Dinks Choice: Pay off your mortgage or save your money?

by Kristina on December 16, 2013 · 8 comments

Tree houseGood morning Dinks. As a financial planner one of the most frequent questions that I am asked by clients is “Should I save for retirement or pay off my mortgage?”  The easy answer is you should do whichever options saves you more money or makes you more money. But the truth is that it is a much more complicated question than that.

Both options have their advantages and disadvantages and as with everything in financial planning there is not one answer that applies to everyone. One option can save you a lot of money on interest charges and the other option helps you save money that you can use on other goals such as going on vacation.  You answer to this always outstanding financial question depends on your personal financial situation because just like with everything in financial planning there is no one right answer for everyone.  If debt drives you crazy then maybe you should pay off your mortgage, but if have other financial goals then maybe you should save money on a regular basis.

If you and your spouse are deciding whether to pay off your mortgage or save money ask yourself these three questions:

Which option is in line with your goals?  Maybe your couple’s goal is to save money and take an exotic vacation every year.  If you don’t have enough free income to save money and make extra payments on your mortgage you will have to prioritize your goals.  I love travelling and I honestly believe that people will most likely have some type of debt throughout their life.  So I prefer to save money and go on a couple really great vacations every year and keep my debt at a low interest rate on my mortgage.  If I can keep my credit card payments to a minimum, keep my debt limited to a mortgage and travel to new places I will be a happy camper.

Which option is better for your mental health?  Some people just can’t sleep at night if they have debt; if that sounds like you then your goal is probably to pay off your mortgage as soon as possible.  I always love reading about people who increase their monthly mortgage payments, double up on payments and take advantage of the prepayment option.  I always think to myself “WOW those people are really disciplined.”  I personally don’t want to sacrifice my lifestyle just for my home but I have to admit that it would be nice to be 40 and not have to worry about making a monthly mortgage payment.

You can always do both.  With the right financial planning you can save money for other financial goals and still make payments to pay off your mortgage as quickly as possible.  Maybe you can increase your regular monthly mortgage payments to help pay off your mortgage sooner and at the same time save money for your other goals.  I am a huge believer that we can achieve multiple goals at the same time if they are realistic.  Maybe you can’t afford to pay an extra $20,000 on your mortgage every year, but that doesn’t mean you can’t afford to pay $10,000.

Do you prefer to save money or pay off your mortgage?

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{ 8 comments… read them below or add one }

1 Brock @cleverdude December 16, 2013 at 8:19 am

I’m a big fan of doing BOTH. I like to see my mortgage balance go down….AND see my savings go up! :)

2 Kathy December 16, 2013 at 9:08 am

Last January we made the decision to pay off our mortgage in full. We had a chunk of money and used it to pay off the house. It wasn’t the wisest choice financially because our interest rate was only 4% and with a lot of searching we could have found a few investments that paid higher dividends or interest. However, from an emotional point of view, it was the best thing. It is a wonderful feeling to know that the house is all yours and no one can take it away as long as you pay real estate taxes on it. AND we are putting the monthly payment into our savings/investment accounts so we are actually accomplishing both.

3 Scott December 18, 2013 at 9:35 am

I struggled with this for some time as well. The thoughts re: my mortgage came from the sting of the Great Recession. If I owe $300K on my house and I push to my acceptable limits in paying down the mortgage say to $200K but at that time the bottom drops out of the market and my house value drops to say $215K – in essence I have thrown away $85K.

Though I personally was able to stay above water I realized that my house didn’t really have a true value that I could count on in the short to mid term . So my decision has been to reduce other debt, save the extra payments I would make in an (almost – unfortunately) no interest account and be able to make a single massive principal payment for when the market is fixed and I see interest rate changes going up that personally affect me.

For all of us – the extra money is hard to come by – and I cannot abide simply sending it in yet seeing my house value plummet. I would rather keep my other debts low to non-existent and have the ability to pay it if I need it

4 Petra December 18, 2013 at 4:06 pm

@Scott

I tend to disagree with your way of thinking.

