Our clients often ask us whether they should accelerate their house payments in order to pay off their house early. Join us as we explore the pros and cons of this strategy.
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The Bass Lines:
How Are You Approaching This Question?
- [00:34] – Usually people approach this question from one of two perspectives. They either want to pay extra to accelerate the process, or they’ve inherited money and want to put it toward their house.
Consider How Long You’ll Be Living In The House.
- [00:56] – If you’re going to be moving in a couple of years, you probably don’t want to pay off your house. Doing so will trap your equity in the house, and you might be better off putting that money in cash. If you’re going to be buying a new house, you’ll want to use that money for a downpayment on your next house.
A Story From Experience.
- [1:40] – I can tell you from experience that paying extra on a house isn’t always a good idea. My first house was in Hillsborough. I bought it when I got married, and it quickly got crowded. While I was single, I paid extra down on the mortgage each month. However, that plan backfired. We decided we wanted to move to Durham, and we wanted to move before we’d sold the Hillsborough house. I scrounged up every penny I owned and put it on the Durham house. I figured I’d replenish that fund with the money from the sale of the Hillsborough house. Unfortunately, that house took eight months to sell. I ended up with two mortgages, and my money was wrapped up in my house.
A Recent Example.
- [3:33] – If you’re not going to pay off your house in the foreseeable future, you might not want to pay extra on your mortgage. For example, let’s say you owe $200,000 on your house, and you inherit/earn an unforeseen $75,000. You could use this money to bring your balance down to $125,000 on the house, but you still wouldn’t be close to paying that house off, and your money would be all tied up. Furthermore, you definitely don’t want to pay that money into the house without refinancing.
When Should You Pay Off Your House?
- [4:19] – Let’s suppose you have seven years left on your mortgage, and you’re planning to retire in five years. If you pay that house off when you retire, you’ll need less retirement income (because you no longer need money to pay your mortgage), and your tax burden will drop.
- [5:18] – Let’s suppose you never want to pay off your house. Instead, you want to keep your payments as low as possible. If you’re mortgage payments are high, but they’re not getting you within striking distance of paying off your home, you could refinance, lower your payments, and save a lot of money. “But John,” you might say. “We’ll never pay off our house now.” Precisely. That’s the point. You’ve lowered your payment and you’re saving money, so it doesn’t matter whether you continue to pay on it. Of course, we wouldn’t usually suggest this option, but it could make sense in select scenarios.
- [7:22] – Some people in the industry always suggest the previous option. They argue you’ll get a better return on your money in the market. However, there’s a lot of value to having peace of mind, and if you’d rather have the security of knowing your house is paid off, then don’t get sucked into the financial talk.
What About Younger Folks?
- [8:21] – Maybe you’re a homeowner, and you’re not anywhere close to retiring. You might want to consider keeping your money in cash in order to provide you with liquidity as you purchase your next house. Let’s say you think you’ll be in the house for another ten years. If you’re not positive you’re going to do that, consider saving and investing that money on the side. While you do that, earmark it for a home payoff. If you move, great. That money is liquid, and you can put it into your new house. If you stick around in your current house, you can always take that money and use it to pay off the current house. Just don’t do that until you can pay the house off altogether.
Don't jump to conclusions about paying off your house. Do your research, and do the math. Determine whether it's better to keep your money liquid or put it toward your home. - Mr. Stillman's OpusTweet This