• http://www.lazymanandmoney.com Lazy Man and Money

    J.D. from Get Rich Slowly tackled this subject recently. There were approximately 17,000 comments (I’m exaggerating for effect).

    I fall on the opposite side of the coin with the paying off the mortgage. It has nothing really to do with the tax savings. As you mention, they are not THAT great, but they factor into the overall decision. I’ll number my thoughts below for easy reference.

    1. For a lot of people $100,000 wouldn’t pay off the mortgage completely. If used to pay off as much of that as possible, you run the risk of losing your job the next day, not being able to make the mortgage payments, and losing the home anyway. If invested, you’ll still have access to it. Even if you lose your job and the diversified portfolio drops 50% (pretty rare, especially if he was diversified internationally), you can use the rest of the sum of money to continue to make payments on the home and put food in your mouth. In this case, it’s actually far less risky to invest the money in my opinion.

    2. Some people are hung up on the “guarantee” of paying off the 5% (tax savings should shave at least a percentage on that original 6% mortgage). Invested over a 30 year mortgage, a return of better than 6% is very much guarenteed (if investing costs are kept down, and the investment is diversified, both things that the individual can control). The return is likely to be 8%, 10%, or in some cases, even 12% (see Vanguard S&P 500 performance since 1976 for evidence of this).

    In summary, the decision (as I see it) is basically between: Do I want 100% chance of a 5% return (by paying off the mortgage and foregoing the tax benefits) or do I want 99+% return of 8-10%? Using $100,000 to pay off a mortgage early (using the 5%) saves you $332K in interest over the 30 years, by my math – ((1.05^30)*100,000)-100,000. However, that 100,000 invested at only 8% would make you $900,000 – ((1.08^30)*100,000)-100,000. At 10% over 30 years, it’s 1.6M. That’s the difference of 3-4% interest accumulated over time. You have decided that the risk of removing mortgage debt from your life helps you sleep at night, which is awesome. I have decided that taking the 1% of risk is worth the $550,000-$1.3M dollars. Losing out on that much money and (potentially two additional homes paid in full) would keep me awake at night. I suppose this why they call it personal finance.

    I understand a lot of people might not have confidence in the stock market over the next 30 years. That’s a reasonable fear. However, if that’s the case, I hope those people are putting their 401k and Roth IRAs investments in a “100% guarenteed to not lose money” investment. Risking a whole retirement is a lot worse than risking a home in my opinion. I can always rent a place to small, cheap place live, but I’ve never seen someone rent a retirement.

    • Hppu

      The market has not returned anything close to 8 or 10% for the last twelve years nor is it likely to return to such numbers in the foreseeable future. By the time it does, if ever, inflation will kill most returns; the only way to beat this cycle is to take huge risks and just like Vegas, the odds favor the house.

  • erik.folgate

    Lazy Man,

    Thanks for commenting. I like fellow personal finance bloggers leaving comments. Your points are well taken. But, there are a few things that I was assuming that I did not convey in my article well enough.

    First, I should have used a number more like a million dollars. You’re right, $100,000 won’t pay off most people’s mortgage.

    Second, you are assuming that someone is going to take the entire 30 years to pay off their mortgage. I was not assuming this, so I was not looking at it with the vantage point of the 3 to 4% interest over 30 years. I was assuming that you would still aggressively be pursuing paying off the mortgage.

    Third, I did not bring up the point about where you are in your life. I am 25, so for me to pay off my mortgage now and not invest it for retirement is perfectly fine, because I have another 40 years to be investing for retirement. If you receive a windfall of money at age 55, then you are absolutely correct, after paying off credit card debt, put the money away for retirement.

    My point with this article is to get people thinking about how powerful their income would be without a mortgage payment. Imagine having an extra $1000 to $2500 per month to play with? You can save up a ton of cash over a long period of time when socking away this kind of monthly investment.

  • http://www.lazymanandmoney.com Lazy Man and Money

    First point – well taken. If you use 1 million though, that’s still $80,000 a year in interest. I would invest it for a few years and maybe after awhile decide to pay off my house. In the meantime, $80,000 a year is still a nice $6600+ a month. My point is that it doesn’t really matter if you change the numbers, making 8-10% is better than saving yourself 5%. If you make the numbers bigger, the difference is just more pronounced.

    Second point – This assumption is kind of my point. People should not aggressively be pursing paying off a mortgage. Saving 5% at the expense of 8 or 10% is huge over a lifetime.

    Third point – Being 25 is an even a bigger reason to not pay off the mortgage. The longer you can make 8-10% vs. saving 5% the better off you should be. If someone gave you 9 cents on every dollar under the condition that you had to pay 5 cents to someone else, you’d do that, right? You’d do it all day as much as you can. Because you are 25, you can effectively do this a lot more than most people.

    Fourth – I can imagine how great it would be to have an extra $1000 to $2500 to “play” with. That $100,000 invested will should make you around $750-800 a month. That same $100,000 only saves you $500 dollars in mortgage (the 5% number) – net gain is around $250-300 a month.

    Along similar lines, I know people that have student debt at 2% and they have no intentions to pay it off as long as they can make 5% in a high-interest savings account. They would be better off putting it in at 5% and then on their deathbed, transferring the money over to pay off the 2% debt. This is really not that different, except that the percents are somewhat different and the stock market is less guaranteed – though I argue very, very solid – over the long haul.

