When to Pay off Your Mortgage

There is quite a bit of miss-information when it comes to whether someone should pay-off their mortgage. On one hand it is wise to have as a goal to someday have a mortgage free home, especially as one enters the retirement years, and minimizing of cash flow and simplification are goals. Many people wonder if it makes financial sense to payoff one’s mortgage instead of using those dollars to invest.

Dave Ramsey and other financial experts advise people to payoff the mortgage after one has: 1) repaid all other debt 2) fully funded emergency savings with 6 months of expenses (or 12 – 18 months if self-employed) and 3) putting enough money into accounts for retirement and college education. This is great advice for the masses, these experts are trying to convey with a simple message that people can strive for. Debt elimination is always good, as it is always nice to not be under the burden that we feel when we are shackled with debt. Simple messages are good for public communicators, because people are often looking for loopholes for their ‘special’ circumstances, and then lose sight of goals and lessen their chances of overall success.

That said, does it ever make sense to direct money that would be going into savings and/or investments instead of house mortgage repayment? ┬áIf someone is not investing (bad idea) and just putting the money into a savings account that today is earning less than 1%, they would be better off to pay off the house. This is because even with today’s low mortgage rates of less than 4%, their savings would still be earning less interest than they would be paying. If someone is investing, and earning a rate of return that exceeds the mortgage on their home, then it is a maybe. Maybe because it would depend upon how they are investing, and the interest rate of their mortgage net of tax-deductions, since most people are able to deduct the interest on their mortgage. The interest rate calculation may require careful analysis with the help of one’s tax preparer. Lastly, the invest or pay-off question depends upon how much money someone has to invest, either as a lump sum or a monthly amount. Meaning the analysis would be easier if someone had $100,000 in investments, and the mortgage was $100,000, but the calculation would be more difficult if someone didn’t have that lump sum, but merely an additional monthly amount to apply to principle. In this case there is no rule of thumb and careful analysis would reveal the most appropriate solution.

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