Early Mortgage Payoff…a Good Idea?

by Neal Frankle, CFP ®

There are real pros and cons to an early mortgage payoff. Some argue that it is not in your financial interest right now. In fact, some say it’s the last thing you should do. They argue you should keep your mortgage and make investments for your retirement. Better yet, go out and get a humongous mortgage.

This argument is based on two realities:

1. Fixed-rate mortgages are really cheap right now.
2. Inflation and interest rates could rise precipitously in the near future.

Let’s take an example to illustrate this.

Assume you have a $200,000 mortgage. You’ve got a 30-year loan with a fixed rate of 4.5%. Say your monthly payments are fixed at $1,013.

Your payments are never going to go up…and that’s the key. Assume inflation heats up. 15 years from now, your payment of $1,013 doesn’t buy what it could today. In fact, that $1,013 will only buy $627 worth of goods and services if inflation rises to 3.2% – the historic norm. So, this argument stresses that your fixed payments cost you less in terms of buying power.

The assumption is that your income will rise with inflation but your payments won’t. (That’s not the case if you rent, by the way, or have an adjustable loan.)

And with that inflation, the outstanding balance on your loan is worth a lot less. While nominally, it will be$132,500, the real value of that money is much less. In fact, the value of that in current dollars at the time will be $82,041.

So why would anyone pay off their mortgage?

There are other considerations — like your emotional DNA. I personally can’t stand to owe any money to anybody — especially on my house. So I don’t really care about the economics of it. I know this is not the best financial decision, but my wife and I decided to do everything we can to get rid of all our debts ASAP. And if you have a concern that you won’t be able to make your payments because you may lose your job or retire soon, you’d want to pay off your mortgage as soon as possible. A mortgage is one of many retirement problems people like to get rid of.

Don’t underestimate the value of this huge emotional payoff. It’s huge. So the bottom line is, from a financial standpoint, it makes sense to have a large mortgage when rates are very low. But from an emotional standpoint, it’s just really nice to be debt-free.

Where do you stand on the issue? Do you want a huge mortgage? Do you plan on taking advantage of possible future inflation? Are you more like me and just want to be out of debt?



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{ 57 comments… read them below or add one }

Ivan May 29, 2014 at 4:26 PM

This is first time I am writting on the blogs about wealth but I simply had to.
I lived in So Cal in Los Angeles area for past 17 years and just recently moved to Henderson, Nevada. I purchased my first home in LA back in Dec 2005 for 375k. I was 26 year old immigrant at that time who came in to this country back in august of 1998. I lived at that home until July of 2013 when we decided to rent it out for 1800 a month and move out of so cal to nevada. We still have a morgage on it for 280k which all expenses are covered with rental amount, but we also managed to purchase another property this time investment property in Henderson, Nevada at the bottom of the market in Sept 2010 for 233k as it was foreclosure. It was not just another investment property needless to say it was a home we could only dream of owning in So Cal, on the golf course, private, guard gated community with every possible ammenity imaginable, 3600 sq.ft 5+3 built in 2008. Now worth close to 400k. Living in California and this being investment opportunity we put 25% down out of 233k and placed it on the market and immediatly got tenants paying 1800 a month for this beautiful home. Mortgage + insurance + hoa + taxes was less than 1150 bucks. Instead of absorbing extra 650 bucks every month we pretended that we dont have it and instead sent every single month since we bought the home these extra 650 towards the principle. Just about 3 days ago our principle was down to 139 k , just about 3.5 years since we purchased it for 233k. Yesterday, I sent the check for 139k plus some minor litle recording fees and have paid off the loan. I am 35 now and dept free exacluding my home in LA which I am not in a hurry of paying off as it is on 3.25 apr and it is worth over 350k at this time and all the costs are covered with rental amount. As we moved here we will be taking over the home after my tenants move out this end of June 2014 and will live in it and enjoy dept free life at age of 35 and combined annual income of 180k +in state where there is no state income taxes. Was any of this smart, I think only time will show and prove it was one of the best decisions we ever made. I am proud that my wife and I did this in such an amazing time frame of only 3.5 years. Only question I have for everyone is do you think it was smart? Do you think this is what real American Dream should be all about? We travel all over the world, drive luxury paid off cars (MB and Lexus), shop smart and only what we need not what we want, own 30 foot livable motor yacht docked in MDR, CA and now will have largest bill of 200-300 bucks probably for electricity. Shall I need to say anymore. For me that is life and belive me if I can do it being from 3rd world country who came to US alone with borrowed 2k dollars trust me folks you all can do it with a little discipline, good work ethic and responsible spending and willingness to be where you have not even dreamed before.
Remember pay yourself first! People first, money second, and everythign else is third!
P.S. I clearly did not want to become another part of statistics in US and have set myself and my family with these goals and have learned how to value money year after year. Would love to hear anyones else story and how they made it. I hold 2 Bachelor degrees Computer Science and Mathematics and my wife holds 2 Bachelor Degrees in Finance and Real Estate. I been working in IT for 15 years and my wife have been working as RE Broker along with full time employment as Revenue Tax Officer.


