probably say yes, but when DH was unemployed a few years back ('99-00), it was for a duration of 18 agonizing and depressing months. He's in a different line of work now, but unfortunately it still haunts me and I wonder if that situation could ever present itself again- I never would have thought it could happen the first time. Oddly, our homelessness didn't occur during the unemployment, but rather when he was gainfully employed- go figure!

Thanks again.


    Bookmark   August 4, 2006 at 7:09PM
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I would probably go with 2 and then if I have the money to pay off the mortgage in a few years, just pay it off

Whatever you do, don't pick #3. That's the worst of both worlds.

    Bookmark   August 4, 2006 at 8:22PM
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As I understand it, in the present situation, you have enough on hand (without hitting the 401K) to scrape by for about a year.

But if you paid off the mortgage, you could scrape by for about 3 years, with no mortgage to pay.

But - if you'd paid off most of the mortgage - the savings would be gone ...

... so how would you scrape by for 3 years?

Assuming job loss in both sitations??

Am I missing something?

ole joyful (dense, as usual)

    Bookmark   August 5, 2006 at 4:30PM
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Ditto what Joyful asked. Would prepaying the mortgage cut into your emergency fund? Does your 12 month 'living expenses' emergency fund include 12 months housing/mortgage expenses? If not, that may be a false sense of security.

Given your fears (which I understand as I also had a brief period of homelessness), think this through and consider what would be the best security. A paid off house and little cash savings might not work out really well if unemployment strikes. Sure, there is the theoretical option to borrow against your equity, but getting a loan with no income in a higher interest, tighened credit future could be dicey.

Maybe pick a number of months to cover that *includes* the current mortgage payment and maintain that amount as your emergency fund. After that, prepay the mortgage. The equity will still be there for you, but you will be able to cruise for a number of months without the hassle of accessing that.

Seems like it would be very, very important not to jeopardize your current home's tax status. For other folks, selling and getting back into in the housing market later would carry less risk. Preserve that excellent situation you have by being ready and able to cover the mortgage yourself - and eat!- for a while. Security is being able to do both.

    Bookmark   August 6, 2006 at 11:49AM
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Thanks for the additional feedback. I must not have been very clear (something I'm good at IRL too, LOL).

The emergency savings is not to be touched unless it's for a major emergency. Prepaying the mortgage has nothing to do with that fund. All additional principal is from paychecks being earned at the moment.

That 1 year emergency fund would be enough to pay just our most basic bills, including the mortgage for about a year. If we were to prepay the mortgage over the next 6 years or so without touching that account, the same amount of money would still be in there and without a mortgage payment we could potentially stretch it to cover living expenses for nearly 3 years. Does that make more sense?

When I wrote it, it bothered me from the standpoint that in an emergency our mortgage payment would account for about 60% or a little more of our basic cost of living, but that is indeed about what it works out to. When we went through that unemployment a few years ago we cut our expenses back to very little- only the bare necessities. Not a fun time, but doable.

One thing I haven't accounted for is that in an unemployment there would be up to 6 months of state unemployment checks coming in, which would make about a 50% dent in our expenses- perhaps a little more. When we rebuilt the savings account after the unenployment, I did not take state unemployment into consideration because after taking the full 6 months, DH was not eligible for unemployment again until he had worked a full calendar year- and he's been working continuously for the past 5.5 years at this point.

Anyway, I've been thinking about this on and off over the weekend and realized that the peace of mind of owning the house outright would be priceless. We could possibly make more money in the long run from investing and stretching the mortgage, but I think we would both be happier and more fulfilled individuals without that hanging over our heads. Still thinking though and open to more thoughts.

Hope that cleared things up, if not just ask more questions- happy to oblige!


    Bookmark   August 7, 2006 at 11:58AM
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I realize that paying off the mortgage will make you more financially secure, and if that is the reason ,do so..That said, remember your mortgage payment may disappear, but you'll still have property taxes/home insurance etc..My escrow account for 25% of my "payment"...Not sure of your mortgage rate, but i would think you have a very good one,based on your time of living in the home..If you have a rate 5% or less, there is no reason i'd ever prepay that in todays interest environment..

