Should You Pay Off Your Mortgage (If You Can?)

So, if you are in the states, you might know of Dave Ramsey, a financial guy with a radio show that teaches no debt, except your house, and you should pay that off as soon as possible.  Most financial guys say he is wrong on this, because, you can make more money in the market, then you would save in interest. So, who is right?  I say they both are, although, it is not based on the numbers, but, on the type of person you are when it comes to money and saving.

First, a quick rundown of my personal story of paying off my house. In my early 20s, I had a decent job and shared a house with five guys, so I was able to save up and put a down payment on a house by my mid 20s. I had friends living with me in my new house, helping with the mortgage and utilities. Later, when I got married, we were able to move into a bigger house, and after a few years, I told my wife, we had the money to pay off our mortgage if we wanted to. We decided to do, but, it took most of our non-retirement savings. It turns out it was the right move for us, for reasons that became clear later on. We can talk about that in a minute.

First, a couple of reasons why it is more than a simple numbers game:

1. You can't time the market.  You don't know if you are selling your house at a low or a high In the market. Depending on where the market is, this makes a great difference on how the move pays off in the long run.

2. There are other considerations.  Think of other the other factors and your current needs.  Do you have big upcoming costs? Are your retirement plans fully funded and is your HSA account solid? What makes you with your family, or security?

3. There is a big argument that finance guys use to get you to keep your money with them, instead of paying off your house. They will say, "Well, your interest rate is 4.5% and I can make you 10% in the market, so you should keep investing with me." Two major issues with this. One, can they really make you 10%, maybe, maybe not. The second is the big one, though. To realize your 4.5% rate you have to keep your house the duration of the loan (usually 30 years.) What does this mean? Well, anyone that has payed a mortgage remembers seeing that fist payment and only about 10 percent of the payment going to principle and 90 percent to interest.  This means, your rate in the first few years is not 4.5%, it is heavily front loaded to be high at the beginning. On average, people keep a 30 year mortgage for only about 13 years. (Funny, in 1985, it was only 5 years.) If you are not living in your home for the full 30 years, your actual interest rate is going to be higher than your stated rate. If you want to see your finance guy squirm, ask him about this.

While these points are important, my original comment is that these numbers don't really matter. It is more a decision about the type of person you are. Here is why. 

Type 1: Bad With Money and Saving.  If you are not a great saver, It is probably not in your best interest to pay off your house. (I know, if you don't save, how could pay off your house? Well, maybe you won the lottery, got a large settlement or an inheritance.) The reason, a house payment for someone who is not great with money is the best way to build wealth and equity, while also maintaining discipline with money. You are forced to come up with a house payment every month for 30 years. So, if you get a large sum of money, paying off your house may set you up for future issues.  Maybe you pay off your house and start spending all your money with no plan.  If you fall into old habits and get in debt and you have to use equity in your house, you might end up in the same boat you were in before. See, it is not so much about the numbers, but, about who you are. All the arguments about what you could do if you pay off your house are not worth much if you are not disciplined with your money under your new situation.

Type 2: Big Money Saver. This is me. Within five years of paying off my house, I had invested the money I would have used for payments and had more than what I had before the payoff. Within in ten years, I had my first rental property. I know, you can say if I hadn't paid off the house, I could have had multiple rental properties by then. Maybe, but, here is why it is not about the numbers, it is about your life and choices.  I few years ago, my wife wanted to go back to work. With the amount of travel I did for my job, this wasn't realistic with our kids.  So we sat down and looked at it, she would only make about a third of what I made, but, with no debt, no house payment, some rental income and some decent savings, we realized it didn't matter.  I quit, became a stay at home dad and I have never looked back. It wasn't the money as much as it was the idea we weren't tied to a large mortgage. We had the freedom to do what we wanted. 

Who knows if I'm right, do what you want. 





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I am an American aquarium drinker. I assassin down the avenue. I'm hiding out in the big city blinking. What was I thinking when I let go of you?

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Interesting Thoughts, That Aren't Always Mine

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