david June 28, 2013 at 3:07 PM

To pay or not to pay off mortgage.

How much tax can you actually take advantage of ?
About the tax advantage, most people would only get benefit of tax writeoff if it is more than their standard deduction. Last time I check it is 12K, in other words the first 12K that you paid on all the interest and property tax, you do not get the deduction at all, because you would have that deduction whether or not you have a mortgage.

How much cash do you have ?
if you already has over million dollar on investment portfolio and have plenty of cash, that would be OK to paid it off, otherwise, it would be better to keep the mortgage for cash flow purposes.

What is your expected return for your investment ?
Paying a mortgage that is 3 or 4% off means that you are investing with the return of 3 to 4% after tax. if your mutual fund performance is 8% and you only got 3 to 4% year after year, it is probably a good idea to pay it off the mortgage.


Dublin May 17, 2013 at 7:05 AM

All this mention about tax returns has me chuckling. Who cares about a tax write off when the house is paid for? Heres a real world example: You get a $2500 tax return, and $1000 of that is from your mortgage intrest being added to your deductions. Your house payment is $500 a month. 12 months in a year, so you are paying in $6000 a year to your mortgage (most of that towards intrest alone depending on the age of your loan of course). So heres the decision: get back an additional $1000 dollars at the end of the year from your tax return, or pocket $500 over the course of 12 months and have $6000 by the end of the year. Thats a no brainer for me, they can keep that $1000 extra on my tax return and shove it up their ass as far as im concerned, I’ll stick with my $6000 cash in hand and do as I wish with it. Now imagine if your monthly payment was more than that, $1000 = $12000 pocketed by end of year. $2000 = $24000 pocketed by end of year. I mean its that or get a couple thousand more on my tax return at the end of the year (big woop \_o.o_/) I can’t seem to see how paying your house off early is a bad idea. All of the money you pay out a year towards a mortgage can then be put away towards savings or investments. With the house paid off, if you decide to sell at any point after that, all money is profit and cash in hand because you dont have to shell out any money to close out a mortgage that isnt paid off. Why would I want to keep a mortgage and have to make a payment every month, which takes away a decent chunk of money out of my income on a monthly basis, rather than pay it off and keep every penny of the money I worked so hard for. No risk of ever being forclosed upon, no risk after a job loss. All of this just makes sense!!!


Neal Frankle May 19, 2013 at 9:54 PM

You make many good points but I believe you might also want to consider:
a. opportunity cost
b. alternative investment options
c. liquidity

Don’t get me wrong. I loved it when my house was paid off. But I recently decided it was better to have my equity working for me in alternative investments. From a financial standpoint, it’s not so black and white in my opinion.


Kevin March 8, 2013 at 5:31 AM

An interesting study would be to somehow try and measure the non-economic benefits of a paid off mortgage and somehow relate it to economics.

For instance, say we measure stress level from 1-100 and a person rates themselves typically as a 46. Without a mortgage they might be a 42. A four point reduction in financial stress is worth $150 a month.

The figures above are arbitrary, but if a proper study was done it could help people better decide for themselves weather to pay off early or not.

Of course, you could also just pay it off early and if it doesn’t give you that crazy good feeling that many have experienced, then cash-out refinance to whatever level you’re comfortable and try and invest the money where you’re risk adjusted return is better than the interest rate hit on the note.


eric conrad March 7, 2013 at 8:44 PM

Inflation may hurt you if you payoff now but I still say pay it off. Sure you give up a low interest rate that will be higher in the future because of inflation, but your house will also be worth more.


