The largest monthly expense an individual or family has in the United States is their housing costs. I am no different. My house in the Midwest is $589 a month. This amount is only the mortgage, it does not include property taxes or insurance. If I include property taxes and insurance my housing costs increases an additional $387 a month. The total sum of my housing comes to $976, a total that is just shy of a fourth of my take home pay.
| Mth. Mortgage | Mth. Property Tax | Mth. Home Insur. | Mth. Total Housing |
| $589 | $333 | $54 | $976 |
I am five years from paying off my mortgage free and clear. However, should I accelerate my payments to rid myself of the monthly burden? I’ve asked myself this question countless times. I’ve researched, read books, read articles, listened to countless podcasts, and asked family and friends their opinion. I’m going to flush this dilemma out a bit in this blog and share a few of my arguments for and against this financial maneuver.
Pros
1. Peace of Mind
2. More Monthly Cash Flow
3. Fixed 3.5% Savings on Interest
1. Peace of Mind. My pros definitely lean more psychological. The first positive to paying off my mortgage sooner rather than later is peace of mind. If I know that I own my home outright that is a huge weight off my shoulders.
2. More Monthly Cash Flow. Another positive is I’d have increased monthly cash flow. Over $500 more a month that I would normally be putting towards my principal of my mortgage could be placed into saving and investing accounts. I feel like this action of paying off my mortgage would allow me to have a keener sense of focus on my other financial goals.
3. Fixed 3.5 % Savings on Interest. And, my last major positive would be a fixed return of 3.5% on the remaining principal of my home. There would be no fluctuation in that return and no risk like many other investments. Granted, that return is less than half the percentage that I may be able to average if the stock market could produce i’s historical 7%-10% return, but remember this is a fixed rate and there is no risk associated with this return. I’ll come back to this topic later in my negatives of paying off the mortgage early.
Cons
1. Loss of Liquidity
2. Potential Reduction in Returns
3. Impact on Credit Score
Now the flip side of the argument; the reasons not to pay off my mortgage early are equally compelling and focus more on mathematics and numbers.
1. Loss of Liquidity. If I would pay off the balance of my mortgage early it would leave my emergency funds not totally depleted, but a considerable amount of my liquidity would be reduced. Life is not certain and curve balls and obstacles always come our way. Having enough liquid cash on hand to battle those uncertainties has a peace of mind all its own. So would I be robbing “Peter to pay Paul” if I took extra money out of my liquid cash to pay off this debt? I could quite possibly be putting out one worry merely to add to another worry down the road.
2. Potential Reduction in Returns. Secondly, if the stock market has averaged 7-10% returns in the last hundred years is only receiving a 3.5% return really a smart move? Most mathematicians would say I’d be crazy to cash in on 3.5% of a fixed mortgage interest rate if I could return a higher yield of 7-10% in the stock market. Although the certainty of the fixed interest I’d be saving should hold more credence than an assumed or expected higher return I may or may not receive in other investments.
3. Impact on Credit Score. One other tiny consequence of paying off my mortgage will decrease my mix of credit and could lower my overall credit score; albeit a very small amount. However, at this point in time or the foreseeable future, I do not anticipate any large purchases where my credit score would factor into a borrowing situation.
Of course there are plenty of other arguments for and against the action of paying off your mortgage sooner than later. I’ve only scratched the surface and discussed the ones that have the most impact on my thought process. I haven’t come to a full conclusion on whether I’ll take money from my liquid accounts and pay off my number one monthly expense, but when I do I’ll keep the blog up-to-date on my decision.
~ Quiet Turtle
Quest for Fi 