    Bookmark   August 7, 2006 at 12:38PM
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I can completely understand why you might want to choose option #1 - that is what I would do - and in fact what I have done. You don't mention what interest rate you're paying on the mortgage. In my case it wasn't particularly bad but rates were going down and it made we think about refinancing but I had not much left on a 15 year FRM. When DH got laid off for an extended period of time we decided to just pay it off and eliminate that monthly expense.

Fortunately with that payment eliminated we could get by pretty well on one income - not saving alot of course. When he got a new job we added that house payment equivalent to monthly savings to rebuild what we used during the time off. When his new company went out of business in a couple years and he was again without a job, I cannot tell you how great it was not to have that mortgage payment.

Now that he has an income again we continue to save that money. Now that we've gone awhile without unemployment that cash reserve is getting large. We now have funds to make major purchases like cars, home improvements, etc. - without borrowing money.

We have nearly all of our retirement savings in aggressive funds so I don't feel compelled to put this house related money into any kind of riskier investment. I know it's quite likely I could get a better return over time but I like the piece of mind of having readily accessible cash and not having to borrow money.

    Bookmark   August 7, 2006 at 1:22PM
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I'd be inclined to go with a hybrid of #1 and #2. It appears you can currently pay down your mortgage in 6 years -- and I'm assuming that means out of income and NOT using your one year if living expenses. Why not figure stretch that a little to 10 years and use your income for BOTH paying down the mortgage and saving more for a rainy day?

Are you maxed out on 401K contributions? If not, I'd increase that and pay down the mortgage as your income allows. If you are contributing the max to your 401K, then add to your savings. But try to choose an investment that will bring you more than a bank will!

    Bookmark   August 7, 2006 at 5:07PM
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I have to weigh in in favor of option 2 again. First, I should tell you that my own home is entirely paid off, but my husband's job is rock solid and we have additional savings besides. I love having my house paid for

What I am suggesting is that you pay off your house in the same amount of time or nearly so, but do it by putting your extra money into CDs or T bills until you have all that you need to pay off the house in one fell swoop. I don't know what your interest rate is on your house, but CDs are paying at least 5 1/4 now so that should come close to what you are paying and t-bills are even better. Having liquid assets gives you choices if something goes sour. You can make your house payments from your savings, you can do whatever you want to. The problem with paying down the house directly is that you will not get any credit toward a missed payment just because you have made extra payments. If you miss one payment, you are behind the 8 ball the same as if you had not put any extra money into the house - not so if the "extra payments" have actually been going into a savings vehicle. This is not just my idea. My financial advisor has always said "own all of a house or very little" Recently I heard an investment guru on public television say exactly the same thing. By the way, I gave my adult daughters exactly the same advice and they quit putting extra payments into their homes and put the money into safe investment vehicles instead. One daughter saved until she could pay off her house and then did so. The other daughter ran into a period of unemployment and was sooooo glad that she had a nice fat bank account from which to meet her mortgage payment and other expenses.

    Bookmark   August 8, 2006 at 12:35PM
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I think devorah's idea is very good provided your interest rate is relatively low. Your interest rate was a question mark for me.

    Bookmark   August 8, 2006 at 2:10PM
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A couple of other thoughts/suggestions:
1. Apply for a home equity line of credit now, while you have good credit. That way you can access some of the equity in your house if you lose your job.
2. If you choose option 2 (investing the amount of the extra principal payment), would you really be able to save up that much cash without being tempted to dip into it occasionally? Putting into the house makes it feel less accessible.
3. I like mary_md7's suggestion to split the difference. Maybe do both until you have more of like a 2-year emergency cushion. Since you already experience an 18-month stretch without an income in the past, 1 year might not be enough.

    Bookmark   August 9, 2006 at 4:37PM
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I'd also take a hybrid 1 & 2 approach, as much as I'd like to say - Go with option 1. (which I did.)
I think you need to make sure that your 1 year rainy day account grows to about 1.5. Just make sure you are getting SOMETHING in interest on that account, as it will have some growth without adding savings.
Also - good advice above regarding taxes and insurance - those you never escape, even after the house is paid off.
TBS, there is nothing, absolutely nothing, like owning your home outright.
Best of luck to you!