Paul October 28, 2012 at 7:23 PM

I am in year 2 of a refi 4% 30yr note for a 120K mortgage. I am short on retirement income due to div. I am 52 and receive bonus’s most years. I have my emergency fund. Should I pay down the mortgage or open up a roth?


Neal Frankle October 29, 2012 at 3:02 AM

Paul,It would depend on the rest of your savings/investments. Also, are you still working or not? I couldn’t quite make that out.


Carol@inthetrenches July 4, 2012 at 3:25 PM

Had a recent situation I wanted to share and warn your readers about. A family member recently obtained a mortgage to purchase a home. The bank offered her the split the payment option so she pays her mortgage in two segments each month. When this option was first developed it became popular because by doing it this way 7 years will eventually be cut from the timeframe of the mortgage due to the positive effect it has on bringing the interest down so much quicker.

After one year of paying this way she inquired at the bank regarding her payments and was told after much questioning that “NO” the early part of the payment was not being applied directly to the mortgage it was being HELD until the second half was received and then a single payment was made to her loan. Needless to say she was irate! The bank simply maintained her funds to the benefit of THEIR use but did not apply it to the loan amount for HER benefit. It was all a smokescreen from which no benefit was occurring.

This is a significant change to the way the bank handles payments than in the past AND the sales pitch is almost identical so one is led to believe that it is the same program. If you have selected this option with your bank, ASK. You may just be going down another primrose path expecting that your mortgage is being reduced when in fact it may not be.


Neal Frankle July 4, 2012 at 7:08 PM

Carol. Thanks for bringing that to our attention. That totally stinks and may be the grounds for a law suit. If I were the client I would look for a class action lawyer because I think she has grounds.

BTW, on the subject of checking up on vendors, I got an outrageous electric bill this month. I called the company and they checked and found that they had misread the meter – again! This is the 3rd time this year! Always check the statements and the bills. And check your assumptions. Carol. Thank you so much for bringing this up.


Ronald Dodge July 5, 2012 at 8:07 PM

Also, if your bill appears to be significantly lower than expected relative to the time of the year, double check the numbers as otherwise, you could get a very unwelcomed suprise in the following bill with a higher bill amount as being made up for what was missed on the previous bill.


Mortgage Free July 13 2012 July 3, 2012 at 7:21 PM

Well, we took a 30 year mortgage out for $123,000 at 8.0 percent on August 29, 1997. We sat in the parking lot and cried, holding each other and wondering how we would ever make the bi-weekly payment. We added a little bit to the principal each payment, got rid of the PMI quickly, then we refinanced to a 20 year mortgage (from the original date) at 6.125 percent. Now we continued to pay the original amount, said no to the mortgage lady that asked us if we wanted $10,000 to $30,000 more cash than our note balance was (saying no with the idea we would pay it off quicker). We will drive into the bank parking lot in the same spot we parked in and pay off the final $2,000 on July 13, 2012, 14 years 10 1/2 months from the day we took out the loan. Probably cry again (and then open the bottle of Dom Perignon, 1996 vintage, that we have saved for this moment). My wife is 9, my daughter is 10. We started saving for college for her at $100 a month since she was born. We will up that a little now. Drove an 11 year old vehicle and only had a car payment for the wife , which we just paid off. Looked at bigger houses a few years ago, but kept the eye on the prize. We pay ours off the day our friends sign a 40 year note on their new house. We may only have a 1,600 square foot ranch with a two-car garage and an acre of land, but it will be paid for. Pool being installed next spring. Our friends with the bigger houses that are upside down can get postcards from us from around the world as we travel (just went to the Caribbean in February for 8 days). Managed to also save 15 percent of my pay in a 401k for the past 18 years. We could have afforded a much bigger house now (different financial situation than when we took out the note, but kept the eye on the prize). Is it the best financial move? Let me think….. Pay in $11,000 in interest to save $2,000 in taxes (that adds up to a -$9,000 deal to me…. Although I do not claim to be a math wiz). Having a mortgage size that allows you to save for your daughter’s college and retirement at the same time is a great feeling. To pay this off early and seeing the light at the end of the mortgage tunnel is truly priceless. What a life we see ahead of us.

The only mortgage I see in our future would be for a small lake house or small cabin near the ocean…. Nice knowing we could do it. Ah, maybe just rent a REALLY nice one when we want to…. Because we can.

