Does your house own you?

Beware, financial geeks. You’re not going to like my answer to the question, Should I pay off my mortgage or invest?   Not to worry, Ive since gone back and added the math analysis regarding paying off your mortgage

I’m making a few assumptions as I begin this post.

Pay Off Mortgage or Invest?  Starting Assumptions

• If you’re asking this question, you’re in great financial shape.
• All your consumer debt is paid off.  If you have an auto loan, pay that off first before entertaining this question.  Your credit cards need to be paid off before this is anything to worry about.
• You are contributing a minimal or reasonable amount to retirement.  I’d put the minimal at 10% and reasonable at 15%.

Four Steps To Help You Know If You Should Pay Off My House Mortgage or Invest

With those assumptions in place, here is how I’d suggest you make this decision invest or pay off the house mortgage.

Step #1 – Put all pens, papers, and calculators away.

Step #2 – Ask your husband or wife to join you on a walk

Step #3 – Ask each other this question – Would you rather pay off the house early or have extra money in investments?

Step #4 – Do whatever you feel like is the best choice, whatever you feel called to do, and whatever you think honors God.

Disclaimer: This approach is not transferable to other financial decisions.  If you are upside down in debt. do not make your financial decisions based on what you feel like.  This, instead, is a luxury offered only to those who are financially responsible and who have a proven track record for making wise financial decisions.

Upon purchasing a new home, it is smart to use a mortgage loan calculator to make sure your new investment is within your budget.

Why Paying Off the House Early is Not a Math Decision

One of the deadly sins of personal finance is the mindset that whatever makes more money is the best decision.

Instead, the best decision is the one that takes you further down the road according to your life goals.

My goal is not to accumulate as much money as possible.  Money is not the destination, but a vehicle to get me to where God wants me to be with my money.

For example, the decision to live debt free has more to do with the emotional impact than it does with the mathematics.  Interestingly, the math may drive the decision – you feel awful paying all that money (interest) to someone else.  That feeling of disgust will lead you to pay off your debt .  When the debt is paid off that feeling of disgust will be replaced with a feeling of satisfaction.  How you feel about your money is much more valuable than how much money you have.

Why I’m Paying Off My House Early

Here’s the thing.  I’d rather not lose x% of my money even if I could gain X% + 2.  What does that mean?  Let’s say you have a home loan at 6% and you feel confident that when everything clears (taxes, and fees) you can make 8% investing in the stock market.  Personally, I’d feel better knowing that I’m not paying someone $150 in interest every month, even if that means I miss out on the chance to make $170 in interest.

Does that make mathematical sense?  Nope. But, I don’t care.  I don’t like paying interest to other people so I’m going to deal with that first.  Later I may invest some of that money, but for now I get a bigger emotional payoff by paying off the house than I do by watching my investments grow in the market .

Are You Being A Good Steward If You Pay Off The House Early?

Is someone being a poor steward just because they don’t run the numbers?  I don’t think so.  God doesn’t require his children to be accountants, just to make him happy.  To be a steward is to responsibly use the resources you have.  If you are thinking about paying off your house early or doing extra investing you are a good steward.  Poor stewards don’t get to make these kinds of choices.

Well, there it is.  An entire post on paying off your home versus investing without a single mathematical equation.

Comments

Kevin@OutOfYourRut says

I think this is an intensely personal decision! But my two cents

If the mortgage is a fixed rate and the rate is on the lower end of the recent range, it might be ok to invest without paying it off. I say this because unlike credit cards or even a car loan, a mortgage is a static debtagain as long as its a fixed rate (and not a balloon) it wont bite you in the fanny at some point in the future. The payments are predictable.

Accumulating savings and investments while youre paying your regular mortgage payments can give financial strength in a more immediate sense. I.E. you may not be able to payoff a $200,000 mortgage in five years, but you might be able to accumulate $50,000. Once you have that sized nest egg, it may be time to split your excess between increasing savings and paying off the mortgagethe best of both worlds.

My own sense is that liquidity is absolutely crucial, and lets face it, even if you pay off your mortgage, your house still isnt very liquid.

