There are many good reasons not to pay off your home mortgage right now. Interest rates are ridiculously low, so you can do better investing. It is good to have a big emergency fund so that you don’t need to reach for the credit card if you need to replace a vehicle or have a trip to the emergency room. Maybe you like to get mail from your mortgage company. Maybe if you didn’t have that payment, you’d just blow it at Wal-Mart anyway.
A really bad reason that I’ve seen in a few places lately, however, is that you are then “putting all of your money in real estate” and therefore are not diversified. For some reason, people feel that they “own their home” even when they’ve put nothing down and have 30 years to go before they have it paid off, yet they feel that they are somehow putting more into their homes when they have equity than when they don’t. Here’s some news – whether you pay the loan off early or not, as soon as you sign those papers and agree to the mortgage, you have just invested the whole value of the home in real estate.
This thinking got a lot of people in trouble during the real estate bubble. People thought that because they only put $5000 into the loan, they weren’t taking a big risk even though they were buying a $500,000 home. In some cases, they bought ten $200,000 homes for $20,000 this way as “investments.” They soon found out, however, that they could lose $100,000 or more even if they only put $5000 down on the table. This is called leverage, which is always a factor when there is a bubble in the prices of anything.
OK, granted, if you have $100,000 in stocks and have a $200,000 home with $100,000 in equity, you are more diversified than you would be if you sold the stock and paid off the home since then you’d have only your home even though your net worth would be $200,000 in either case, so it is technically true. But how many of us would take out a $100,000 mortgage on a paid-for home to invest in stocks? There is something about having your home paid-for that brings you peace. When possible layoffs are announced, you think at least I’ll have a place to live while I look for another job and could cut expenses down to something like $500 per month if needed.
The other thing about paying off your home is that it frees up all kinds of cash and cashflow. Without a home loan, you can put $1000 or more into stocks each month. At that rate, you would have a large portfolio built within just a few years. You also get to make interest rather than pay it. Granted, at 10% you would be paying about $20,000 per year in interest for the first several years of the loan on a $200,000 loan, while at 4% you’re only paying $8,000. Still, that $8,000 saved is somewhere between 200 and 400 hours of work for many of us. That’s a month of two of work just to pay the interest for the year. Wouldn’t you rather be investing that $8,000?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.