Remember readers….. KEEP YOUR EYE ON THE PRIZE. Anyone can do this!


Mortgage Free July 13 2012 July 3, 2012 at 7:22 PM

Should have read “my wife is 39”


Ronald Dodge July 4, 2012 at 10:13 AM

Very good job on paying that off with a higher interest rate.

For my family, we took out the mortage with a 4.99% stated APR that amounted to $119,130 in June 2005. Today, it’s just under $93,800 and we no longer pay the PMI as I got rid of that last October.

Currently, our financial picture isn’t the greatest given I been on unemployment for the last 14 months and went back to college to finish out my Accounting degree. However, we are in much better financial position than what I was in back in the 1990’s when I was making only $4,000 gross annually with no sort of help from the government other than for the Pell Grant.

The sad thing about all of this, I will have earned a total of 341 quarter credit hours to finally have a BA degree in Accounting, and only 20.5 of that would not have been needed for the Accounting, but rather apply directly to the minor in Information Systems. But then that is what happens when you end up earning 93 quarter credit hours within 4 quarters including working 20 hours a week in the 4th quarter for CO-OP, and graduate with an Associates in Accounting with a GPA of 3.87, which then none of those credits get counted and have to start all over again, and earn another 102 semeter hours from a university (102 semester hours converts to 153 quarter hours), and then due to the 10 year rule, that university would have you start from scratch again, so I ended up having to go to another university, and end up having to earn another 95 quarter credit hours to finally get that degree. Note, there was not a single change in the major, all 3 colleges was with the major in Accounting not counting the fact I also had Accounting in high school that’s would be equivalent to the Sophomore year of college accounting with a couple of courses being in the Junior and Senior years of college for Accounting. Having earned 341 quarter credit hours is equivalent to having been in school for 7 years and 2 quarters. My actual time in college to get this 4 year degree amounts to 7 years even.

As of August, the only requirement I will have left to meet is to get a minimal score of 630 on the GMAT, which I plan on taking in August. Once I meet that requirement, I will then be eligible for taking the CPA exam without even having to graduate in December, which I still plan on finishing up my degree in December. That’s because I am not about to have 15 quarter hours turn into some much larger number just as 18 semester hours turned into 74.5 quarter hours. In case you wondering where the half credit hours is coming into play, University of Cincinnati is switching over from quarters (This summer being the last term to be on quarters) to semesters in August. It’s also easier to speak in halfs than to speak in thirds as one would have to do when converting quarter hours to semester hours. Normally, you must have a master’s degree in Accounting in order to take the CPA exam, but I will meet the requirements via the exception to the general rule.


ann April 25, 2012 at 4:55 PM

I am trying to figure out whether or not i should pay down my loan and is seeking for your advice. 3 years ago, i had one house and had about 13 years left to pay off my loan but decided to cash out to buy investment properties. I was paying about $1600/month for a 15 year fixed rate loan. I used the extra cash to buy 2 income properties. We have been making extra payments every month and also made extra lump sum extra payments whenever we can. Now I am refinancing again to take advantage of the lower rates and to lower my monthly payment to $1550. Now that i am getting income from the two properties, I calculated that each month i only need to pay $300 (mortgage+tax+insurance for all 3 properties included) for this new 30 year fixed rate loan. Now my question is should i continue to pay this loan down aggressively or should i save the money to invest elsewhere. It seems that in most cases it is better to pay off the loan as early as possible, but i think in my case I may not need to since i can count on my rentals income to pay most of my loan for me. I am in my mid 40s so i still have a long way to go until retirement. I would appreciate your suggestions and/or advice on this matter. thank you


Neal Frankle April 25, 2012 at 10:47 PM

What is your question?


ann April 25, 2012 at 11:06 PM

oh I am sorry. I guess i didnt make myself clear. My question is should i make extra monthly payments to pay down my loan earlier or should i save this money to invest in another property or investment opportunities. Is there any thing wrong with just paying just the minimum ($300) each month for 30 years even if i can afford to pay down a lot more?


