There’s no such thing as stupid questions. But I’m pretty sure I’m about to ask one. When should I pay off my mortgage?
We’ve been homeowners for a while now. In fact, we were just awkwardly introducing ourselves to new neighbors down the street (I later found part of a stick in my hair, don’t mine me!) last week. They asked us how long we’d lived here, and we both shrugged. A few years.
Actually, we’ve owned our home for nearly seven years. Wow.
For the first few years, we simply paid our mortgage. And we called it that. A mortgage.
In fact, I used to call myself a debt-free blogger and tell people that I had no debt. Cue the not-so-humble brag. Then, it kind of slapped me in the face one day.
If you think a house isn’t a debt, don’t pay your mortgage for a few months and see what happens.
After that moment, we’ve really moved at an almost pants-on-fire emergency pace to douse the debt (after maxing out our Roths for the year, of course).
Though I don’t calculate our net worth with any real precision, I do know that our mortgage is set to dip below six figures this year. As our debt drops and our savings and incomes increase (woohoo for doubling my money!), I’m left with one question:
When should I pay off my mortgage?
Camp 1: Pay My Mortgage On Schedule
There’s one camp in personal finance that does math really well. They would look at our situation and say that we’re homeowners for the long haul, so we should let our money go to work in the market. Looking at averages, it is mathematically probable that we would earn more in the market than we would paying extra on our mortgage.
These practical folks are likely to point out that my husband and I are actually climbing through the ranks of the middle class. Eventually, we will knock on the door of being upper class in terms of income. That’s right. One day, I’ll earn six figures. If my students’ decisions to cover their arms with glue during Supervised Study to “see what happens” doesn’t send me to an early grave first.
Wealthy people do some things differently with their money and even their debt. They leverage it. They actually (at least sometimes) take on debt as a means to earn more money. I can’t imagine that kind of lifestyle, bravado, or mathematical acumen for myself, but I can certainly appreciate how the numbers shake out.
So Camp 1 would answer my question to pay off my thirty-year mortgage in…thirty years. That means my mortgage will be paid off in another 23 years by 2042. When Judy Jetson and I are flying through suburbia in our cars.
Camp 1B: Mortgage Recasts and Mortgage Refinancing
The personal finance world is abuzz with people doing successful refinances and recasts of their mortgages. This isn’t making extra mortgage payments on my current set up, but it isn’t sticking with the 30-year plan either.
What is a mortgage recast?
A mortgage recast is basically when your bank creates a new amortization schedule for you based on your new mortgage balance. The payments that you need to make on the remainder of your loan are recalculated. This happens after you make a large payment on your mortgage balance.
Why didn’t we do one?
A recast actually seemed promising, especially because we love making large lump payments when we can. After inquiring about it with our specific lender, the process and the fees (!!!) associated with it didn’t seem worth it. However, I have heard of several people doing recasts where there was a negligible fee. If you have the option, it’s at least worth the inquiry.
What is mortgage refinancing?
Refinancing your mortgage is different than recasting it. It doesn’t just change your payment amounts. You can refinance your mortgage to adjust the interest term and/or the rate. A mortgage refi takes into consideration your home’s current value and your credit score (so, you know, just another reason why you actually really should care about it). There are also fees associated with mortgage refinancing that are akin to the closing costs you might recall from buying your home. The process can be a bit complex, but many people find it to be very worthwhile.
Why didn’t we do one?
This answer is a little bit more complicated. I know people who manage to do refis for very low fees. The fees can also be wrapped into your new mortgage. But the fees weren’t the real reason we didn’t refinance.
We didn’t do a refi because our future is a big question mark right now. Our current loan rate is very competitive because we were incredibly lucky when we bought our home. Scratch that. When I bought our home. Because my husband (then fiance) was willing to swallow his pride and let me buy the house myself, we scored a more competitive rate. And because our timing was so fortuitous, we scooped up our home at a price so low that the tax assessor actually thought we bought a foreclosure or a short sale.
So our rates are good and our future is uncertain. Our 30-year loan gives us a lot of flexibility. The current payments annoy me because there is a sizable amount of interest in them, but I relish the wiggle room. In the event of a job loss (I’ve been fired twice before!) or another maternity leave (they are very expensive!) or some other event, we love the fact that we can comfortably fit the regular payment in our Oh Shoot! Budget.
Camp 2: Pay Off My Mortgage Early
If you’ve followed me on Twitter for even five seconds, there’s a good chance you’ve heard how much I hate my mortgage.
