Progress to Date

  • Original Loan Amount: $204,000.00
  • Balance at Beginning of 5-year Goal (1/1/08): $188,983.82 @ 6.00%
  • Balance at Refinance in February 2009: $148,000.00 @ 4.625%
  • Outstanding Balance: $0.00 (PAID IN FULL!!!)
  • Latest Payment Date: April 2011
  • Latest Additional Principal Amount: $17,623.22
  • Amount Ahead of Schedule (since refinance): $121,462
  • Time Ahead of Schedule (since refinance): 7 years 10 months
  • Interest Saved Last Month: $23,972.48
  • Total Interest Saved: $28,435.55 ($1,037.74 on original mortgage; $27,397.81 on current mortgage)
  • Months Remaining in 5-year Goal: 20
  • Average Monthly Principal Needed to Meet Goal: N/A (Goal achieved)
  • Progress List Explained

Thursday, January 20, 2011

Pay Down the Mortgage Early, or Invest?

A popular Personal Finance topic of debate concerns the wisdom of using extra cash to either pay down a mortgage early, or to invest. By now, it should be clear which side of the fence we fall on: DEATH TO THE MORTGAGE!

This article makes the opposite argument. I completely disagree with the author's point of view, but I was amused by the numerous comments offered up by readers. Some are logical, some are emotional, and some are truly novel.

The reasons we choose to pay off our mortgage early (redux):

  • Paying off a fixed-rate mortgage offers a risk-free, guaranteed rate of return. When comparing this to other risk-free investments (government bonds, CDs, and the like), the mortgage debt reduction almost always offers a higher rate of return. Investment classes which have posted higher historical returns (stocks, corporate bonds, high-yield bonds, etc) carry a significantly higher degree of risk, including the risk of losing the entire investment.
  • Eliminating mortgage debt has an immediate, lasting effect on monthly cash flow. Sticking with a mortgage through 15 or 30 years requires a steady income during the same time period. By paying off a mortgage early, there is less dependency on sustained employment to meet this monthly obligation (the modern version of indentured servitude). Once cash flow improves, the ability to invest (and even to contribute to old-fashioned savings) gets an added boost.
  • Our house is not an ATM, nor is it a chip to be gambled away. A house is a place to live -- a home, a shelter, a place of refuge and strength and solidute. If someone had given us our house as a gift (mortgage-free), we would not have taken out a home equity loan and used the proceeds to invest. If we wouldn't put our home at risk in that scenario, why would we make the same decision when we're paying down a mortgage?
  • Nobody can know the future. Nobody can predict the future behavior of the stock market or the bond market. Very few people can predict the future of their employment situations. Investing involves risk. Debt elimination adds certainty to a very uncertain world.

5 comments:

laura said...

Agreed!

In this day and age the more any person can do to insulate themselves from being affected by job loss, the better.

Dreamer said...

I agree with you pay off the mortgage rather than invest.

First Gen American said...

I do both, but with a bigger slant on the mortgage. I'm hoping to make my very last payment next month on the second house we own (that my mom lives in) and I can't wait.

Houses are tangible assets that you can at least live in or rent out if all else fails. When I watched my retirement savings all but vanish in 2008, I had nothing to show for it except bitterness and despair.

Reverse Mortgage Calculator said...

I truly like to reading your post. Thank you so much for taking the time to share such a nice information. I'll definitely add this great post in my article section.

Gmac Mortgage said...

Behind the argument for not paying off your mortgage is the reasoning that you could invest the extra money and earn a higher return, while keeping your money more liquid. That may have been a good reason in the past but the rate of return on investing now is more questionable, compared to the fact that every dollar paid to reduce a mortgage balance provides a guaranteed return equal to the interest rate on the mortgage.