Neal Frankle April 25, 2012 at 11:13 PM

There are pros and cons. From a financial standpoint, you just have to be very careful of not getting in over your head. I agree that could be a wonderful time to accumulate real estate. But if you build it on debt and then have a problem with finding renters and/or you lose your job, the entire house could come crashing down on you. Does this make sense?


ann April 26, 2012 at 1:47 PM

I think what you are saying is right. I will hold off making other investments for awhile. Thank you

Patti April 11, 2012 at 11:40 AM

I am paying off my mortgage today!!! We had a fifteen year note and refied for another fifteen, but i wanted to be mortgage free in 15 years since our purchase. We did it! We have no other debt and about $400K in retirement and our house would probably sell in the $400s. We do plan to stay in this home–it is perfect for us. I agree, the emotional payoff is HUGE. I am in my mid-40s, we have not children to put through college. I am so glad we made it a priority to be debt free. Now we are going to save the extra money. THAT feels wonderful!


Neal Frankle April 11, 2012 at 3:45 PM

WAY TO GO PATTI!!!!! Congrats! This is really fantastic! I am proud of you. Enjoy the debt free feeling. It’s great.


Angie Wilkinson April 10, 2012 at 8:41 AM

Hi, like you, my husband is a financial adviser, we are very close to paying off our house! Yay! We do believe in the piece of mind it will give us. I also love the fact that it takes a lot of pressure off my husband to HAVE to earn big bucks in the future to support all of us. Our retirement fund has always been a #1 priority and have a good amount saved for college so, since we are doing fine on those fronts, getting rid of the mortgage payment will be very exciting! I KNOW if we weren’t saving enough in our 401K then THAT would be the priority. We are in our early 40’s and looking forward to being debt free!


Neal Frankle April 10, 2012 at 11:40 AM

Angie, that is fantastic! You and your husband should feel proud of yourselves!


Kevin May 7, 2012 at 8:09 AM

Angie, thank you for your reply.

“I also love the fact that it takes a lot of pressure off my husband to HAVE to earn big bucks in the future to support all of us.”

This is SOOOO TRUE. I’m glad you recognize it. Many wives do not understand the socioeconomic pressure on men. We are in our mid 40’s and have now had no mortgage for a year. The emotional capital gained and pressure relief for not having to make a certain income each month indescribable.

Someone may be able to demonstrate on pure face value the economic benefit of a 4.0% mortgage when real interest rates on relatively risk free investments go back to 5%, but it is no comparison when you count the emotional return, decreased stress, and so forth.

There is far more going on here than a simple monetary calculation.


Neal Frankle April 1, 2012 at 3:16 PM

I don’t see the connection. Keep your house paid off Ralph. That is great. I thought we were talking about new money.

But the only people who lost everything in 08 are those that “KNEW” it was never going to come back and stayed out.

I have no idea about the future. Of course you could be right about the next time. That’s why I don’t believe in “buy and hold” but depend on a more dynamic investment plan. It isn’t perfect but it doesn’t subject me to undue risk IMHO.


ralph April 1, 2012 at 3:33 PM

I agree, i do not believe in buy and hold either, but what about all those people who took their money out in 08 because they were not really sure if the market wasn’t going to 2,000?? yes, it was heading there if it was not for the fed bailout. so we have those people who got out at 7,000 and they are the same people who were told in 07 that everything was a ok in real estate, no one wanted to miss out on this great real estate market. i know a couple who got a 780,000 frannie and freddie mortgage in 05 and they has an income of 60 k a year!!!!!! so they are now foreclosed on and most of the other who bought the kool aid, are now way under water, and they also pulled out of the stock market when it crashed. now, new money…..as you were saying….what if people can no longer write off their interest…you must know this is a possibility next year being a financial planner…. so real estate drops more, esp high end and their is no guarantee with all this stim money pumping the markets…c’mon…we haven’t recovered that quickly. we as a nation need to live within our means and paying off our debt is paramount. i feel we should take out the least amount of mortgage and be reasonable about and also careful about investing in the market over the next little while. if not, we face this happening al over again….it will take years and years for this housing market to recover, and people need to learn from others misfortunes and not keep making the same mistake over and over and over..


ralph June 1, 2012 at 8:13 AM

So glad this am that I paid off that 200k mortgage in March rather than buying stocks which were at 13k at the time….can you imagine what that 200k would be worth today if i went into the stock market instead? I am glad i took my “new” money and did something sound with it!


Ronald Dodge July 5, 2012 at 12:28 PM

Yes, that was a very good move as not only did you do much better by doing this, but even if that wasn’t the fact, your primary home should be considered a safe haven, thus it should be free and clear when you can without necessarily hurting other things such as your emergency fund for when other issues comes up.

