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Does It Make Sense to Pay Off The Mortgage Early?

About two years ago, I went to an optometry conference hosted by the Public Health Service. I started my career with an PHS residency, and was very close to taking a career position with the government. I ultimately chose to go into the private sector, and bought my own practice in 2002. It has been rewarding in many ways, but I was growing disillusioned with being a business owner, and this conference made me consider going back to working at a government clinic. The wheels started turning, and now I am a month away from selling my practice. Since the buyer has worked for me for the past two years, I am comfortable carrying his business loan as a seller finance.  I will continue to see patients part time in my old office and at a public health clinic (best of both worlds!) on a part time basis. I own our office building, and the buyer will stay in the same space and rent from me. With my husband’s income, my part-time income,  rental income from our residential and commercial properties, and the loan payment from my buyer, we should be doing well barring some unforeseen circumstance. Now that I’ve gone around the world with that introduction, the big question of the hour is should we pay off our mortgage early?

I have continually struggled with a workable budget. I know my husband and I want to be at a point where we can retire in 10-12 years. I just wasn’t sure which steps to take in how to get there. Jake from I Heart Budgets was kind enough to take me on as a Friday Budget Submission, which you can read on his blog. Ultimately, his calculations show that if we stick to our current path, we could be free of all debt, including our mortgages, in about six years. That’s assuming we choose to pay everything off, but is that the best option? When you aren’t sure which path to take, make a list of pros and cons.

Cons of Paying Off the Mortgages

  1. Low Interest Rates-Our primary mortgage is a 3.25% and our residential rental is at 4.25%. The commecial rental will be paid off in two years, so I’m not figuring this one in. One could argue that we should find  investments that would return more interest that what we would be paying off.
  2. Tax Deductions– We would not have the mortgage interest tax deduction if we paid everything off early.

Pros of Paying Off the Mortgages

  1. Money Saved on Interest-If we paid off both properties on the accelerated schedule, we would save over $60,000 in interest. Even if taxes go up, this is much more than our tax deductions would be if we kept the mortgages until their original payoff dates.
  2. My Investments Might Suck-If we tried to invest in stocks or other rentals, we could very well make more than 4.25% in interest, but what if we have another 9/11 and the stock markets crashes, or what if we buy a rental that sits empty or has hidden repair costs? What if we pick stocks that are terrible? It’s all a bit of a gamble.
  3. Security-Perhaps this is the biggest reason to pay off our mortgage. We love our house and have no plans of moving, at least until our five year old is out of school.  I have never really though about throwing everything at the mortgage. It seemed like a pipe dream, but the more I think about the idea, the better I like it. No matter what happens, we have our house. With watching my in-laws lose a house they were in for over 30 years, knowing that won’t ever happen is a pretty empowering feeling.
  4. Increase in Passive Income-If we paid off the rental, even if we never raised the rent, our passive income would increase from around $300 per month to about $650 per month.

It seems that I have answered my own question. The Pros list is double the Cons list. I realize there are some other things that will pop up that we will need to add to the budget like doctor and dental visits, school activities that get more expensive as our daughter grows older, and household repairs to name a few, so we could be a little off on the calculations. We might also make more income that projected and pay everything off sooner. (Perhaps my blog will get bought out for a $$$$!)

When my husband and I got married in 2002, we owed about $350,000 on my business and commercial property, around $100,000 in student loans, and $100,000 in mortgage debt, which increased to $215,000 when we built our house. We also were really stupid and took out car loans and got into credit card debt to the tune of over $30,000. Talk about a negative net worth! Buying my business was the smartest financial move I’ve ever made, even though taking on that amount of debt has kept me up many a night. I think selling will be the second smartest. To think that we can be debt free in six years is amazing, and I’m on board for making it happen. Whether it makes sense of not, we are paying off the mortgage early. I hope you stay around to enjoy the ride!

Do you think we should pay off our mortgage? Feel free to disagree. Do you have a plan for financial freedom? Why not?

I also have a guest post today about how people waste money on eye care at Club Thrifty. Be sure to check it out or you might end up on Holly’s naughty list!

 


About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

62 comments

  1. I think it all comes down to interest rates and what you think the inflation rate is. I say what you think it is because the CPI is not always accurate in my opinion. I take the same approach with other debt: depends if the interest rate is above or below inflation. If it’s above inflation, then we have a different topic to discuss!

