To prepay or not prepay (the mortgage, that is)
Jim at Blueprint for Financial Prosperity has an interesting couple of posts about increasing your mortgage payment above the minimum. This topic occasionally comes up and usually generates a good number of comments. Generally, there’s agreement that prepaying your mortgage is not a very good idea assuming you bought or refinanced your house within the last few years and have a low rate. I disagree, though, and here’s why.
I believe the piece of mind gained by owning your house outright outweighs the monetary benefits of not prepaying and investing the difference. True, mathematically, if you have a low interest rate mortgage, you can probably put any extra money into a high-yield savings account and make more money there. Look at ‘historic’ rates of return from the stock and bond markets and you could do even better.
Let’s just consider the guaranteed return a CD would provide, though, just so we’re comparing apples to apples. Without doing any math, let’s accept you will make more money in a CD than prepaying your mortgage. Taxes, though, reduce your return. True, the mortgage interest deduction means that your apparent rate of return will be lower if you prepay. So let’s say that’s a wash. Admittedly, you’re ahead if you don’t prepay. But by doing that, we’re totally discounting the real value of piece of mind.
For me, the piece of mind I’ll gain once my mortgage is paid off is of greater value than the net gain of not prepaying and investing the money elsewhere. Being debt-free isn’t everyone’s goal, nor should it be necessarily. I wouldn’t even say it’s my primary goal. I still consider it valuable, though. That’s why we put nearly $200 extra toward principal curtailment each month - I want to be done paying mortgage payments nine years early. It’s not for everyone, but that’s my tack.
April 13th, 2007 at 10:27 pm
I’m with you on it being worth it for the peace of mind. To me paying off our mortgage symbolizes freedom. There’s just something about being able to say that “I don’t owe any money to anyone at all” that really appeals to me. We don’t get a tax benefit from our mortgage anyway. Now, if someone GAVE me $107,000, I probably would invest it instead of plopping it down in one lump sum to pay off our mortgage, but that’s a different story. And I’d still pay the mortgage off early.
May 1st, 2007 at 5:48 am
I guess I understand the piece of mind if you’re old, expecting a drop in income, or saddled with other debt. For me, there’s a lot more piece of mind in saying “I’m 24, I live in a 200,000 house that fits me and my family in relative comfort and I pay less a month that if I was renting it. Not only that, I have a good bit of money in the bank that I can use if I need it without needing to sell or otherwise jeopardize my family staying in this house.” That, to me, is much greater piece of mind than saying “I only owe $50k on this $200k house, but I have no savings.”
Let’s be realistic. The mortgage company is NOT going to come boot you out of your house and wave the title in your face as the cops drag you off the property! There isn’t really anything to be “out from under” other than a delay over a long period of an extremely large expense.
July 16th, 2007 at 8:00 am
[…] believe the piece of mind that will come with owning my home outright outweighs the amount we’ll be ‘missing out […]
July 18th, 2007 at 8:03 am
[…] I’ve pointed out a couple of times before, I believe strongly in paying off a mortgage as soon as is reasonable. By that I mean sending extra money each month toward principal curtailment or any of the other […]
July 23rd, 2007 at 4:51 pm