Paying Off the Mortgage Early

“Paying off the Mortgage Early”–it’s an idea with obvious appeal, but not one that many middle-class workers pursue. The reality is that it’s often a better idea than much conventional money management advice suggests.

Many money advisers are less than enthusiastic about the idea of paying off the mortgage early. I think they are wrong. It is certainly true that there are circumstances in which it makes sense not to do so. If your interest rate is so good that the bank just made a bad bet in giving you that low rate, you might want to continue enjoying the benefits as long as possible. In many other circumstances, paying off the mortgage can be a fine money management move indeed.

Reason #1 — It Provides Peace of Mind.

Even conventional money advisers acknowledge that there is a peace of mind that comes from paying off the mortgage early. Unfortunately, they often speak of the peace of mind gained as if it is something that shouldn’t count for much in the minds of those who are smart enough to run the numbers before making their financial decisions.

Paying Off Mortgage Early

I disagree. We all spend money all the time to gain access to good feelings–the excitement that comes from riding a rolling coaster, the connected feeling we get from making a donation to our favorite charity, the ego boost we obtain from sitting in a car that shines after its trip through the car wash. The peace of mind obtained from paying off the mortgage comes at a higher price than most feel-good purchases. But the good feeling we obtain from making this choice lasts a long time. I say that peace of mind is worth a lot, and those who know that they would feel a lot better about their futures if they didn’t have a monthly mortgage payment to make should give serious consideration to the idea of paying off the mortgage. Feeling good about your future is worth a lot.

Actually, peace of mind is not the only good feeling that can be obtained from paying off the mortgage. Another good feeling that comes from taking this step is the feeling of being in charge of your finances. Many of us often think of doing something to improve our financial picture, but fail to act on those thoughts. Pay off the mortgage and you have done something concrete and tangible. You will have made a difference and you will know it. That may give you confidence to take a good number of other money actions that also need to be taken.

It’s not the norm to pay off the mortgage early. So you will also feel liberated from conventional thinking if you take this step. That also can be a big plus. Pay off the mortgage, enjoy that benefits that flow from doing so, and you will begin thinking of yourself as the money expert that knows the most about what is best for You, Inc. You are! Effective money management requires a certain willingness to engage in independent thinking, and even the fact that you are considering the idea shows that you have what it takes. Going ahead and taking the plunge will confirm for you in your own mind that you are one of those willing to go your own way when necessary to make financial dreams come true.

Reason #2 — It Reduces Costs of Living.

What is the core thing you must do to obtain financial freedom early in life? You must reduce your costs of living. Paying off the mortgage early reduces costs in a number of ways.

Most importantly, it does away with interest costs. If you are like most middle-class workers, interest costs are a big item in your monthly budget. You have to live somewhere. So it is not realistic to think that you can do away with housing expenses altogether. But you do not have to pay interest costs. Those are an add-on imposed on those who elect to borrow. Elect instead to pay off the mortgage, and those costs disappear into thin air. Nice!

If you are not in a position yet to pay off the mortgage altogether, you might try paying off just enough to eliminate mortgage payment insurance costs (PMI). Doing that will allow you to enjoy in a smaller way the magic trick of making costs of living disappear and may encourage you to take bigger steps somewhere down the road.

Reason #3 — It Diminishes the Fear of Job Loss.

One of the biggest fears that trouble middle-class workers today is the fear of job loss. Money advisers tell us to put six months of living expenses away to cover emergencies. But don’t you worry at times that in the event you really do experience job loss that that will just not be enough? What if you paid off the mortgage, and no longer had to make those monthly payments? In those circumstances, the prospect of a job loss would not cause nearly as much worry.

Should I Pay Off the Mortgage Early?

There are lots of spending categories that you will be able to cut back on if you lose your job. You don’t need to go out to eat as often as you now do. You don’t need to take expensive vacations. So there are places where you can cut back if so required. But you have to make the mortgage payment, don’t you? So that one is the real source of the worry over job loss. Do away with that one, and you have to a large extent addressed your concern over what will happen to you financially if you lose your job.

The other side of the story is that paying off the mortgage early is a celebratory event. You have heard stories from the old days about people burning their mortgages, right? There was a time when the dislike of debt was such that people made a fuss over eliminating it, as they do when they make a fuss over wrapping presents for the birthdays of their friends. We need more of these sorts of celebrations to mark the progress we make in the money management area of our lives. Don’t look at paying off the mortgage just as something you do to escape worry. Look at it as something you do because you like the freedom that comes from no longer needing to make payments to the company store. Celebrate the financial freedom win you experience when you reach the point where that monthly mortgage payment is no longer one of the items on your list of Bills That Must Be Paid.