In case you’ve missed it, I HATE MY MORTGAGE.
Six figures of debt feels downright suffocating at times.
For the past few years, we’ve been working to accelerate our mortgage payoff and saving for retirement. That’s right. I’m a big believer in skipping the either/or in finance and doing both instead.
A short while back, we crunched the numbers and realized that even if we never made an extra payment again, we’ve already shaved a decade off of our 30-year mortgage.
That is thrilling. And it’s not the only mortgage milestone we’ve hit recently.
So When Should I Pay Off My Mortgage?
We hit another wild money goal. We actually have enough money in savings to pay off our mortgage.
So why don’t we? For starters, our savings account is kind of a hot mess by other PF blogger standards. It’s our emergency fund, and it’s a mishmash of other short and long-term savings because I am financially lazy and unwilling to distinguish between an emergency and regular car maintenance if and when my transmission goes out. The mechanic is not going to care which fund it comes out of and neither am I. The bill simply needs to be paid.
But even if we decided to pay off our mortgage entirely, we’d still have about $10,000 left in savings. The issue isn’t just that our savings account isn’t properly named, it’s that we really don’t know what constitutes an adequate emergency fund.
3 months of expenses. 3 months of salary. 6 months of expenses. No, 6 months of salary. No, no. A year!
We are less hung up on the math of an e-fund than we are on the psychology of one. Because money is never just about numbers.
The thought of having less money than what we currently have in savings is disconcerting to us. I realize that we could make extra payments incrementally, rather than in one big chunk. One strategy might be to slowly slice away from our savings until the point of discomfort is too great.
That’s similar to what we currently do in fact. But rather than pull from savings, we take from windfalls and side hustles.
But this process is getting tedious. I’m tired of building a tower only to pull down part of it every month to fill up a hole. Sometimes the idea of starting from zero (or $10,000) seems really refreshing. We could take what we put toward our mortgage and double the amount in a year.
But the idea of starting from zero also feels terrifying.
So the question remains: When should I pay off my mortgage?
So Tell Me…What’s your mortgage strategy? What would you suggest we do? You know it’s more fun to play with other people’s money than your own!
Government Worker FI
So many similarities to our situation!! We hate our mortgage. We are close to the 100k mark. We scooped our house up in a recession. We are doing a weird mishmash of paying off our mortgage aggressively and investing. You’re not alone!
I wrote a post a few months ago about how we’re paying off our mortgage on an advanced schedule even though it doesn’t make the most financial sense because it gives us peace of mind. We’re already part way through out 10 year mortgage. So our timeline is quite a bit faster and making extra payments doesn’t really shorten the lifetime of the lone (because the interest payments are small).
But each time we get a windfall or raise we go around and around about whether to pay down the mortgage or invest it and it’s getting mentally tiring, as you say. I can totally relate to everything you’ve said.
It’s nice knowing we’re not alone
It is nice to know that I’m not alone! I think more people are in this position than we realize or are willing to talk about.
Our situation was very similar to yours. We bought our house in 2011, with the market at its lowest, and negotiated it for comparative peanuts because it was an estate the family wanted to unload. Our rate was 4.25 but we refinanced a year in to 3.5 as the costs were far lower than the interest savings. We have serious monthly payments because of the interest and the escrow for our taxes ($6k/year) but I chuck at least $150 extra at it every month in order to shave it down. It’s finally starting to make a visible dent so that the balance drops substantially rather than a few hundred bucks a month. Depending on our savings situation I’d likely pull the trigger on payoff when it reaches half of our savings, assuming they’re at a comfortable level. It’d be purely psychological at that point since without a mortgage payment one should be able to rebuild more speedily than usual. But if I were you that’s what I’d do, just for the satisfaction of kicking it to the curb.
I’m so booooooored, J. This is what happened with our car payments. I had a 0% loan and I eventually just paid the dang thing off a year early because I was tired of chipping away at it.
We moved to a larger, more expensive home because we have a large family and wanted more space (7 of us.) We did put almost 50 percent down and though we had a previous 15 year, we did a 30 year this time. I hate seeing the interest each month and it makes me sick…but we have decided to pay $500 a month extra on the mortgage as well as a lump sum every year. We don’t have car payments or student loans so it’s one thing though I hate seeing, it has taught me patience and I know that retirement comes first as well as us putting some money in 529’s.
We are maxing out my hsuband’s 401K and both our IRA’s as well so the mortgage seems to be the next logical step. We could move at some point so I don’t feel comfortable doing anything too crazy, though we could sell and buy a smaller home with cash and have no mortgage (I have entertained that) but we did move for more space so that would create its own issues.