Items that’s not subjected to inflation risk directly such as the house given other purposes, those items should not be put at greater risk than what they will already be at. Other items like bank accounts, they are directly impacted by inflation risk, which many people don’t think about inflation risk like they think about market risk like with the stock market. As such, with things like a bank account, you must find a striking balance so as to be able to take care of immediate needs, but not to get left behind because of inflation risk eating you alive.


ralph April 1, 2012 at 2:48 PM

I just paid off my mortgage completely. Boy does it feel great to have absolutely NO DEPT. As far as investing the money rather than paying off the mortgage, what happens if we have another crash like 08 or even the 3,200 point drop we just had from aug-oct? Yes the market came back, but it is floated by the fed and could crash again big time. So knowing i have a million dollar home all paid off, it is now going to be part of my retirement in 15 years when i sell it and the cash is all mine! Also, remember that we as a nation have a huge debt problem, no matter who wins in nov, they will take away the interest write off next year, so now we all will be paying twice the amount of our mortgages because of no write off. So it is for these reasons and many more, why i am big on having no debt…plus, you sleep rather well at night!


Neal Frankle April 1, 2012 at 3:03 PM

I am w/you Ralph. It does feel great to have the house paid off. I am not however a fan of predicting the market. You do make good points but more people lose money by predicting and waiting on the side lines than being invested. FWIW.


ralph April 1, 2012 at 3:12 PM

really, ask the millions of people including the senior citizens who lost everything in 08…..we are forced into risk right now and i would rather wait this one out and know that my house will always retain or even grow in value over the next 15 years. sure, there will be a time to get back into the market, but not in 08 and not in aug-oct 2011. the next crash could be even worse….there is a liquidity trap forming and soooo much debt….what if they take the write offs away on the interest. now, a 500k mortgage over 30 yrs will cost someone 1,100,000 and no write off. i was also lucky enough to get out before 08…a lot of my friends were not, and they are also sitting under h2o in their mortgages right now because the house prices have also plunged and they took out big loans on there houses when EVERYONE SAID GET INTO REAL ESTATE NOW!!!!! So they did and bought high and got huge mortgages and put their money into the market…that bubble burst and the stock market crashed and here we are!!!!! yuo know how the story ended and still is…


Chuck July 2, 2012 at 11:51 PM

You make no sense you say you’d rather know that your house wil always keep or increase its value yet you speak about your friends that are underwater…if realestate always kept or increased its value how did they ever become underwater


BoFo December 4, 2012 at 4:32 PM

Simple, Chuck. They became underwater because they thought they could afford more house than they could in reality. He means that over the long-haul the value will stabilize or increase. But if some one bought property valued inititally beyond their means, the whole theory is trashed. Think about it.

Doug Glass June 16, 2011 at 1:26 PM

All the author is really saying is that if you have to have debt, make sure it’s the cheapest debt you can wrangle.

What he’s NOT addressing is the the best debt you can have is zero debt: no interest, no payments … nothing. Since when is it preferable to go into debt in order to “save” money.

If you can pay off your house, do so and invest that monthly sum(minus some for taxes and insurance) and let it grow for you. True, that may be a bit more difficult in today’s economy but it can be done.

Think about it, had you rather your money be making you 2% free and clear or costing you 2.89%. One puts money in YOUR pocket; the other puts money into the bank’s pockets.

Just saying…


Neal Frankle June 16, 2011 at 11:18 PM

I love the idea of being debt free. There is the financial consideration and the emotional issue. From an emotional standpoint, most people I know would prefer to be out of debt — even if it isn’t always the most efficient financial move.

From a financial standpoint, it comes down to alternatives and risks. If your after-tax mortgage expense is 3% and you can earn more than that (risk free) after-tax, you should not pay it off but rather you should invest the money. This is just simple math.

But few important decisions come down to simple math. There are always other considerations. And as I said, from an emotional standpoint, it can really be worth a lot to be debt free. Thanks for your insightful points Doug.