Reason #4 — It’s a Saving Goal That Provides Strong Motivation.

The conventional saving goal–financing an old-age retirement–is not a goal that generally provides the motivation we require to actually take steps to move money from the spending column into the saving column. It is short-term saving goals that work. Paying off the mortgage early is a short-term saving goal (at least compared to financing an old-age retirement). Make a decision to pay off the mortgage, and you will begin to think about how much you will enjoy reaching the goal. Your anticipation of the good feeling to come will cause you to save more than most middle-class workers think is possible. Motivation matters.

Reason #5 — It’s a Marriage Strengthener.

What cements a marriage is the things you do together, the things you accomplish over time by combining the power of the different skill sets possessed by the two marriage partners. Don’t you feel good about your spouse when you work together to make a good purchase of a new piece of furniture, first doing some research, then talking over pros and cons of different options, and finally making a decision that you know is the right one? Going through that sort of process helps one spouse appreciate the good things that the other spouse brings to the partnership.

Paying off the mortgage early is a long-term project that requires the use of a variety of different skills. You are going to need to make numerical calculations to determine where you stand. You are going to need to make decisions to cut spending in other areas to come up with the money needed to double up on mortgage payments, and so on. At the end of all this, you will feel like you climbed a mountain together. On the day the final mortgage payment is made, it will feel like you are at the top of the mountain looking out at an awe-inspiring view. You will reach to your spouse and want to hold her (or him). You will love her (or him) a little more than you did before you embarked on this adventure together.

Reason #6 — It Highlights the Benefits of Financial Freedom.

It was our joint decision to pay off the mortgage early that convinced my wife Boo of the merits and feasibility of our plan to seek financial freedom early in life. In my case, it was a job loss that got me thinking about this stuff. But I would not have made the progress I did in the time I did without an awful lot of help from her. It was the mortgage pay-off that got her on board.

Why? Because she needed to see something tangible to understand that financial freedom really is attainable to middle-class workers early in life. I had talked to her about financial freedom many times and the words were just words. When she reached the point when she no longer had to make out a check to the company holding our mortgage, that was not talk. That was real. From that day forward, she was a believer. That made a big difference.

Reason #7 — It’s a Safe Investment.

Money directed to paying off the mortgage early pays a highly predictable return–the reduction in interest expense achieved by doing so. At this time of overvalued asset classes,  that’s something not to be overlooked. You know you are getting a nice return on your investment when you use it to pay off the mortgage.

Reason #8 — The Tax Deduction Is Often Oversold.

Pros and Cons of Paying Off the Mortgage Many do not pay off the mortgage early because they do not want to give up the tax deduction available to those who make mortgage interest payments. That’s an important concern. The reality, however, is that many do not obtain as much benefit from the tax deduction as much conventional money advice might lead them to think. If you do not itemize your deductions, you don’t get the benefit. If you are subject to minimum tax rules, you might not obtain the full benefit. You need to check your circumstances to see if the availability of the tax break really justifies a decision not to pay off the mortgage.

Reason #9 — It Fosters a Low-Spending Mindset.

We all rationalize spending in this Consumer Wonderland of ours. One way we rationalize is to compare the costs we incur with a new expense with the other expenses we are incurring for other things. Did you ever find yourself saying “Yes” to a $3 charge for a bottle of water because it is being offered at a baseball game at which you have already incurred a big expense for tickets and for parking and for food?

It’s harder to get serious about cutting back in other spending categories when the amount you spend on housing is so high. Pay off the mortgage and all of those other “small” (compared to the mortgage) expenses begin to look not so small afterall.

Reason #10 — It Simplifies Money Management.

There are all sorts of complexities involved in hanging on to a mortgage. The most important one is that the big number in your budget category for housing expenses makes it hard to keep a firm grasp in your mind on how much you need to earn to keep body and soul joined another month. Get the total monthly number down, and the entire money management project becomes a lot more, well, manageable.

Is the peace of mind (and all the rest that goes with it!) that comes from paying off the mortgage early one of the New Luxuries made avaiable to middle-class workers of today as a result of the Productivity Bonus we have all enjoyed in recent decades? I say yes.