I love your blog because I have been on a similar path of decluttering, donating, selling and trying to kill the mortgage 😉
I feel like we are on the same exact path! It’s a good place to be but it does get tedious. It’s nice to have some flexibility, though!
Britt @ Tiny Ambitions
We’ve only been in our mortgage for a year, but out attitude has changed a lot since the beginning. When we first bought the house, I really wanted to pay it off early, with lump sums every year. But, I still haven’t looked into how that actually works, so it must not be that important to me. I hate having a mortgage so paying it off early is appealing. But, given where our salaries are at right now, we don’t have a ton of wiggle room if we also want to save for retirement (which obviously we do). I totally understand your feeling of not wanting to go below a certain amount of money in savings, so maybe continuing to chip away at it more slowly makes the most sense? I don’t know, Penny. Mortgages are hard!
Yup! We are in a good spot this year for retirement savings (we’ve maxed out our Roth IRAs). But we could always increase our 403bs.
The real pickle is that the money that we could use to pay off the mortgage isn’t something I’m willing to invest. It’s pretty much either leave it in savings or pay off the mortgage.
We just refinanced. Doing so took us from an FHA loan to a conventional loan. We also have the option to remove PMI once we have 80% LTV. Plus, we shaved off nearly two years by doing it. Our monthly payment is a little higher, but that’s mostly due to the escrow finally sorting itself out.
I also HATE having a mortgage, so I understand where your coming from. I would not be willing to wipe out my sack as to do it though. Maybe if it only took half the savings to do it, I would reconsider.
For now, we decided to make set payments to the principal every year and we’ll increase that amount over time.
Yes! Good for you! We were fortunate to set up our loan with no PMI or escrow.
Yeah. I don’t like the thought of wiping out our savings. But my husband and I both have our jobs for at least one more year (that’s the benefit of contracted work!). So I know we could easily bump it up from $10k to $20-$25K just by saving our mortgage payment if we did take the money from savings.
I think cooler heads will prevail, though. I’ll probably just keep plugging away and grumbling on Twitter.
Penny Pinching Ninja
We had a mortgage for around 5 years before finally pulling the plug and paying it all off last year. We had a pretty unfavorable rate at 5.25%, and in the end it really gave us peace of mind not having the mortgage payment. The financial security of eliminating that monthly expense really helps us sleep at night!
I’ve been currently at the top of my pay scale (thank you one more step to professional designation and a new grid in a couple months!!) so my yearly “raise” is something like $30 a pay check or $60 a month. since thats such a small amount and really doesn’t make much of a difference in my day-to-day life I keep throwing that at my mortgage. I’ve managed to shave 3 years off my total amortization that way without feeling the hit. I do still have some higher interest debt that I will need to pay off before I really get to the “prioritize savings or pay off the mortgage faster” stage.
Id say maybe even pay off 1/2 your mortgage with your extra cash. You don’t fully get down to the bare bones ($10,000) but its a super sizeable amount paid off RIGHT NOW and then keep throwing all your extra monies towards the mortgage to get it off sooner than later. Congrats on your money wins and I wish you the best in whatever you choose to do!
First, thank you for letting me play with your money! This is a fun question to think about.
I think your huge savings account balance is the area of most concern – it just seems like an unnecessarily huge amount of cash. I’m assuming you’re getting 2.2%-ish return on that, and your mortgage rate is around 3.5%-ish? Over just a few years that is thousands of dollars of difference in interest, so I’d prioritize paying down the mortgage as quickly as possible, while ensuring you and your husband are comfortable with the process.
Here’s what I’d do, assuming you’ve got $115k in your savings account:
1) Open a new “deferred maintenance” savings account, and move $15k into it. This would cover car and home repairs, like your mentioned transmission replacement, a new roof or furnace, etc.
2) Pay off $20k of your mortage each quarter. This is the “slice method” you mention. That’s pretty slow, so have time to get comfortable with slowly draining your savings, but you still get the dopamine hit from seeing your mortgage balance drop noticeably.
3) Once your savings account has six months’ worth of expenses in it, stop making the quarterly slice payments. You’ll still have a mortgage balance, but between your maintenance and emergency funds you’ll still have a solid cushion.
4) Assuming your maintenance and emergency funds aren’t tapped for anything, pay your mortgage minimum + the amount you’d divert into savings monthly until your mortgage is gone. I’m guessing that would take about a year or two?
