Should You Pay Off The Mortgage?

I’m frequently asked about paying off a home mortgage. I tell everyone, “It depends!”.

I asked that same question. A friend said his CPA was emphatic that one should not pay off their mortgage. He arranged a meeting where the three of us could talk.

The CPA asked about the interest rate; 6% at the time. He showed me excellent stock market returns, suggesting I could earn more than 6% and continue deducting interest on my tax return. Other People’s Money (OPM) was the buzzword at the time. The smart people used borrowed money to become wealthy.

I was self-employed and worried if I had a bad month. Wouldn’t having a house payment be a good thing? He said, “NO! Financially it’s not a smart move.”

“Is your home paid for?”, I asked. His response, “Oh Hell Yes!” I was shocked. He explained his wife was from Europe. They don’t believe in debt – she made me pay it off. I asked, “Do you sleep better at night not having to worry about a house payment?” With a sheepish grin, he replied, “Yeah, I do.”

I realized the decision is both emotional and financial and the right decision is different for everyone. I upped my house payment and in a few short years, it was paid off. I never looked back!

Please don’t jump to any conclusions – there are other factors to consider.

Not everyone agrees.

In the MarketWatch article, “Should you pay off your mortgage or invest the money?” they outline 5 reasons to keep your mortgage.

Homeowners need to maintain liquidity.

A mortgage doesn’t affect a home’s value.

Mortgage interest is inexpensive.

Mortgage payments get easier with time.

Investments will outperform the interest cost of the mortgage over the long term.

Let’s dissect the premise using (fictitious) Bob & Mary Jones. Their combined income is $80,000. They have a $200,000, 30-year conventional mortgage at an interest rate of 4.5%. Bankrate.com provides a handy Amortization Schedule Calculator. Their monthly payment would be $1,013.37.

Money Under 30 provides a tool, “How Much House Can You Afford?” They tell us:

“…. The golden rule in determining how much home you can afford is that your monthly mortgage payment should not exceed 28 percent of your gross monthly income. For example, if you and your spouse have a combined annual income of $80,000, your (monthly) mortgage payment should not exceed $1,866.”

Bob & Mary are well within the guidelines.

Homeowners need to maintain liquidity. You need enough liquid assets on hand to cover an unexpected emergency or job loss.