When your house’s value is going down (according to the market), that’s all the more reason to pay down your mortgage, so that you will not be underwater and can refinance if possible and benificial; or so that you can sell the house and move without suddenly having to find $15k or $50k to make up the difference between what the house sold for and what the remaining mortgage is.

Maybe it wasn’t smart of you to buy your house for that much, when you bought it, but currently that’s a sunk cost, and there’s nothing you can do about it anymore. You still owe the bank whatever is remaining of your mortgage, so why not start paying it back, if your mortgage is the debt with the highest interest rate that you’ve got?

5 Scott December 19, 2013 at 1:46 pm

@ Petra – I struggled earlier with thinking this same way, and in fact you may still be correct – for me what I am now doing goes against my earlier thinking. But in reading your comment I’m uncertain that you are taking into account what I said (no offense meant just can’t completely tell from your response).

What I am doing is accumulating cash on the side as well as paying down other debts. This gives me flexibility should I need it. My interest rate on the mortgage is an ARM currently at 3%. So part of me wants to pay it while the interest is low but in this economy today I don’t know if I’m next on the chopping block at my company (unlikely but always possible). So if I save $50K for example and it is in an easily accessible account should I get canned I am not as stressed because I have some living expenses (above and beyond emergency fund). Or should the economy recover to where my interest rate readjusts to 8% I can pay the entire $50K to the mortgage and open enough room to refi.

Now looking at worst case possibilities (e.g., an even more major downturn) I can shed my house if need be so long as I’m willing to accept the consequences, but for example I can never shed my student loans – so I have focused on paying them off and accumulating cash as well.

My specifics on the house are not that I overpaid but I did have to get second to get necessary updates if/when I need to sell. As I mentioned I am still above water so if I sold I would be ok…maybe with RE commission I get little back in equity but I shouldn’t need to pony up any more. And if housing recovers (I don’t mean to bubble levels – but it just gets more balanced) my view may revert back to paying down the mortgage over saving.

It’s just in the Great Recession I saw so many people who had been putting large amounts toward their very high mortgages subsequently lose all of that when the market fell out. So they don’t have the money should there be a need and they really don’t have the value rolled into their house either.

Thanks for your comment though – I’m curious if this has altered your thoughts in any way?

6 Tim December 26, 2013 at 6:06 pm

This is a perpetual, revolving question, which demonstrates the individuality of the answer. For us, I take a purely opportunity cost approach. There is no reason for me to pay down my mortgage early, when: property value is appreciating more than my 30yr fixed APR, when my other investments are appreciating more than my 30yr fixed APR, and, on top of getting a mortgage interest tax deduction. I don’t consider other people disciplined for paying down a mortgage early if there is no money value to doing so. However, I understand people believe they have some psychological benefit of paying down a mortgage or debt earlier, despite not being opportunity cost efficient. Good on them, but I don’t consider it disciplined. Disciplined is being able to carry debt if it makes sense to do so; however, I won’t knock anyone’s decision to make non-optimal decisions if it eases their minds.

Also, having seen so many house rich individuals effectively broke over the past several years, I don’t find comfort or security in putting myself in the same situation. I’m also concerned about how the demographic trends are going with baby boomers going to eventually dump their properties no the market to gain liquidity and downsize, when our population growth isn’t meeting replenishment rates. A different thought, though.

7 MonicaOnMoney January 2, 2014 at 12:42 pm

This is the same question I’ve asked myself for years! My goal for this year is to pay 24K extra towards my mortgage to pay it off in 5 years. But I am still saving exactly 15% towards my retirement too. I’ve thought about stopping my retirement savings for a few years to pay off the mortgage faster but like you said, it’s all about the level of comfort.

8 Scott January 6, 2014 at 12:31 pm

Good point Tim – I think we are on the same page. My house value is also on the upward swing and meanwhile before rates go up I’m saving for a potential refi if needed while paying down other debts that unlike my house I cannot sell. Assuming we have more time before rates reset I’ll get to the mortgage when it makes the most sense.

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