5) If either savings account balances drops due to necessary expenses, priority is to refill those by just paying the minimum on your mortgage until they are topped back up.
This is *such* a good plan! Thanks for the steps!
Never pay it off.
I used to work with a financial services brokerage, and one of our mortgage lenders said he will always have a mortgage. It is a very inexpensive debt that you can use to leverage for investments. It sounds ridiculous to never pay off a mortgage, but long term you could be much further ahead.
Sounds like you have enough equity that you can get a mortgage where you only have to pay the interest on the loan, without paying down the principal.
Structure your payments so they are exactly the same as they are now, but paying only interest. Use the difference to invest. If you get even a 5% return, you will be further ahead in the long run. As your investment balance goes up quickly, the joy will outweigh the grief of not paying down the remaining balance.
The mindset factor seems to be where you are struggling. Think of it is a “business loan” for investing, rather than a loan for your actual home. Think of your home as just the asset the loan is tied to for collateral.
Work out the numbers. The difference is amazing!
Great article BTW 🙂
Yup. Totally get that. Leveraging debt to make more money.
I’ve loved reading your journey and balanced approach to paying down your mortgage. We’re also splitting resources to max IRAs and then also pay down the mortgage. We have a one year old and we’ve calculated that an extra $270/month in principal will get us paid off by her 16th birthday (we’ve been in the house for 6 years already, but only made extra payment starting recently). That’s still 8 years early, very do-able in our current financial situation, and gives us room to breathe too. And pay increases in the future will likely still be split between these goals. My dream would be paying off the house before she’s in high school.
I was hell-bent on throwing as much at my mortgage as possible while not completely neglecting my new SEP-IRA. But I realized that I need to calm down for a few reasons. First, even if my job were in danger, I’d have years of notice (I’d probably just have to take a pay cut) so I could reprioritize at that point. Second, if I can keep the guest house rented, it’ll cover 75-85% (thinking of raising my asking price) of my mortgage. So even if I did lose my job, I’d probably be fine making house payments. Third, I’m way behind on retirement, and I need to take advantage of compound interest while there’s still time to compound. So my focus needs to be on my SEP unless something changes. At which point, again, I can reprioritize.
I think it’s smart not to empty savings to pay off your mortgage. But hey you could always take a little bit and make some even bigger payments to make yourself feel better. Since — and I could be misreading this it was very nuanced — you don’t seem to like your mortgage all that much.
Angela @ Tread Lightly Retire Early
We bought our home a year before you but refinanced a year later, so our mortgage end date is 2042 also… except ours is still 2042 because I’ve only now started to dip my toe into paying more than the minimum. The math part is why I haven’t been focused there, but sometimes it kills me to think about having it around for so long. With our dabbling we’ve shaved *a whole month* off the loan so far, and the remainder is still SO big that we could maybe pay it off in 4-5 years if we buckled down and had no fun and no other savings…. so then I wonder why I’m even thinking about it at all. Ugh. Basically, I hear you. There is so one answer here.
If I could go back, I would max out our tax advantaged retirement savings before doing large amounts of pre-payment on our mortgage. We can’t get that tax-advantaged room back now that the mortgage is gone.
That said, earlier mortgage payments (when your regular payment is mostly paying interest) are worth a lot more than later mortgage payments (when your regular payment makes a big dent in the principal). So just from a mortgage perspective it makes more sense to pay off early and then slow down or stop prepaying later. It is fun to play with an amortization spreadsheet (I like the one from Get Rich Slowly) and see exactly how much money a prepayment will save.
So I guess what’s important is what are the opportunity costs of that money and, like previous posters have said, what’s the risk of not having that large of a cushion in savings.
The only thing that really matters is that you hate having a mortgage and you value being mortgage free. It just doesn’t matter if you can “leverage” your money with investments or play refinancing games when what you want is to be mortgage free. What if you paid it off over two years or even three years? Pay a big chunk of it off now as it won’t completely deplete your savings and it will give you a huge psychological boost in seeing the mortgage balance drop dramatically. You can reassess next year and pay another big chunk if you haven’t had an unexpected financial hit to your savings.
I share your hatred of housing debt and the crazy bag lady living inside of me NEEDS my home to be mortgage free. It gives me a priceless feeling of safety that I won’t compromise on. Hubby could go either way but he understands my need to own our home outright and so we have always prioritized having no mortgage debt.
It is okay to want what you want and make that a priority even if it isn’t the “best” choice for your money. It is probably the best choice for your soul and your peace of mind. Good luck!!
