Down Mortgage Paying

The reader notes that just about every personal finance guy he has read says not to pay off your mortgage with the idea being that market returns typically, I say typically, exceed mortgage interest rates paid..

Down Mortgage Paying

The reader asks why not pay off all debt and invest whatever little bit is left over. I think the question was prompted by my noting that while people with a lot of money may not worry about having enough in the bank, people with no mortgage and no car payments probably don't have a lot of worries either or Down Mortgage Paying.

This issue comes up in talking to clients. I should note I am the portfolio manager not a CFP, my colleagues at the firm are and for planning issues I consult with them but in terms of just talking the issue comes up. My answer is always the same which is that from a long term numbers standpoint there is no question that paying off the mortgage is the wrong thing. It is like investing at a very low rate. Additionally a $2500 mortgage taken out today will be far less of a
burden in ten years from a cash flow basis than it is now. Think about people paying a mortgage they took out 20 years ago that might only be $800 a month.

That being said I paid off my mortgage five years ago when I was 38 making me a tad hypocritical although I always tell clients this in the conversation. We live in a small cabin we bought in 1998 for $87,000 and the financing situation was such that we had to put $30,000 down. Based on troubles my parent had I was motivated to live modestly, this is clearly rooted in psychology versus reason, have a very low overhead and thus avoid financial stress points that many people grapple with.

We are all motivated by different things and the numbers notwithstanding I think most people need to heed these drivers and act accordingly.

In addition to the numbers favoring investing and maintaining a mortgage there is another less objective drawback to paying off the mortgage. If a person has $100,000 in the bank and $100,000 in debt then they have a decent pile of cash and a small payment to make. Each month they make the payment the debt goes down a little and they still have that pile of cash which allows for flexibility to do many things. If they pay off that debt all at once then the cash is gone, the flexibility is gone and they have nothing.

One last consideration is how many people can pay off their mortgage? Is the average mortgage debt $200,000? I can't imagine raiding an IRA account to pay off a mortgage makes any sense so that would mean taking it out of a taxable account. Obviously far more people have mortgages with close to nothing in the bank than with the ability to pay it all off.

Having no mortgage creates an emotional comfort but in my opinion has no numerical support. Down Mortgage Paying