    Bookmark   August 9, 2006 at 6:00PM
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Wow! Thanks for all the additional feedback. You've given me even more to think about, although it all seems a little bit clearer now.

whode, you are definitely right that putting the money into principal makes it less accessible. Though we are generally very disciplined, there is a high chance that we would dip into a more accessible savings account, or perhaps not be as disciplined about putting the money away in the first place. By setting our mortgage minimum (the real mortgage payment + our self imposed principal payment) we don't seem to waver much if ever.

I have to think that whether we pay off the mortgage ASAP, build up savings, or do a little of both, we are still heading in the right direction. I have so many friends who discuss why you shouldn't pay off your mortgage, but then they don't/can't save any money on the side so they really aren't getting ahead on any level, are they?

Thanks again.


    Bookmark   August 10, 2006 at 11:52AM
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devorah, great post. I am currently unemployed (hoping I get a job offer on Monday!) and luckily have 1 year of savings. Even with that, it has been 3 1/2 months with no income, and I have been panicking. If I get this job, I would have a good chunk of money left each month, and had planned to pay off my home in 8 years. Your plan sounds like a better idea for me.

    Bookmark   August 13, 2006 at 9:21AM
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We are paying additional principal each month, so our mortgage will be paid off in 5 years rather than 15. It may seem extreme, but my husband wants to retire in 2 years, and I will retire in 4 years (age 55 for each). We believe in not having debt hanging over our heads. We will have 2 houses free and clear; will just have to worry about taxes/upkeep.

    Bookmark   August 16, 2006 at 7:06AM
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I had a similar experience as the OP, ended up liquidated everthing over 2 years -
So I vote to split the difference until she feels comfortable enough to
* smash the heck out of the mortgage *.

    Bookmark   August 23, 2006 at 2:57PM
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I like a mortgage free home, I feel more secure that way. My experience with situations like this and the things I learned in my husband's retirement seminars have shown me there are many ways you can lose your money. If you lose your money, you can't make your payments. Your home is secure if it is paid for.

    Bookmark   August 26, 2006 at 11:57PM
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#2 absolutely. A mortgage is good debt, good to the
tune of a 17 point deduction in your FICO score when you pay it off. No bonus, no increase, just a warm fuzzy feeling. Unless you are are living hand to mouth each month, a 30 year mortgage is a complete waste of money.
Simply look at the tens of thousands of dollars in additional interest. If you can do each of the following:
Pay 13 mortgage payments in 12 months (you can divide).
Mortgages are cheap money. Invest the difference.
Max out your 401K
Max out your Roth IRA (s).
What "high cost" area are you in?

    Bookmark   August 27, 2006 at 6:17PM
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I'm still following this thread. Thank you all for the continuing input, I'm fascinated by the different perspectives that are being shared.

Bushleague, I am in Los Angeles.


    Bookmark   August 28, 2006 at 2:26PM
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Do whatever feels best to you after full consideration of all the alternatives. There is no right or wrong answer.

I have had big mortgages, small mortgages and no mortgages. At a point in time where my monthly income was smaller, but we had enough savings to pay off the mortgage and still have a cushion, we did so, and it felt right. I'm now building a home that will have a huge mortgage, but given my much higher and stable income I will feel just as comfortable. The worst thing is to get yourself in a situation you can't handle - either because you can't handle the monthly mortgage payments or you eat up all of your cushion by unnecessarily paying off a mortgage. Think it through and do what feels best for you.

    Bookmark   September 1, 2006 at 4:02PM
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I'd vote for getting rid of the mortgage. I had that luxury for the first 11 months I had of living in limbo, and it's nice to know that I only had to come up with Taxes, Insurance and Utilities, and would still be able to keep my house for more than the 5 months that it takes to go into foreclosure.

I'm a firm believer in tax free munis, so once you paid off the mortgage and have some available cash, go for them...(hint: clamshell has an addy at hotmail) and can tell you more about how to avoid escessive fees on this.

I'm not a broker.. i just have a cartload of those things.

    Bookmark   September 1, 2006 at 11:47PM
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