5 Reasons to Payoff Your Mortgage Early

Before I get into my reasoning for early mortgage payoff, let’s talk a minute about the view from the other side.  This is an age-old argument – probably because there is no one-size-fits-all, “right” answer.  You’ve got to decide what is best for you and your family.

That's the banks house!

That’s the banks house!

The standard financial advice seems to be that having a mortgage is a good thing.  You don’t want to pay this off early.  In fact, you should use refinancing (or… yikes… “upgrading” to a “nicer” home) to ensure you have a mortgage as a constant companion until retirement.  The top reasons I see for this are:

  1. You don’t want to give up that Mortgage Interest Deduction on your taxes!!!!  It is saving you money!!!
    1. Here’s why this is dumb.  I’ll use some easy numbers for this math.  Say you have a $400K mortgage @ 5%.  That’s $20K/year in interest.  Say you are married and have a combined income of $115K/year putting you right in the middle of the 25% tax bracket.  You’re getting $5K/year back from the government for the $20K you gave to the bank.  Net loss to you is $15K/year (if you’re in the 15% bracket, you’ll get back $3K – a loss of $17K/year!).
      • For anyone who reads this and still thinks they “need” the Mortgage Interest Deduction and that it is saving you money – please let me know.  I will happily give you $5K in exchange for your $20K.  You don’t even have to let me hang on to your $20K until tax day before I kick back your $5K, I’ll do it on the spot.
      • Side rant here… does anyone see this as anything other than your tax dollars subsidizing the mortgage banking industry (and the housing industry that is able to convince you a more expensive house will save you more on your taxes)?  Also, another “tax break for the rich.”  If you’re married and make $75K/year (15% bracket) – you get $3K back on that $400K mortgage at 5%.  If you’re married and make $1MM/year (39.6% bracket) you’ll get almost $8K back on that SAME mortgage!
    2. You’re better off putting this money into other investments.
      • This one has validity, depending on your mortgage terms and what you expect you’ll make off your other investment avenues.  For example, if your mortgage is at 3.5% and you make a 7% return on your stock investments, simplistically investing in the stock market would be twice as good an investment (it gets more complicated when you factor in the benefits of the Mortgage Interest Deduction and the drag of taxes on your 7% stock investment return).  Here are the main reasons I don’t side with this argument:
        • Regardless of what investment you choose, those investments will come with risk (and likely an expense ratio…).  Looking at the funds available to me in my 401(k), I see exactly three that are even in positive territory for the year.  Yes, these are all short term numbers.. the point is there is risk here and the numbers are always in flux and never guaranteed.  I know exactly what my mortgage #s are.
        • While investments have risk, owning your home brings security to your family.  No matter what happens from here, just cover your property tax every year and they’ve got a roof over their heads.
    3. If you factor in inflation, they’re giving you money!!
      • This one I’m just going to call BS on.  Most times when you hear this argument, you’ll hear 3% inflation rate referenced.  If you’ve got a 3.5% mortgage and you factor in the Mortgage Interest Deduction, you see where this argument comes from.  But guess what?  Inflation also fluctuates and is also not guaranteed!  The last time inflation was at 3% was 2011 (half-a-decade ago!), before that we hit 4.1% in 2007… then hit ZERO in 2008 (see chart below courtesy of usinflationcalculator.com).  2011 and 2007 were the only two years in the last ten we were at or over 3%.  We’re currently at about 1% (up from 0.7% last year!).  And guess what?  As with all things money, zero is not the floor.  Countries around the world are dealing with DEFLATION (Japan has had deflation for more than two DECADES).
Courtesy of usinflationcalculator.com

Courtesy of usinflationcalculator.com

So, without further ado, here are the five reasons I believe in paying off your mortgage early:

#5 – Your only guaranteed investment.  As I discussed above, investments are risky and not guaranteed.  Your mortgage, on the other hand, has defined terms.  If you have a $300K, 30-year mortgage at 5% and you make an extra payment of $5K three months in, you’ll save more than $11K in interest over the life of your mortgage.  Guaranteed.  Oh yeah, and you’ll decrease the length of your mortgage by 11 months.

#4 – Increased cash flow.  With no more mortgage, you just freed up a sizable amount of money every month!  If you used the “snowball method” to pay off your debt, you’ll be well trained by now to figure out where to put that money next (investing for retirement).

#3 – No more Escrow!  Maybe this is just a pet-peeve of mine… but I hate the escrow part of my mortgage payment.  The implication is that I’m not responsible enough to save money in my own account (and earn interest on it) to pay for my taxes and Homeowners Insurance (HOI).

#2 – Decreased insurance needs.  I see three different areas you can potentially scale back your insurance and save money on premiums.  First, you may elect to make adjustments to your HOI when your mortgage is paid off and self-insure the gap, saving you money on premiums.   Plus, if your mortgage is paid off (which should be the last of your debt), you need less income to support your family every month.  As a result, this is a great time to reevaluate things like disability insurance and life insurance.  A coverage decrease in these areas could keep a even more money in your pocket from premium savings.

#1 – Sleep better.  For me, this is the big one.  The financial security of owning my home outright.  I have a borderline irrational fear of my wife and children going homeless.  Of course, there are many reasons this should never happen (that’s where the irrational part comes in).  I don’t lie awake at night (yet!) concerned with how much money we have saved for retirement, how we will pay for our girls to go to college, what this year’s inflation rate is or what the stock market did today.  I do lie awake thinking about the amount remaining on my mortgage.  I look forward to the day I never have to worry about this again!

We don’t completely ignore investing for retirement, but for the most part we have been forgoing any investment outside of tax-protected / tax-deferred accounts in favor of paying down our mortgage for the reasons above.

One final note on this that I think is a big one that people miss out on.  The way amortization works, you pay the bulk of your interest early in your mortgage.  Remember that example with the $300K, 30-year mortgage at 5% where you made a lump-sum payment of $5K three-months in and it saved you $11K in interest and 11 months on your mortgage?  That same $5K payment 20-years in only saves you about $2400 and gets you done five months earlier.  Certainly not nothing, but a big difference in benefit.  There are two big takeaways here:

  1. It may feel like the worst time, but you get the biggest value from extra mortgage payments in the first five years of your mortgage – earlier the better.  The argument for getting better returns elsewhere does seem more compelling once you’re in the home stretch and the majority of your payments are going to principal.
  2. Think very carefully and do a lot of math before you refinance!  The bank makes their biggest money in the first five years of your mortgage – they count on you to move or refinance frequently to keep you in this stage of your mortgage perpetually.  You didn’t think your mortgage banker was telling you about cutting your interest rate as a favor to you did you??

If you’re looking for ways to pay down your mortgage, this is well tread territory and I don’t think I can say it any better than the top responses you’ll get from Uncle Google on the subject.  As with any other debt, there is no magic, just brute force.  We pay extra every month, then when we do our end-of-year finance review (where the places we’ve managed to hang on to a little extra money throughout the year show how they add up), we dump anything extra we have into a lump sum payment.


As I said, this is your home and therefore an inherently personal decision.  The only right answer is the one that’s right for you.  I fully admit that my primary motivating factor here is an emotional one.  What do you think?  Have a 30-year mortgage and your happy with paying as scheduled?  Think my logic is completely off?  I’d love to hear your thoughts!

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