Ronald Dodge June 17, 2011 at 8:50 PM

As for you claiming on an after tax basis with regards to the Effective Annual Percentage Rate (what I termed as ATBEAPR), you assuming the total Itemized Deduction on the Schedule A exceeds Standard Deduction, which for some peoples cases like myself who do have a mortgage on a home, that is NOT the case. As such, the ATBEAPR on my mortgage is no lower than the BTBEAPR. On the other hand, my student loans as a lower BTBEAPR than what my mortgage does, and they are also lowered by tax effect, which means the ATBEAPR on the student loans are lower than the BTBEAPR on the student loans. Even the student loan of 3 with the highest stated APR (3.75%) has a BTBEAPR of 3.82% and an ATBEAPR of 3.51%. The only reason for that, I am allowed to deduct the interest before AGI. Therefore, in this case with the mortgage having a BTBEAPR and ATBEAPR of 5.63% (after adding to this the effect of the MIP/PMI on the mortgage), it makes more sense for me to pay the mortgage down, then maybe do other investing. But then I currently need to pay down the mortgage about another $6,600 to save myself on the MIP of $45.00 or so a month. After the MIP is gotten rid of, it will then drop down to a BTBEAPR/ATBEAPR of 5.11%. I been in the home for 6 years now.


matt cadwel November 26, 2011 at 4:38 PM

I’m 23 years old I bought my first house when I was 18 I’ve been making extra payments to my mortgage since my first payment I just made my last payment this month and going to save all the money I was putting on my house. My mortgage was 5.63% 99000 dollar loan 10% down extra 1800 a month I was paying. I’m lucky I have no other debt. I plan on saving up for a huge home I’m going to pay cash for or at least 50% down. It feels great not to be over my head living paycheck to paycheck. Now what I make is mine not the banks. Good luck to you all I would work towards being debt free its nice. Thanks for reading, Matt


Neal Frankle November 26, 2011 at 8:06 PM

Matt, that is fantastic! What a great inspiration to everyone! How did you pay off your mortgage so quickly? What other tips would you share?

Carol@inthetrenches November 27, 2011 at 7:23 AM

Matt, that is so cool and I think quite possible for others to accomplish if they recognized the potential.

Ronald Dodge November 27, 2011 at 12:59 PM

At the age of 18, I was still in high school. I wasn’t able to get a house until about 6.5 years ago. All I could do then was the 3% down.

I ended up getting the 119k mortgage with 4.99% APR, though had to have the MIP on it. As of last month, I got rid of the MIP on the mortgage. Considering I been unemployed since mid May of this year, that was an accomplishment itself.

Vince December 2, 2012 at 8:24 AM

Just ask Obama and the dems…


Ronald Dodge December 2, 2010 at 3:14 PM

While such concept is true, I look at mortgages, at least on primary home, as not good cause your primary home is a safe haven and as such, shouldn’t have negative things attached to it. I know almost all of us start out that way, which that’s okay, but we should work towards a manner to become debt free. However, that has to be balanced with retirement funding (keeping in mind of the IRS limitations per year for such contributions) and emergency funding (so as you don’t end up in a place between a rock and a hard place when you really do need the cash).

For me, I will first work on getting the mortgage down low enough to get rid of the MIP/PMI, which this year, I accomplished a huge amount of this goal. I am now about 70% of the way there. I hope to finish this goal next year, but given I had to shift gears and start replenishing my emergency fund, it will detract from that goal next year.

After that, I will invest until I get to a point where I can sell the investments with still a healthy backup fund but yet, also able to get rid of the mortgage, so as I can also get rid of the escrow account as the money in the escrow account earns nothing in it.


Andrew September 3, 2010 at 9:13 PM

This is a really interesting analysis Neal and I think it makes a fair amount of sense. I guess the only point to keep in mind is to not take out a big mortgage solely due to expectations of inflation. What if inflation doesn’t play out like you expect (or worst case, there is deflation). In some ways, it’s kind of like a risky investment as though you invested in gold (banking on inflation). I think one needs to be happy with the investment first and foremost, and can see the potential inflation as potential upside. Overall though, this makes me look at mortgages differently as I used to always previously think it made the most sense to pay it off ASAP.


Bucksome September 3, 2010 at 4:53 AM

I’m not going there with you, Neal. This argument is what got a lot of people in trouble (and loose lending of course).

I think home ownership is great for the reasons you mention. However, don’t get the biggest mortgage possible. Get the lowest one that meets your needs. If something unexpected happens, the person can hopefully keep their home while dealing with a lost job or other crisis.


captainkids September 2, 2010 at 9:02 AM

I do like your argument but what if you already have your mortgage paid off? I just can’t see myself going back to a bank


Neal September 2, 2010 at 8:22 AM

Right….while the logic would argue for refinancing and taking out a huge loan to invest, I’d NEVER advise anyone to do that.


chris September 2, 2010 at 7:17 AM

The future is always so uncertain, I’m personally very happy to see my mortgage gone in 12 months time. After that I am more interested in using savings to invest.


