Weekly Newsletter   Challenge account


Should you pay your mortgage off quickly?

BoyYou probably found an army of people telling you that you should use all of you spare money every month and pay more than the minimum to pay your mortgage off as quickly as possible.

You probably found another army of people telling you it a bad idea. Mortgage is a good debt, right?

So should you pay your mortgage as fast as possible paying additional cash towards your principle?

Of course NOT!!!!

Don’t act like a sucker!

What makes you think it is a good idea to pay your mortgage fast? Why would you do it?

Unless your interest rate on your mortgage is 8%, 10%, or 12% APR it is a very, very, very bad idea!

Your mortgage is the lowest loan possible. Let’s take a look at my mortgage. My mortgage sucks. It was expensive, I am under water, but I recently refinanced and my APR is at 3.5%. Can you see it? Let me repeat:
 

3.5%

 

My mortgage sucks and yet paying it off is a sucker’s game which I will never play

Boy and moneyI have 30 year fixed FHA loan at 3.5%. It was a good deal. I paid very little down, I had a great equity, just before the crisis wiped it out and now I am stuck with monthly payments to a property which doesn’t have that value. But that’s a different story. The point is, I pay almost $1,700 a month on mortgage payments (PMI and taxes included) and I want if someone can explain to me, why I should take an extra $100, $200, or $500 a month to pay my mortgage off faster when I can do a lot better investing my cash.

My investments can make more money, why give up almost 9% APR?

Just take a look at my latest interest or return my current investments are making. For example my investments in Lending Club are making:
 

 

OK, I admit that the NAV provided by Lending Club is not an accurate measure to tell how much I am actually making. So let’s reword it.

My latest interest or return my current investments are making:

 

 

The number above came from my spreadsheet and calculated XIRR (or internal rate of return) on my current investment with Lending Club. It is more exact number, but still larger than what I pay to my mortgage company!

My dividend growth stocks bring more than 5% in dividends and wait for YOC 15 years from now!

And my stock investments? They bring in 5.4% in dividends. And since I invest into dividend growth stocks, many of them will increase that yield on cost several fold. Ten to twenty years later that yield can easily be 10% – 20% YOC. I don’t have the 10 YOC calculated, unlike some other fellow bloggers and investors who regularly calculate their YOC, so those numbers are just estimate.

Why, if I can make more by investing, should I or you pay my or your low-interest mortgage off with spare cash?

Why is it a bad idea to give spare cash to your bank

If I take $500 monthly and pay it to the bank against my principal, what do I save? 3% of my current rate?
 
 
lost money

  • Once paid you will never see that money back again.
  • In financial hardship can you ask the bank to postpone your next bill since you just prepaid? Yeah, try it. I can already hear their laughing.
  • If you lose job, how do you plan continuing your monthly payments? Who would get foreclosed first? You with a lot of equity and low debt or me who has the property mortgaged to the tilt? I bet they will try to negotiate with me while you lose your house.
  • You lose money. At least 9% will be forever lost. And do you remember the story about compounding, right?

 
 

Why is it a better idea NOT to give spare cash to your bank

Ok, and what if I take my $500 monthly and instead of paying it towards the mortgage I invest it with Lending Club? Do you want to know how long it would take me to save enough to pay the entire mortgage with that savings?
 
 thumbs up

16 years!!!

 
 

In 16 years I’ll save and compound enough to have $287,810.99 which is my current mortgage loan. Try it for yourself with this calculator.

If I pay $500 every month towards the principal, I will be able to pay the entire mortgage off in 18 years! Booo!

Paying more money to the bank will not speed up my mortgage payoff? What the heck!

What the heckI told you it is a sucker’s game. Saving and investing money will allow you to pay the mortgage 2 years faster than paying it to the bank. Plus you get the following benefits:
 
 

  • If something goes wrong, you have huge financial reserves available
  • If you lose job, you will have enough money to continue monthly payments without being foreclosed
  • Once you pay enough on mortgage you can pull the equity out of your house and invest it. That will allow you to pay your mortgage off even faster.
  • 16 years later you can decide whether to pay the entire mortgage off or continue paying regular payments and saving spare money. A great freedom.
  • As said above, you are the one who controls the mortgage, not the bank.

 
 
And don’t argue that investment can lose value. In 15 year period dividend growth stocks won’t lose it. I can guarantee it to you. However, if you are a bad and inexperienced investor, use mutual funds. If you are a sucker, then pay it to the bank since this method isn’t for you.

So should you pay your mortgage off with extra money? If your interest rate is 3.5%, 4%, 4.5% or even 5% forget about it. Or do you have another reason why to do that?

 





5 responses to “Should you pay your mortgage off quickly?”

  1. […] HelloSuckers had an thought provoking post on the pitfalls of rushing to pay off the mortgage. It certainly caused me to stop and reconsider our strategy of aggressive payoff. […]

  2. […] Should You Pay Your Mortgage Off Quickly – This is an old oft brought up question and I like hearing others thoughts on it.  Martin at Hello Suckers gives his thoughts and I tend to agree with him.  I have a low interest mortgage and prefer to buy up quality dividend growth stocks looking for a higher return compared to early payoff of my mortgage. […]

  3. Integrator says:

    This is an interesting post, and I tend to agree that keeping low interest debt that is tax deductible and applied toward generating wealth makes sense. I guess it depends what other debt commitments you have outstanding. We don’t have any other material debt, we’ve got substantial assets tied up in equities, so excess cash gets deployed to pay down the mortgage. You’ve made me pause to think whether this is the right thing to be doing.

  4. […] Hello Suckers asks whether you should pay off your mortgage early. […]

  5. I think it’s essential to pay off your residence mortgage before you retire. But other than that, just drag it out.

    When you are retired, you want to have as little expense as possible. Then you can keep your income level low to pay less tax.

    • Martin says:

      Definitely! But before that paying it off is a nonsense. If you diligently save and invest, you should be able to pay it at the time you retire easily and have something left. Bud many people aren’t able to do that. I have seen many taking equity loans and spending it on vacations or new cars… These type of people aren’t able to manage their mortgages and end up in trouble.

  6. This is a timely post as I’ve just paid down my investment property mortgage solely to eliminate the PMI. I will post about it this weekend. PMI should be eliminated by September. It was something I was able to do within a short amount of time, two months. It will free up about $50/mo in extra cash flow. I’ll then be comparing three investments: Paying down the remaining mortgage, buying a solar system or buying a 3rd rental property.

    • Martin says:

      I was thinking about it as well, and that makes sense to pay down to eliminate PMI, refinance to a regular loan but then drag it as long as possible.

Leave a Reply to midlifefinance Cancel reply

Your email address will not be published. Required fields are marked *