Small Budget Retirement
I love how honest this is. Thanks for sharing!
I can’t wait to pay off my mortgage. I am working on a student loan that should be done by 2019. After that I am snowballing the funds to pay off my rental’s mortgage, which I calculate will take 4 years.
I want to get into two more rentals before 2029. My dilema is always should I wait to pay my rental mortgage or bring two more people on board(Tenants) working for me and helping me achieve those goals?
Not having a mortgage payment is a HUGE relief! You could live with barely any money and invest more. Real estate taxes and interests are a big detriment to your investment potential.
I think that the idea of making extra payments towards the principal is teh way to go. Those make a huge difference in the long run.
I think we are going to keep doing what we’ve been doing. I do have some serious daydreams about deleting that mortgage line from our budget, though! Sigh…
We stopped paying off our mortgage early. Like you, we have enough money in the bank to finish it off, but I see no need to rush it. The money is there in case we need it for some other purpose and in the mean time we just chisel away. But our light is at the end of the tunnel. We refinanced to a 10 year mortgage and then threw extra money at it in the beginning. So we have less than 1 year to go before it’s officially finished. I can’t wait to stop sending $3,000+ to the bank every month!
Max Out of Pocket
Even though camp 1 has the numbers on their side, I sure would be tempted to empty the bank and pay it off if I was in your shoes! : )
We owned a home down south from 2012 – 2017. I vividly recall making extra payments and seeing the impact on the amortization table and how much time it would shave off. These days, we moved back north and are renting with no mortgage. It is a really weird feeling after owning a home so long, but I also enjoy it! We have been pretty conservative with the proceeds from the sale. We will probably eventually buy again and would want to dump that equity into a down payment on new house! Have a good Sunday!
It is so very tempting. I thought that moving $5k would be an easy kind of compromise. But that honestly just made it worse. Now I really want it gone. Maybe it’s time to buy a lotto ticket 😉
We have had this debate for several years in our house! We completely max out retirement accounts yearly, and make that our priority. That being said, we are at a place now that we can pay extra on the mortgage. We have decided on a new plan this last week. We are going to change our focus every year. One year all our “extra” money will go to the mortgage, and the next year all the “extra” will go to investments. This way, we are getting the benefit of both. Also, we do get the tax benefits of mortgage interest, so we see no need to rush it too much.
That’s a great way to balance it out, Jen! I’m glad you shared your approach. Maybe we will borrow that!
I bought my house at the end of 2010, my rate was 4.25% and after 18 months I refinanced to 3.25%.
At the time, a 30 year mortgage would have taken me to 2040, at which point I would have been 65 years old – that TERRIFIED me! So from the beginning, I’ve been making extra payments – my goal has been to pay off the mortgage in 10 years, not 30.
I’m now at the last 13 months of my mortgage – I *could* cash in some investments and pay it off – but I’ve also taken my emergency fund and spent it on a non-emergency but important thing in the last few months – so I don’t feel comfortable cashing in more investments right now.
My car loan (at 0%) will be done in 4 more payments, and then I will use that payment to start putting my emergency fund back together.
I’m SO looking forward to being OUT of debt just over a year from now!
We both had car loans to start, and it was so nice to be able to take those payments and plunk them toward our mortgage once the cars were paid off! So excited for you. A year from now is such an exciting timeline!
Have you thought about the risk/reward of having a small mortgage against a large asset such as your home? If you are going to carry a mortgage on hour home why not carry a large one and invest the money? You can borrow at a better rate against your principal residence than a rental property and can use the money to buy a better priced property during the coming pull backl, for a long term source of income.
Because I don’t want to? 😉
We already max out our Roths, contribute to 403bs, and have a taxable account that we add to as well.
From a numbers perspective, we absolutely should follow your plan of attack. It’s a smart one! I have no interest in owning rentals, though, and the mortgage bugs me psychologically.
It depends on your risk profile and your expectation of stock returns. Stocks are expensive right now, so your expected return may not (or at least should not) be much higher than your mortgage rate if at all, which is why I would throw quite a lot at the guaranteed implicit return from paying down the mortgage. If and when stocks revalue to provide a better expected return then it would make makes sense to then divert more to them.
Yeah, we’re already maxed out for the year in terms of our Roths. We’ll keep adding to our 403bs anyway. The only thing we really bother with in terms of timing is our taxable account.
The money that would go to our mortgage isn’t coming out of investment money. It’s strictly savings.