Sandy L September 2, 2010 at 2:40 AM

I do like your argument but what if you already have your mortgage paid off? I just can’t see myself going back to a bank and adding that payment back into my life + the few thousand in closing costs.

If I cashed out the $200K in equity, where the heck would I put it to earn more at a guaranteed rate of return?

I definitely like the emotional security of living in a home that’s paid for. Large fixed expenses make me nervous. Reducing that expense is part of my “emergency fund.”

I have almost all my savings outside of the house in stocks, so it is my way to diversify.


Jason210 September 2, 2010 at 6:01 AM

If you own your house of course don’t take more debt! This suggestion is more related to budgeting than an investment suggestion in my humble opinion. for those that have a mortgage, keeping the loan open can be beneficial in a high inflation environment is his only point.

If I was you, i would suggest keeping less of an emergency fund. Having all that home equity, means your need for liquidity is greatly reduced. Whereas most people want 6 months to a year of living expenses, having the ability to take a loan against your home, means you can invest and get a return on more of your money.Don’t open the line until you need it though :) And Hopefully you never will.


JoeTaxpayer September 1, 2010 at 9:08 PM

Here’s how I look at it. The 4.5% mortgage costs me 3.24% after taxes. The DVY (an ETF of the higher Dow dividend stocks) yields 3.67%, or 3.12% after the 15% tax on dividends.
So (I know the dividend 15% rate may go away) I am paying .12% or $120 per year for the potential gain on $100K of these stocks over the long term along with the increased dividends overtime. The chances of the next ten years being flat is minimal, we are now overdue for reversion to the mean, an abnormally high next decade.


Jason210 September 2, 2010 at 5:51 AM

You have to also add in the fact that interest payments are front loaded in a mortgage. This makes the math very complex. Large lump sum payments earlier in a mortgage are much more beneficial than monthly additional contributions. One may also consider the fact that savings from payments to a mortgage are guaranteed much like an annuity. I personally do not believe that hyperinflation is a real possibility for us here in the U.S. it would have to be done intentionally by the fed in order to pay off our debts at a cheaper rate, but it would be so politically unpopular I don;t believe it could ever happen. We would basically be holding a gun to seniors heads if we were to follow a monetary policy which allowed that to occur.


Carol@inthetrenches September 1, 2010 at 11:44 AM

I like it from the following standpoint: basically you are saying that this is the best deal we are going to get on this area of our finances. Now it can be put on the back burner while you work on other goals such as building savings, or paying off other debt. I would suggest that when these goals are reached go back and hit the mortgage again or consider the two week accelerated payments which pay a 30 year off 7 years early. Why? My own experience. I was so close ($15,000) to having my entire mortgage paid off on my home at age 39 and planned to live debt free for ever. Live changes happened and the tab ran up again. To be that close and get knocked back still bugs me. And, I have to admit that I was so close I got complacent. Like in football, being 1st and goal is not a touchdown.


Neal@Wealth Pilgrim September 1, 2010 at 10:07 AM

Thanks Climbing, Nunzio and Penny.

Interesting in that the “answer” to this question changes as the economics change. To be expected of course but something we just don’t revisit.


Penny Frugalista September 1, 2010 at 8:58 AM

While I’m still in the “early mortgage payoff’ camp, this is the best argument I’ve seen against doing so. Definitely food for thought.


Nunzio Bruno September 1, 2010 at 8:46 AM

Great post! I’m with you though I don’t really mind about losing out on future purchasing power I get more utility in knowing that something like that is not over my head longer than it has to be. Nice work referencing hyper-inflation too-people forget that stuff like that really does exist.


Joe Plemon September 1, 2010 at 7:59 AM

I can’t disagree with your assessment, but I am one of those who have low debt tolerance. My house is paid for, so following the tactic of this post, should I mortgage it in order to leverage that fixed payment debt against future inflation? Hmmm.

One thing I know: the chances of foreclosure on a paid for house are zero.


none May 3, 2012 at 4:12 PM

unless you cant pay the taxes


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