Alan says

I have lived through the conflict of financial advisors telling me to invest versus my gut feel of paying off my mortgage. You are right, it is hard to make the math work and this ends up being an emotional decision. In the end I paid off the mortgage. I cant begin to tell you how much I enjoy the peace and freedom of living completely debt free. A few of additional items to consider:

1) Cash flow you dont want to pay off your mortgage at the expense of an emergency fund or ability to consistently save

2) Age factor as you get older, you have less tolerance for the risk required to make the sort of investment that would earn more than your mortgage interest rate.

3) Study your tax situation closely

Craig says

Jason @ Redeeming Riches says

I agree with Kevin that it is a personal decision and liquidity is crucial however, if you have your house paid off that equates to less liquidity you need.

I like the best of both worlds scenario where you are knocking the mortgage out and also increasing savings if possible.

There is something to be said for having NO DEBT AT ALL!

-= Jason @ Redeeming Riches´s last blog. How to Help in Haiti =-.

Craig says

Reading comments like the one left by Alan makes me think it is an even better choice to get it paid off.

gn says

Ive never paid extra on a mortgage already in place at the expense of savings. But I have dipped in to savings during a refi to reduce the principal balance (and avoid rolling closing costs into the new loan) which felt great.

BTW I like having the flexibility granted by savings+unusedHELOC+biggerfixedmortgage more than the equivalent mix with a smaller mortgage. Pulling money out of a house in a hurry is not easy.

FinancialBondage.org says

Do both. Put 15% into Roth IRAs, etc pre-tax retirement. And work on paying the house off. Step 4 and 6 of Dave Ramseys Baby steps.

Cool thing about a paid for home is 100% of the time it cant be foreclosed on. Not having a house payment puts tons of money back in the budget for other things, like saving and giving.

Craig says

John Gargotta says

After much financial and emotional consideration I paid off my house. I owe nothing on credit cards or car loans, have ample liquid cash reserves and stocks, max out my Simple retirement plan. I am fortunate and blessed.

My only concern is the thought, a house is not a liquid investment. Your house should not be an investment.you need a place to live, not an asset that can be liquidated at a moments notice. The thought that my house is an ATM and whenever I want something I just borrow against my house is the very mindset that got us in all this trouble.

How liquid is a stock that has lost 50% of its valueyou probably wont want to sell that unless you absolutely have to.

I am debt free and loving it! I know if something happens to me my family will be ok.

Craig says

Tim says

If God leads you to pay off the mortgage, that is no problem at all. The money you were paying monthly toward the mortgage can now go into an invest account. That math works out quite well.

Say you owed $150k on the home and you paid $1,000/mo with 25 years left to pay it off. In 25 years, the mortgage would have easily cost you $250k with finance charges. If the investment tanks, you still have to pay the mortgage.

By paying off the mortgage now, you have the ability to invest that $1,000/mo with the added benefit of dollar cost averaging. Even with no interest accumulated, $1,000/mo over 25 years is $300k. But hey, anyone wise or blessed enough to be in that position, will be wise or blessed enough to invest in something that will provide compound interest over that 25 year period. So instead of $300k, they can very easily and conservatively have over $700k.

Do you pay it off? Let God lead the way based on His plan and purpose for your life, as the original author said.

Craig says

ROY STROBEL says

Craig says

Mark says

Youve made some excellent points with this article. Choice A involves much less risk than choice B. I often find that most individuals who are paying down their mortgage are more financially responsible overall. Paying off debt is always a good choice, you cant go wrong no matter what anyone suggests.

Matt Wegner says

I agree that paying off the mortgage is largely emotional, and wow, does it feel great to be completely debt free. I dont think I agree with the statement that youre a good steward whether you pay off the mortgage or not. Yes, youre trying to get the best return for your money and manage the resources you have to the best of your ability. However, the Bible is pretty clear on matters of debt it is to be avoided at all costs. That tells me Im being a better steward when I get rid of my debts and stay debt free.

I also would say that the argument to keep the mortgage and invest instead almost never comes out mathematically, once you factor in risk & inflation vs. appreciation. You actually lose money on your house over time and the longer you keep the mortgage, the more money you lose.

Great post!

Craig says