Today I’m going to talk about why I believe paying off your home mortgage early makes more sense for us middle folks (and probably the upper folks too) instead of investing all of your extra money into the stock market.
From some financial advisors, we hear advise such as paying off your mortgage is a bad financial decision if not down right stupid.
But unless you are a robot, I don’t believe this is true!
Let’s looks at the argument for not paying off your house early. The typical argument goes that if you take the extra amount that you would pay on your house and invest it, you’ll end up rich some day!
The problem with that argument for the majority of us is twofold:
- That extra money that you were (in theory) to invest somehow gets spent in a moment of weakness or financial strain during your life.
- The standard deduction is so high that sooner rather than later the itemized deduction for a mortgage is not worth it after 5 or so years (Unless you have a $300,000+ house)
Another problem is what if the market tanks like it did in 2008? Investment returns aren’t guaranteed, but the lack of a house payment is forever (at least until you upgrade to a larger house…)!
Financial strain happens, and that is why it’s wise to have an emergency fund during this process. While I didn’t have a dedicated emergency fund per se, I had money in diversified portfolio (including fixed income) that I could hit if such a need came to surface.
Since I am mortgage free, and no longer have a mortgage, saving is much easier for me now (after a period of adjustment).
-MR
You nailed the post with ‘the investment returns are not guaranteed’! That makes all the difference!
It’s been 20 years and Japan’s market is still to recover even without considering the nuclear fallout.
Imagine those who in the 80’s decided to invest rather than pay off their mortgage in Japan!
Yeah, that would be horrible! It’s definitely a case where buy and hold wouldn’t have worked.
Speaking of Japan, I often wonder if such a scenario is possible with China… I wish I know the history of Japan’s economy a bit better.
I thought Japan had a huge real estate bubble in the 80s. I don’t know if paying mortgage will look any better. I guess at least you don’t have to worry about the monthly payment.
I would love to not pay mortgage, that’s for sure.
I think there is an added level of complexity if you don’t plan on staying in the home forever. This condo and probably the next house are not my “forever” homes so I would just be prepaying the debt without a guaranteed return either since I am not taking the note to completion and as many people found out home prices can go down
Or am I totally off base lol?
“Investment returns aren’t guaranteed, but the lack of a house payment is forever.” This is the way I look at it, too.
All right I’m following you! 🙂
You’re in a great position being mortgage free. Really, any debt is a burden and one becomes servant to the lender in essence. Debt free is the way to go anyday, and that includes mortgages. Having a paid off home, plus a good emergency fund, seems like a really good place to be.
Obviously I agree as I took a similar approach to you. My real question though is what is your new purpose for saving? Paying down a house that you’re living in now is so much easier than thinking 20 years out to retirement.
I seem to need short term and bite sized savings goals to keep me motivated otherwise I start to question why I’m working in the first place.