The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice

August 26, 2009

To pay down or not to pay down?

Filed under: Goals, Mortgage, Personal Finance — Tags: , , , , , — thebalancedspreadsheet @ 2:47 pm

One of the greatest debates in the financial world today is whether or not to pay off your mortgage early or ride the mortgage out for the full term.  There is very passionate debate in the blogosphere world from both sides on this.  There are those like Ric Edelman who believe in never paying off your mortgage, while others believe in paying off the mortgage ASAP.  If you have read our financials goals summary or the full post you know that my wife and I believe in paying off the mortgage, but only after 15% of our pre tax income is going towards retirement.  This plan is similar to the one Dave Ramsey uses.  Below are some points each side makes followed by what my family settled on:

Reasons to keep the mortgage-The main reason to keep your mortgage and not pay it off is because you can invest your money at a higher interest rate.  While most mortgages are in the neighborhood of 4.5-7%, there are many mutual funds that have a long track record of returns greater then 10% annually.  Instead of paying down the mortgage, just invest extra into these funds and over time you will have more wealth.  Another argument made by people who keep their mortgage is that you get a tax write off on the interest paid on your federal income taxes if you itemize.  So essentially a portion of your interest on the mortgage is being paid by the federal government.

Reasons against keeping the mortgage- To sum it up in one word . . . . RISK!  Finding investments that earn greater returns then your mortgage rate sounds great but what happens if when your investment returns go south and your house value plummets?  If it sounds like I am talking about our current housing environment, it is because I am!!!  In the last few years we have seen housing prices plummet all over the country.  By not paying down the mortgage you could be underwater (you owe more on the house then it is worth) and your investments worth about 60% of what they were two years ago.  You get handcuffed because if anything happens to you like you lose your income due to job loss or have health problems and need to move, you will not be able to move unless you can pull off a short sell.

Reasons to pay down the mortgage-Not owing anybody a dime is a felling that I can only imagine.  Paying down the mortgage is a safe, guaranteed investment.  My paying extra on the mortgage it is essentially like a savings account at whatever interest rate your mortgage rate is.  Since interest rates are currently at all time lows, paying down the mortgage is a better “investment” then a CD or money market account.  For those who struggle savings this is a good tool because it is a lot harder to get the money out in equity in your home then to take out money in the bank to make impulse buys.  In addition, once the house if fully paid off there is increased cash flow.  Mortgage payments makeup somewhere in the neighborhood of 25-35% of take home pay for the average worker.  This freed up cash allows them to make other investment as well as enjoy more things.

Reasons to not pay down the mortgage- Having a mortgage is a good hedge against inflation.  I am not going to explain in detail how having a mortgage can be a good thing during periods of inflation.  Truthful lending explains it a lot better then I ever can.  However this is a really interesting point to ponder because most people feel that will all the government borrowing we have had in the past year that inflation is due to occur.

After taking arguments from both sides and comparing the pros and cons, my wife and I decided that paying off the mortgage will be the best thing for our financial future in the short term and the long term.  Being able to walk through our house while having title free and clear will be a great feeling as well as free us to do save more cash which will in turn create more wealth. 

Coming up in the next few posts I will explain our plan to pay off the mortgage sooner.  That will include an amortization schedule, possible refinancing issues, as well as plans that help you pay off your mortgage sooner such as bi-weekly plan and mortgage acceleration plans.

So what is your opinion of the mortgage?  Get it and keep it or get it and pay it off?  Let me know your experiences below.

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11 Comments »

  1. […] reduction of approx ~ $1,750!  I discussed in a post our decision to pay down the mortgage pretty as quick as we can. It is really cool to see the principle reduced by big chunks every month.  At our current rate, we […]

    Pingback by August ‘09 Net Worth update (+6.96%) « Thebalancedspreadsheet's Blog — September 11, 2009 @ 12:43 pm

  2. […] @ 10:56 am Way back when I discussed the topic of whether or not it was wise to pay down the mortgage or not, I promised that I would post our current mortgage debt situation.  Well almost a month later I […]

    Pingback by Expedited Mortgage Amortization Schedule « Thebalancedspreadsheet's Blog — September 17, 2009 @ 10:57 am

  3. […] mortgage, Refi, refinance — thebalancedspreadsheet @ 8:11 am After discussing our plan to pay down the mortgage, discussing my families accelerated mortgage amortization schedule, and things to consider before […]

    Pingback by Should I Refinance? 4.375% w/ 1 point v. 4.75% « Thebalancedspreadsheet's Blog — September 23, 2009 @ 8:12 am

  4. […] refinance my $90,435 6.1% mortgage. You first might want to first ready my thoughts on why we are paying our mortgage down quickly, why to refinance and the reasoning behind refinancing with a 15 year 4.75% fixed […]

    Pingback by Should I Refinance? Part II-The Final decesion « Thebalancedspreadsheet's Blog — September 24, 2009 @ 8:04 am

  5. […] reduction of approx ~ $1,750!  I have discussed our decision to pay down the mortgage pretty as quick as we can before. It is really cool to see the principle reduced by big chunks every month.  At our current rate, […]

    Pingback by September ‘09 Net Worth update (+7.66%) « Thebalancedspreadsheet's Blog — October 9, 2009 @ 12:10 pm

  6. […] triple mortgage payment reduces the principal by ~$1,750!  I have discussed our decision to pay down the mortgage pretty as quick as we can before. It is really cool to see the principle reduced by big chunks every month.  At our current […]

    Pingback by October ‘09 Net Worth Update (+4.66%) « Thebalancedspreadsheet's Blog — November 3, 2009 @ 10:20 am

  7. […] triple mortgage payment reduces the principal by ~$1,750!  I have discussed our decision to pay down the mortgage as quickly as we can before. It is really cool to see the principle reduced by big chunks every month.  At our current […]

    Pingback by November ‘09 Net Worth Update (+4.23%) « The Balanced Spreadsheet-Financial News, Advice, tips, and more — December 3, 2009 @ 10:51 am

  8. […] triple mortgage payment reduces the principal by ~$1,775! I have discussed our decision to pay down the mortgage as quickly as we can before. It is really cool to see the principle reduced by big chunks every month. At our current […]

    Pingback by December ‘09 Net Worth Update (+4.82%) « The Balanced Spreadsheet-Financial News, Advice, tips, and more — January 2, 2010 @ 12:16 pm

  9. […] triple mortgage payment reduces the principal by ~$1,800!  I have discussed our decision to pay down the mortgage as quickly as we can before. It is really cool to see the principle reduced by big chunks every month. At our current […]

    Pingback by January ‘10 Net Worth Update (+1.95%) « The Balanced Spreadsheet-Financial News, Advice, tips, and more — February 1, 2010 @ 11:54 am

  10. […] triple mortgage payment reduces the principal by ~$1,800!  We are trying to pay down the mortgage as quickly as we can and it is really cool to see the principle reduced by big chunks every month.  I have added a […]

    Pingback by February ‘10 Net Worth Update (+6.32%) « The Balanced Spreadsheet-Financial News, Advice, tips, and more — March 1, 2010 @ 9:26 am

  11. […] triple mortgage payment reduces the principal by ~$1,800!  We are trying to pay down the mortgage as quickly as we can and it is really cool to see the principle reduced by big chunks every month.  I have added a […]

    Pingback by March Net Worth Update (+6.23%) « The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice — April 1, 2010 @ 10:25 am


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