Should You Pay off Your Mortgage?

About five years ago we worked with some clients moving to Austin, Texas, from California. We were a little surprised by their choice of mortgage - a 100%, interest-only loan. At the risk of sounding a little backwater, I asked them, "Why would you not want to pay off your loan?" Their answer was, "We both have MBA's." I assumed that meant that they were better informed than I. And, I am sure that was true. But, I still wonder (for non-MBA's), is it a good idea to pay off your home mortgage?

It is true that a home mortgage is still the best loan program available. It has often been referred to as "good debt." But, does leveraging this loan in order to put cash into other investments make sense?

Certainly, the deflation in housing prices in many parts of the country makes clear that there is some risk in this strategy. As the real estate market heated up during the past few years, the expectation was that values would continue to increase quickly, and buyers would be covered, in case they needed to sell. When you could put zero down to buy a home or investment property, and save your cash for other things, why not participate? If people could expect 10% - 30% appreciation and get 6% interest rates, who would turn down the opportunity? A subtle change took place in how we bought homes. Home ownership became speculative. In many cases, buyers did not realize that speculation has a risk factor. No pain, no gain, as they say.

Home prices will fluctuate. We know that from experience. Regardless of the state of the market, most of the expert advice that I have read suggests that, for most people, it is better to pay off their mortgage as quickly as possible. Mortgage debt is a long term burden. There is really no good long term burden. Of course mortgage loans do not have the high rates of credit cards or payday loans. And, the federal government has favored mortgages by making the interest deductible. Nevertheless, a 15 year mortgage is worth considering. It has a lower interest rate, and pays off fast, saving thousands in the long run.

No matter how you look at it, debt free is a nice place to be. First of all, when you move into retirement, you will be in a much better position if you are debt free. You will be able to exercise more control over your savings. Second, when you have a fixed income, you will have less ability to make money to contribute toward paying down debts. And, third, most of us are not able to control the success of our other investments. The stock market has its ups and downs. But, paying down a mortgage offers a clear and predictable return.

Of course, if you have an investment that you are sure will offer a better rate than you are saving by paying off your mortgage, then that might be the best choice for you. Or, if you have high rate credit card loans, then these should take precedence over paying off your mortgage. Homeowners should look at their whole situation before making a decision to work on paying down their mortgage.

But for most of us non-MBA's, the security and peace of mind that comes from being debt free is well worth the effort.