Wednesday, September 4, 1996
Should You Pay Your Mortgage Early?
By CHSams

Paying your mortgage off early? Might as well put the money under your mattress.

"Cut years off your mortgage." "Save thousands." You're probably already familiar with the experts who tell you how to save thousands and thousands by paying another month's principal payment every time you make a mortgage payment. Doing so, you'll cut your mortgage by "x" number of years. Another way to do it is to pay however many principal payments forward you want to each month. You've now saved all of the adjoining interest portions for those payments too. Oh, you're in the money now ... right? Well, probably not.

There are several reasons NOT to prepay your mortgage. Probably the best known is that if the return you're earning on your investments is greater than your mortgage rate plus tax savings, then prepaying doesn't really pay. And gosh, if you are learning and applying Foolish investment principles such as Beating the Dow and Investing for Growth, then you should definitely be beating your mortgage rate! Also, your house is exactly as liquid an investment as some of your other options. But anyway, for more on this, you can read MF DowMan's Fribble, "To Borrow, or Not to Borrow," on the choice of investing your money for a higher rate of return instead of paying your mortgage off early.

The most compelling reason for me, though, is the following. With all of the "save on interest" theories, the interest is only saved if you're in that house through the entire length of the mortgage. If you move before the mortgage is paid, the money you gave your bank actually saved you nothing. That's right. Saved you nothing. And in effect, it's earned you nothing. You will not have saved the thousands of dollars in interest that you were counting on saving. All your money did is reduce your principal amount by the exact extra amount you paid. Sounds like a mattress savings account to me.

"But," you're saying, "I love this house. I plan to be here forever!" Well, consider the odds. I think the current consensus is that the average person stays in a house for about seven years. It is highly likely that some kind of change (different job, marriage, kids, divorce, kids moving out, or even being able to afford something bigger or better) will have you wanting or needing to move in the future, long before that thirty-year mortgage is paid off.

Personally, I would not even consider paying my mortgage off early unless I was within 3-5 years from the finish line (of the mortgage, that is) and just wanted to have it over and done with for a sort of mental freedom.

So consider your circumstances before you plunk that extra money into prepaying your mortgage. Otherwise, your good intentions and hard-earned cash might just turn into ... well, extra stuffing for your mattress!

Transmitted: 9/4/96