  • author

    Yeah, I guess it just comes down to personal preference. I can see your point about the mortgage. It doesn’t have to be your first priority or your second or third priority. As long as you don’t live in the slums, it will never go down in value, so paying it off isn’t a necessity.

    However, I would personally pay off my student loans as soon as possible. I just don’t understand why you’d rather make net 3% rather than making the full 5%. You and I may have a different view of paying off the debt. I am talking about going crazy and paying off the debt in a year to 18 months. Then, you can start getting more out of your money and never have to worry about a payment.

    The bottom line is that i hate payments. Maybe our agrument is different. I am thinking more along the lines of what is less risky. You are thinking more along the lines of what is more logical in a mathematical sense.

  • Jessie

    For either of you (Lazy Man or author): What if you are 68 years old and have bought a retirement home and hope to sell the previous home at a, possibly, minimum 200k advantage. Would you pay off your new mortgage or pay down on it and invest the rest to supplement your less than ideal retirement income? New morgage is about $1300 at 6%. Thanks.

    • Leeanne

      Pay off the mortgage. When you reach retirement and if you don’t have enough in savings, etc.?? You can opt for a “reverse mortgage” based on the equity of your home. In other words, you will be paying yourself (plus interest) and when you go to sell? It will be worth less because you have tapped into the equity to live off of. Just an idea, but talk to a certified financial advisor before you do anything….

  • Jessie

    Oops! Re my last comment/question. The 200k would not pay off my new mortgage, just most of it.

  • http://www.carthan.com Chuck


    It’s good to see someone who thinks like I do. I am allergic to debt. All Lazy Man has to do is set up his scenario in Quicken, with real data instead of made up data. He will easily see how the interest in a home takes away more of your spending power even if you have investment. Your net worth takes too long to get over the hump. You spend too much time working for the banker than for yourself, and after the dust settles you only end up with 30 cents on the dollar, depending on your tax bracket.
    You are right to get rid of the debt. Get rid of the debt and keep that money for yourself and your family! Let’s look at my scenario. $192,000 in debt @ 5.25% Schwab One gives me only .01%, the credit union, .1% & .4% for savings. The bank on the other hand is taking 5.25% on a very large sum of money. That means for every $1063 I send them, they pocket $840 and only pay my debt down with $263 adding a dollar on to that every month! I actually send them $1542 a month. The rest is escrow. That makes no sense to me Erick.
    Now, if Mr. Lazy Man could show me how I could have $192,000 in two places and show me a vehicle where I could get more than 5.25%, then I might listen to him, but as far as me and my house, I will aggressively seek to pay down this mortgage and get rid of the debt. I will always have money in my pocket if I have no bills!
    Debt is debt. There’s no such thing as a good debt. All I can say is, anyone advocating that you stay in debt must obviously be working for the banks! LOL!
    Spell bank backwards and you get knab. Too close to nab. That means to snatch or steal from somebody. When I pay off my debt, in quicken my debt goes down, my equity goes up, my net worth increases and goes up as well! Stay on track.

  • little late dear

    This is interesting. I have just today received that exact windfall of 100000. I also have a disease that quite potentially will kill me in the next 5 to 10 years. Everyone talks about saving for retirement but I have to assume I won’t make it to retirement and so I need better advice. Obviously I want to pay off credit card debt, and then do i plunk the rest on my mortgage? Or invest it in a short term thing that I can roll over? It would take 220000 to fully pay off my mortgage. I am thinking that I could drop down my mortgage payment from 1400 to about 700? The extra 700 a month would be good but not fantastic. If I pay off my two cars at a total of 18000 I would have an extra 700 a month and 80000 left over. So, that to me sounds like a better deal. Then plunk 20000 onto my personal debt and free up another 400 bucks a month. If I stuffed that 675 + 400 in a tax free savings account in one year I would have gotten about 12000 saved up again to add to the pot. Then I get nervous and don’t want to spend any of it. Help!

  • Anonymous

    Both my parents passed away about 9 years ago. My inheritance was put in Vanguard where I managed asset allocation investments until a year ago when I retired at the age of 58. Because of the crash in 2008/2009, I did not make as much as I thought I would, but I still managed to make a long term profit of about 16%. Right after I retired, I sold all these investments and then transferred all the money into a discount broker. For over a year, we have been living off stock/fund dividends and make enough to live on and not have to take any money out of my IRA (it is large now since I transferred my work 401K into my relatively small IRA at Vanguard). My brother and sister got the same amount of inheritance as me. My brother just kept it in cash, but my sister put it in real estate and pretty much lost the bulk of her inheritance. What I have learned, since all of this happened, is to carefully save/invest a windfall if you are reasonably healthy. However, if you are not very healthy and/or have a lot of debt over your head, I agree that the windfall should be applied to the medical/personal debt first. By all means, don’t gamble with a windfall.

  • ~Leeanne

    Don’t forget that unless it is an insurance settlement, you need to save part of the $$$ to pay “Uncle Sam” the taxes that you owe on the money itself. Count on paying at least 25% for Federal and whatever you state % is for income tax or inheritance tax. Frankly, if you can pay off your mortgage?? Do it! Wouldn’t you rather have “peace of mind” instead of a tax write off on the interest of a mortgage payment? You save thousands over the lifetime of the loan by paying it off early which is more savings long term than just on the interest alone. Always think “long term” security first. The security of owning your own home outright, especially in bad economic times whereas people are losing homes/jobs everyday far outweighs any other alternative. One less bill to worry about and you will always rest knowing that you have a roof over your head that is yours!

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