Should I Pay Off My House Early?

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Should you pay off your mortgage early?You’ve been doing well with your finances.  You don’t have any car loans or credit card debt.  You’ve been socking away money in your 401(k), Roth IRA, and other investments.  Now you’re looking for more avenues to help put yourself in a better position with your money.

Eventually, you start asking yourself that one question… the one that can really stir up some good debate…

Should I pay off my house early if I can?

On one hand, you have that huge feel-good aspect of getting rid of that giant burden that you’ve had for years.  A mortgage payment is a real thorn in anyone’s side – no one likes paying that bill every month.  I had a major debt problem coming out of college years ago that took years for me to dig myself out of and now I have this wonderful hatred of bad debt (as opposed to good debt).  To be done with that mortgage ball and chain would be exhilarating… ah, the sweet smell of freedom!!

On the other hand, you have the math facet to look at.  For one, you could take the extra money that you were going to put toward the mortgage and instead invest it elsewhere.  Chances are you have a really low interest loan right now.  If it’s even a 5% loan, you could probably make your money work better for yourself by putting it in a well-diversified stock portfolio that might earn you say 6 or 7% over the long run.

Getting rid of that mortgage payment also gives up your home mortgage interest deduction come tax day – that can be a big deal for many people who can itemize on their returns.  And the higher the tax bracket you’re in, the more important this is for you.

And another important factor is that you’re putting yourself in a tough situation.  If you invest the extra money in the stock market, for example, and run into some money problems, you can sell your stocks and get your money pretty quickly.  But if you put it into your mortgage instead, you lose that liquidity.  Selling your stocks is easier and quicker than having to sell your house.

So, basically the numbers will generally tell you that you should not pay off your mortgage early if you have a low-interest loan.  But the emotional factor of losing that stress might still make you want to reconsider.

So should you pay off your mortgage early?

In my case, the answer is yes.  When I did the numbers for my early retirement, I factored in that I would not have the monthly expense of a mortgage payment.

Right now, if I continue to make the payment amount I am at, Quicken says that my payoff date will be January of 2027.  I currently make a little more than an extra payment each year.

My problem is that January 2027 is about a year and half after my retirement goal of July 2025… and that’s the latest I want to be done.  So this is an issue.  I’m going to need to tighten up and continue to get more of the principal paid down if I’m going to make this happen.

One of the nice things about recent versions of Quicken is that it gives you the ability to do “What if” scenarios without actually modifying your actual data.  In other words, I can easily see what would happen if I paid an extra $100 a month on my loan for example.  Or I can see how my loan would be affected if I made a one-time lump payment.  Quicken will then do all the amortization fun and instantly let me know my new payoff date (as well as how much interest it would save me).

So in an instant, I can see that if I increase my mortgage payment by another $200 a month, I’ll hit my goal of paying off the house by July, 2025.  Easy enough… wait – $200 a month??!!!  Ouch… that’s a pretty big jump for my payment.

As an alternative, if I make a $20,000 lump-sum payment right now, I can also hit the July 2025 date.  Hmm, that’s a pretty hefty sum of money as well.  I can make that payment, but it would take a huge chunk out of my emergency savings.  I’d be better off with the extra $200 a month.  Now I’ll just have to figure out what I need to cut out to make that happen.

The good news is that Quicken says that the mortgage on my rental will be paid off in January 2024.  Right now I’m paying $685 per month on that, so for that last year before retiring, that’s an extra $685 I can apply toward my primary residence loan.  That’s $8,220 which is a good piece of the mortgage, but still not enough.

So the numbers say that I shouldn’t pay off my mortgage early, but I’m doing it anyway!  I need to do it in order to make my retirement a success.  What about you?  Are you going to try to pay off your mortgage early or let it ride for as long as you can?

Thanks for reading!!

— Jim

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8 thoughts on “Should I Pay Off My House Early?”

  1. We’re in the same boat as you, just on a shorter timeline (retiring at the end of 2017). And like you, we’ve found the numbers telling us not to prepay the mortgage. But, there are considerations the calculators can’t factor in, like the cost of health care. The Obamacare subsidy limits severely penalize us if we let our income go above $40,000 in retirement, and right now our mortgage payment is $2400 a month, which pretty much eats up all that we could “earn” in retirement! So we have decided to own our home free and clear in retirement, so that we don’t have to have enough cashflow to cover the mortgage, and can stay well under the subsidy cap! Who knows — by the time you retire in 2025, all the rules could be different, but for those looking to retire soon, this should be a big consideration!

    1. That’s an excellent point – I didn’t even think of the health care aspect. Like you said, the rules could change by the time of my retirement so I haven’t concentrated too much on the health care aspect yet. The nice thing is that the burden of the mortgage payment will be off your plate! Also, congrats on the 2017 retirement date – that’s fantastic!

  2. So I’m in a different boat. Retirement is aways off and we are building a new home and outdoor living with pool. Hefty costs associated with that but we want to enjoy ourselves now. It adds stress for the future but you know the saying “you only live once”! We are going for it. Only thing better would be the new house and retirement!

    1. Congrats to you on the new house and pool, Joe! That’s part of the fun – unless you’re filthy rich, you pretty much have to choose between living extravagantly or retiring early. I agree with the “you only live once” saying, but for me that means being able to have the freedom of retirement to spend more time doing the things I want and less time working.

  3. In the same boat… rocking back and forth between pay-it-off and don’t pay-it for some time now. As of today, though, our decision is to not pay more or accelerate payments on our house until we get to our magic net-worth $ figure (less property). The Mrs and I are in the accumulation phase and, for us, our thinking is that it’s better to have as much $ as possible working for us (appreciation, dividends, etc) as early as possible, while we’re able. If anything ever happened we can always sell, move, rent, etc., but we still have our nest egg working for us. Barring any major set backs, once we get to our magic #, that’s when we’re planning to accelerate paying down our mortgage.

    BTW, Love Quicken, too, I use it daily!

    1. Thanks for coming by, Mr. LifeMoneyFire! Since this post came out, believe it or not, I actually went the opposite direction and dropped my payment slightly.

      With as low as the interest rate is likely on your mortgage, it sounds like focusing on putting your money to work elsewhere makes the most sense.

      — Jim

  4. I chose to pay it off. The main reason was a shift in income that left me digging into savings every month. It was a sustainable situation, but didn’t sit well with me.

    The timing 2007 turned out to be excellent. With the house paid off I was dumping cash into my 401k right as the recession was setting in.

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