  2. YES! Pay that sucker off as long as you are still saving and investing at the same time. That is exactly what we are doing. A lot of people are expecting the stock market and economy will completely tank sometime in the next 5 years. When that happens, I will have my house paid off instead of all of that excess money invested.

  3. I think it comes down to the personal situation when it comes down to paying off a mortgage early. Looking at your situation I would totally go for it, especially with your goal to retire in 10-12 years. It will free up a huge chunk of money for you to better use that can get you closer to that dream. One thing to also keep in mind is that our lovely politicians are looking at getting rid of or capping the mortgage interest deduction to help with our finances. I know that would rile up a lot of people, but it is a possibility. So, that deduction could be lost anyway in the near future.

    • They are certainly going to have to cut some things, so that wouldn’t surprise me. That would be a hard one though. Seniors in Colorado get a property tax exemption. The state tried to do away with that a few years ago due to the budget crisis and you would have thought the world was ending. They ended up reinstating it.

    • They are certainly going to have to cut some things, so that wouldn’t surprise me. That would be a hard one though. Seniors in Colorado get a property tax exemption. The state tried to do away with that a few years ago due to the budget crisis and you would have thought the world was ending. They ended up reinstating it.

  4. I think DC makes a great point because when you factor in inflation to investments, it’s really hard to outpace what you’re currently paying on your home loan interest. You’d need to earn at least 6% on investments, and while that’s been the case historically, I’d much rather take the sure bet than the gamble. That’s just me though. 🙂

  5. Mandy @ MoneyMasterMom

    I totally vote to pay off the sucker. Debt freedom is a beautiful feeling that can’t be explained, but is very enjoyable/rewarding to say the least.

  6. You know how I feel about this 🙂

    But as I’ve stated before, I don’t like to gamble with debt. Though you might come out a thousand dollars ahead (maybe), I think the question really is; what will make you sleep better at night, a ‘paid for’ house, or a huge amount of money in investments?

    Also, on the math front, you aren’t truly outpacing your interest rate until you have the same amount of money in investments as you have on the balance of the loan. Since it would take you a while to get there, you would be guaranteed losing out for a while.

  7. Buy paying it off, you have less money to invest in the short term, but more in the long term.

    I should be completely debt free within 10 years, but other than that, I don’t have any specific plans for “financial freedom” I would rather not retire.

    • My Dad is the same way. He absolutely doesn’t want to retire, ever. I probably will still work when I’m “retired.” I just don’t want to have to if there is something else I’d rather do. I want to see only nice people and not have to play nice for jerks, or do pro bono for low income or homeless people. I also might want to do more property management. Who knows? That’s the beauty of it.

  8. You’re right, you answered your own question. I like the idea of making a pros and cons list, helps you get a perspective visually. Honestly, the thought of not having a payment and that feeling of security would be reason enough for me to pay off something that keeps me warm at night.

  9. This topic is always on my mind. Right now, I don’t plan on doing it because we want to move in a few years. Paying it down wouldn’t make sense, since I can make more with my short term investments than I would gain with a lower principle. After we buy our next home, I think I will definitely be putting myself on an accelerated plan.

    • Absolutely, I would not be paying off if we were moving, but we plan to be there until we’re too old to get up and down the steps.

  10. I am curious about why paying off your student loans hasn’t factored into the decision? I see that there is one at 6%, which seems to be the highest rate debt you hold? Why not pay off that one and put the rest against your rental property, which has the higher rate? Then snowball the rental property and your own property, using the rental income? $60K is some solid savings 🙂

    • I’ll get a pretty good lump sum down payment of my sale. The student loans are going down with that. Then the rental, which should take a year, then the primary mortgage.

  11. I’d pay off the mortgage, definitely! You lose the mortgage interest tax deduction, but the savings on interest makes up for that. Plus, who knows if the mortgage tax deduction will always be available? Personally, I think they should probably do away with it, though I know that’s not a popular view.

    As you’ve learned with your in-laws, it’s better to be safe & have security as you age. And paying off the mortgage still leaves you with a “note” each month, if you consider homeowners/flood insurance and property tax. The P&I on my house is half of my house note… the other half is insurance & tax escrow. So when the house is paid off I’ll still have a monthly payment of half of the current note!

  12. I do think you’ve largely answered your own question, given that your pros list is double the size of your cons list. I think the feeling of security that comes with a house that’s fully paid off is huge (not that my wife and I have experienced it personally 🙂 Knowing that no matter what happens with the economy, your investments, etc – that you’ll never have to worry about another mortgage payment. That’s huge!

