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Where Does Paying Off My Mortgage Fit Into My Overall Financial Plan?

1 December 2009 One Comment

Paying off one’s mortgage is a subject that is debated all the time.  You can easily make a case for each side of the argument.  Since it’s pretty much a 50/50 argument, your choice should depend on your situation.  So, let’s talk about my situation.  I have an obscenely low rate of 4.75% on a 30 year fixed mortgage after re-financing earlier this year.  Even with such a low rate, I still have the desire to have it paid off.  It’s just a matter of how fast and how to do it.

Why Do I Want It Paid Off?

Even though the money that’s been loaned to me for my house is dirt cheap, if you read my post on complete independence, you will see that I still desire to have a house paid off.  I don’t care how cheap the loan is.  Now, this doesn’t mean it’s my top priority because it’s not.  The interest rate should be a factor in my strategy but it’s not the determining factor.

To achieve complete independence, I need signfiicantly lowered expenses.  Eliminating a mortgage payment (or rent or whatever) each month is a way to significantly lower my expenses.  Therefore, I believe it’s a worthwhile pusuit.

How Fast Should I Pay It Off?

As I mentioned in previous posts regarding savings, I want to save upwards of $15,000 a year towards my retirement funds and other savings areas.  If I have a decent year and go above and beyond that number, I could see myself putting money towards paying off my mortgage.  Because this is a dynamic situation, there isn’t a set strategy in terms of how much to pay off each year.

The only set amount each year that I may consider paying off could possibly be a 13th payment.  Taking a year end bonus and paying an additional payment at the end of the year is a decent strategy to save some money over the long haul.  If you can’t do a full payment, target $800 or $1000 or whatever makes sense for you.

The Arguments Against

What I find interesting is that often times the people who say you should never pay off your mortgage because you can get a higher rate of return in the stock market (how’d that work out the last 10 years?), are people who embrace diversification.  If you’re for diversification, shouldn’t you diversify into the guaranteed return of paying off a mortgage?  Just a thought…

Inflation

If my beliefs on inflation are true, then I should not be trying to pay off my mortgage because significant inflation will eat away at my loan balance.  Again, I’d rather plan for multiple scenarios and focus on holding gold and other assets to protect me in the case of inflation.  If I pay off some of my mortgage balance and inflation hits hard, I will still reap the benefits of a diminished value on the remaining balance.

One Comment »

  • Moe said:

    I've spent a while trying to figure this out also.

    When it comes to paying off mortgages, from what I can figure, for a significant percentage of people, the benefits of maintaining a mortgage and investing surplus money elsewhere seem to become more pronounced after an extended period of time– say 8-10 years. Unfortunately, it's very difficult to accurately predict what will happen over an extended time period: one could experience a job change and have to move to a different region or state, inflation could spike, tax rates can change, your earnings may change, your tax bracket may change, capital gains rules can change, etc…. To accurately calculate the benefit (or detriment) of prepaying a mortgage, a large number of assumptions must be made over a long period of time- almost certainly one prediction will be inaccurate, and therefore it is unlikley that you can make an accurate prediction of the ultimate benefit of one course of action.

    I agree wholeheartedly that reducing expenses is a valuable step toward financial independence. Furthermore, one way to look at inflation is to say "why pay down debt that will be diminished by inflation?" On the other hand, you'll always need housing, and thus paying it off may offer you some protection against many economic scenarios (inflation, deflation, stagflation, wage decreases, unemployment, underemployment, etc…).