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Reasons Not To Pay Off Mortgage?

10 December 2010 12 Comments

There are two main reasons people cite when arguing against paying off one’s mortgage.  They are:

  1. You can invest the money at a higher rate of return than what you’re paying in terms of your mortgage rate.
  2. Lose mortgage interest deduction

Let’s look at each briefly.

Investing the money at a higher rate of return is always assumed and isn’t really thought through much.  First, one should adjust their rate of return based upon the risk associated with it.  Clearly, the risk is much higher in investing versus paying off the mortgage debt.

Secondly, usually people don’t factor in taxes into the equation.  You are taxed on the gains on your investments.

The ultimate indicator?  Asking someone if they would borrow money to invest in stocks if their house was paid off.  The answer would almost always be definitely not.

On the mortgage tax deduction, you’re paying interest in order to save some money on taxes.  Say you spend $10k on mortgage taxes this year and save $2500 in taxes because of it.  You’re still losing $7500 in the equation.  If you’re set on losing money and deducting taxes, why not give that $10k to a good charity?  You’ll save/lose the same amount.

I’m a firm believer in paying off a mortgage.  The only thing that holds me back from a big time aggressive payoff is the prospect of inflation.  If you hedge yourself for inflation, pay off the mortgage at will.


  • TaJ said:

    It also depends where you are in the mortgage. The "younger" the mortgage is, the larger a guaranteed profit you're locking in, in terms of the interest you're not having to pay in the future. In your first year, it's like buying 30-year, tax-free fixed income at your mortgage rate. Try finding a better low-risk investment than that at the moment.

  • aaronius said:

    First of all, I'm not exactly an evangelist for or against paying off your mortgage before saving for retirement, investing, etc., but I do want to point out a couple things:

    "If you’re set on losing money and deducting taxes, why not give that $10k to a good charity?" — That's pretty simplistic to assume that people like not paying off their mortgage for the tax benefit. Some noobs might think this way, but most folks are just incorporating tax breaks into the overall equation.

    Let's take a look. My mortgage interest rate is at 4.5%. Let's say my tax bracket is at 30%. That takes my effective interest rate to 3.15%.

    Now, if I take that money and put in the stock market, 11% is a historic growth rate for an aggressive, long-term investor. With a 30% tax rate (I realize it may be different due to the term of investment, capital gains, etc) the effective rate is 7.7%. Even though the risk of a long-term investment is fairly low, we'll lop off 25% of that because of the risk and because it just may not be what history has cracked up to be. That takes it to 5.775%. Heck, take 25% off that if you're really risk-adverse and we're still sitting pretty plus we get liquidity and keep our mortgage as an inflation hedge.

    Again, I'm no evangelist either way. I just wanted to make a few points for readers.

  • aaronius said:

    One other thing. I think the whole pay off the mortgage vs. investing thing is really more of a principle issue than a mathematical one. Mathematically it almost always seems like it would be better for me to invest, but on principal I don't like having debt. In the end, I've decided to split between the mortgage and investing as I think they're both important and have their benefits.

  • SBF said:

    What a great topic. How about paying off all debt, except a mortgage? Stay liquid, enjoy the interest deduction, and aggressively invest. With some (not all) of the gains, double up on mortgage payments. Sounds like a winner to me. Reward yourself and take advange of the situation. Many of my friends are renting!

  • Arthur said:

    This is a great short/to the point article. I would only add that there is MORE benifits from looking at this topic from an investment property perspective. Once you factor in cash flow, tax benifits, depreciation and equity (via tenats paying down mortgage or possible appreciation), you really can't beat it.

  • Rick said:

    Only an idiot has a mortgage if they have the cash to purchase a house outright. The money you are losing in interest payments can go towards other expenses, or can be saved to increase your net worth.

    A loan at almost 100% interest shouldn't sound very appealing, well that's what a mortgage is. The only winner is the banker. If you can't afford to buy a $300,000 house outright, you don't need to be living in one.

  • -- Angry CFP said:

    Crikey, no wonder the poor get poorer.

    Rick – you need to get educated: Just because you have the cash to buy a house doesn't mean you spend that cash to buy a house 'outright'. Lots of factors are involved: Tax bracket, interest rates, value of 'peace of mind' associated with no debt, actual value of property, liquidity of property, alternatives available, primary residence vs investment property, etc. Get your head out of your ass, dude, are you not aware that real estate has been pounded these last few years? It's a sure thing that folks taking your advice 5 years ago would be cursing the day they listened to you.

    Paying off a mortgage is not a clear-cut decision, especially if the alternatives have variable risks or you have emotional baggage associated with debt.

    BTW: WTF are "Mortgage Taxes"? Did you mean mortgage interest? The difference between donating $10K to charity and paying $10K in interest is pretty significant – only one of those choices can legally be associated with a tangible financial return that will personally benefit you.

  • Chris said:

    Yes, yes and triple yes on paying off the mortgage. I wish I had the determination this author does to remain debt free. After 13 years of paying on a mortgage I can attest to the fact that anything over 15 years on paying a mortgage is TOO LONG! It ties up too much money for retirement, saving for our kids college and giving to charity. The mortgage interest deduction argument doesn't pencil and is hyped by banks and others interesting in collecting your interest. I'd always been conservative in my finances… paying off my student loans ASAP, buying used cars for cash and setting up a retirement account upon getting my first job out of college. Then in my 30's I got more pay and looked at those around me and decided for some dumb reason I DESERVED a bigger house with a fancy view = bigger mortgage. Super dumb because we could have had our previous house PAID OFF by now. Lesson learned. We will be looking to sell our current house within the next 2 years to eliminate our mortgage within the 15 year time frame I originally gave ourselves for payoff. Young Y'ers, DON'T EVER get caught up with the Jones. debt-free living is like a warm comfortable blanket! I'm currently a little more chilly than I care to be.

  • Mokkijo said:

    I was advised to pay off down the mortgage principle only if:

    1. You have some cash reserves and you do NOT need the money for monthly expenses.
    2. You POSITIVELY plan on remaining in the home forever (yeah this is a tough one).
    3. You are NOT upside down in the mortgage.
    4. Do NOT pay down an investment property, only your primary residence.

    I like the idea of partially paying extra towards principal and partially towards savings. This is a good example of DIVERSIFICATION, the foundation of any good investment portfolio.

  • Larry Fry said:

    Well, it really depends on you whether you will pay off the mortgage or not. Utah mortgage loans has so many methods to pay.

  • mortgage said:

    Paying off the Mortgage"–it's an idea with obvious appeal, but not one that many middle-class workers pursue. The reality is that it's often a better idea than much conventional money management advice suggests.