  13. I always thought that if I had the means, I would pay off my mortgage early, especially these days when getting a good rate of return on an investment isn’t really guaranteed (who the hell is making %8 on an investment besides prooperty investments?). I say paying off your mortgage early sounds like a good idea.

  14. “Tax Deductions- We would not have the mortgage interest tax deduction if we paid everything off early.”

    This made my brow furrow.
    How much mortgage interest are you still paying if you’re to the point where you could pay it off in 6 years? We still have 14 years left on our term and I’ve tried to finagle the numbers so that we could itemize and benefit from more than the standard deduction, but it’s just not happening. And as we pay down the mortgage, the interest payments will be even smaller and make that an even higher hurdle. Plus, since you get to deduct your kid, your standard deduction should be even bigger than ours!

    • With owning the business, we have to itemize. I have interest on my business loan and commercial loan plus all the other things that go along with the business,so we come out way ahead by itemizing. Otherwise, we’d pay a ton of taxes. All those will be gone this year, so we’ll see what comes out better in the future.

  15. I know a lot of people say pay it off but remember to factor in inflation. If inflation averages 3% the money you use to pay your mortgage tomorrow is worth less than the money you use it to pay today. That, plus tax deductions make the case a little stronger to wait, but ultimately you have to do what is right for you.

  16. We are in this spot right now with having the money to pay our mortgage off. The hard part is the exchange rate for us since we have already taken a hit with it. In the end it’s a personal deicion and what will make you sleep better at night. For us, we would pay it off and that is the goal. Then we can invest until our hearts content with all the money we make, if that’s what we desire to do. I keep losing my crystal ball… if you see it let me know! 😉 Mr.CBB I’m sure you will both make the right choice.

    • I am actually looking for a crystal ball for Christmas. If I find it I’ll let you know for sure. I’ll look forward to your post about killing your mortgage and I’ll fly a Union Jack for you.

  17. Well now I’m upset with you. I was JUST working on a post of the same exact title!! I guess great minds think alike …

    I’m of the school of thought that doesn’t think you have to necessarily pay your mortgage off early. There are a few surprisingly good arguments not to, especially if your interest rate is so low. Don’t forget that your house payment will remain static as everything will increase over the next 30 years at the rate of inflation.

  18. To me, it doesn’t make financial sense to pay it off. There is inflation, there is money from the rental offsetting part of the rental mortgage… but your point about being secure, and having no burden doesn’t have to be rational. You should pay it and live happily debt free ever after.

    • I will be sure to use money wisely from now on and not ever let lifestyle inflation or debt creep up on us. If we do want to splurge on something, it will be planned. It seems boring, but having crushing debt is not exciting in any way other than the panic attacks it causes.

  19. i think that it does make sense to pay a little extra when you can… completely debt free, including the house, would just be an amazing sense of freedom.. but I don’t make it a priority..

  20. I absolutely think you should pay off your mortgage as quickly as you can. We have put together what I call a “Financial Gameplan” and are planning on paying our’s off in 5 years. It is not as much a mathematical reason but more of a psychological one. We want to have peace of mind and having a paid for house and being completely debt-free will help us with that, for sure!

  21. I say go for it! I wrote about my mortgage free dream several months ago. I don’t have a set date, but my goal is to pay off my mortgage well in advance of the standard 30 year mark. I don’t think reducing your debt is ever a bad idea.

    We have a saying in the tax world – it’s “never spend a dollar to save 15 cents.” It’s kind of like “spending more to save more.” I wouldn’t even let the mortgage interest deduction play into your decision.

    “Security” is the clincher to me – peace of mind is priceless!

  22. Kim,
    Robin and I are 61 and 60 and have done much reading on paying off the mortgage early. It almost seems like the opinions are 50/50. Our interest rate was 4.35% and we only owed on our house for 10 more years. We changed our 30 year loan to a 15 year loan about 5 years ago and it was great to see more than half of the payment going toward principal – In addition we were paying extra on the principal. Just last week as our loan was down to $25,000 we decided to take money from our Emergency fund earning 1% and pay off the mortgage. This gives us an extra $2000 per month to put back in our emergency fund but most of all the peace of mind
    that when we retire in a few years we will owe nothing to anyone. Even
    walking on the grass feels different now. The argument that getting a $3000 back on the $10,000 in interest you paid has never made sense. I know what Dave Ramsey would say.

  23. The tax deduction should not be a consideration. Would you pay 10k in taxes to save 3k in interest? I hope not.

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