Why not pay down the mortgage?
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Anonymous
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A lot of responders on various threads advise against paying down a mortgage. Can someone walk this dummy through why that's the best approach?
We have some investments indexed to the market and otherwise just have cash sitting around, some of it in wimpy things like CDs that earn almost nothing. We are risk-averse and want to keep a chunk of money pretty accessible in case something disastrous happens. Our mortgage rate is almost 4% and we have $700,000 left on it. DH keeps saying he wants to buy gold and stick it in a safe, which...let's just say doesn't quite seem like the right approach to me.  Very healthy household income, but both of us are from very modest backgrounds and have no financial savvy.
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Anonymous
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The question is what is the alternative to paying down the mortgage.
If you have cash sitting around then a guaranteed 4% return is pretty good and you should consider paying it down (personally I would do that way before buying gold). The other posters are planning to invest in the stock market and figure that long term they will earn more than 4% there, but if you have a different asset allocation/time horizon/prediction about future returns it's fine to take different steps. |
Anonymous
| I plan on it eventually once our emergency fund is where I want it to be. |
Anonymous
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One factor in favor of paying it down is peace of mind. There is a benefit to the satisfaction of having your debts all paid off.
The factor against paying it off is that money is now "tied up". Let's say you have $100k cash. If it's in a CD, you can easily withdraw it should some emergency expense arise. If it's instead put towards a mortgage, you can't _easily_ (like on a moment's notice) get access to it, though you could get a home equity loan (and you can set that line of credit up in advance). The people saying put it in the market are usually considering in the long-term. If you may need the money in the next 5 years, the market is probably too risky for you. History has shown it goes up over time in the long term, but not always in the short term. So if you put it in there now, and you need it 2 years from now, maybe it'll be worth 20% less and you may not like that. I'd say pay it down while keeping enough cash around for an emergency. |
TwistdMike
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You’re paying almost $2,333.33 per month in interest on $700k.
Not giving that to the big bank every month would make me feel better. I’d definitely pay that down as much, as quick as I could. My vote... keep 6 months emergency funds and put the rest towards the mortgage. |
Anonymous
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This is a personal choice.
We pay ours down. We have plenty in the market and have the choice of holding it, paying down the mortgage or putting it in the market which to me feels over inflated. We have chosen to pay down From my standpoint, and this is personal, it is part of a mix in your risk. Having no debt is a powerful thing and gives you lots of options. |
Anonymous
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If you're investing and earning more on your investments than the payment on your mortgage then hold onto the mortgage, assuming it's not adjustable rate. Otherwise, paying off mortgage will feel like a huge increase in your income.
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Anonymous
+1 We are paying off our mortgage as part of a larger financial strategy that includes a multipronged approach that takes into account our short term and long term goals. |
Anonymous
| We pay extra each month to pay it down. We have no other debt. |
Anonymous
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Flexibility. Cash on hand, even earning only 2% (vs the txt deductible 4% mortgage interest payment) gives us a lot more options if things go south.
You never really own your home, you always have to pay rent to the county as property taxes — so if we did hit huge dire straits, we need cash for all sorts of things. Paying off never guarantees perpetual ownership. |
Anonymous
| Paying off your mortgage is a great thing to do. |
Anonymous
| You are getting a tax deduction for the interest paid per year on your mortgage- so really you are eliminating your own tax deduction. |
Anonymous
Let’s do some quick math. Let’s pretend you had a $200,000 mortgage at 5% interest. Five percent of $200,000 is $10,000, which means if you have a 5% mortgage on $200,000, you pay $10,000 in interest to the bank. If you make $75,000 a year, you’re in a 25% tax bracket. You’re able to deduct that interest—the tax write-off. The reason everyone keeps their mortgage is because they’re sophisticated and want to keep the tax write-off. “You don’t want to pay off your mortgage. You’ll lose the tax write-off!” How many times have you heard that bunch of crap? Let’s play with this for just a second. If you make $75,000 a year and you have a $10,000 tax write-off, that means you pay taxes not on $75,000 but on $65,000. If you paid off your home mortgage, you would have to pay taxes on not $65,000 but $75,000 because you wouldn’t be paying any interest anymore. You’re going to have to pay taxes on $10,000 worth of income. You’re in a 25% tax bracket. Twenty-five percent of $10,000 is $2,500. Your tax bill just went up by $2,500 because you paid off your mortgage. Did I mention that you’re no longer sending $10,000 to the mortgage company? Your tax bill went up by $2,500, but your interest bill went down by $10,000. Did you get this? What these idiots are saying all over America is that you need to keep your tax deduction—and you’re an idiot if you believe that. You’re sending $10,000 to the mortgage company to keep from sending the federal government $2,500. Calling that sophisticated would make you an idiot. I’ve been that idiot. I used to tell people to do that all the time, and then I got called out on it. Then I went, “I was completely an idiot.” That’s wrong. You don’t send Countrywide $10,000 to keep from sending the IRS $2,500 and call that sophisticated. It’s not sophisticated; it’s stupid. That’s why I say pay off the house versus the tax deduction. If you want to trade $10,000 for $2,500, you can do that without being in debt. Just increase your giving to a 501(c)3—your church or the Red Cross or whatever. Pay off your mortgage, give $10,000 extra in charitable giving, and your tax bill will not go up one penny. You’ll save the $2,500 in taxes by giving away the $10,000. Your charitable giving is tax-deductible. We do not stay in debt because of the tax deduction. If you’re in debt, take the tax deduction, but don’t stay in debt because you’re somehow sophisticated. |
Anonymous
| Plus after the Trumpscam on taxes you might not get any benefit on deducting mortgage interest |
Anonymous
| There are CDs out there now that are paying a higher rate than my mortgage so I can get a guaranteed rate of return that beats prepaying the mortgage. |