Asking if one should pay off his home mortgage is like asking if one
should eat apple pie, because over the past 40 years having a home
mortgage has become as American as apple pie! These days, living in a
home without a mortgage is the exception rather than the norm.
Today many financial “experts” have offered conflicting advice
about whether or not one should pay off one’s home mortgage. The
headline of a recent article in the Atlanta newspaper read, “Don’t
Use Windfall to Pay Off Mortgage.” And yet others would contend that
the first thing you should do with excess cash is pay off your mortgage.
Which advice is right? It’s impossible to answer that question with
finality; however, let’s consider some issues so you can draw your
First, consider your marriage relationship. One spouse’s conservative nature
will often cause him or her to be adverse to risk; as a result they typically
want to avoid the use of debt – particularly when it involves the home.
Therefore, for marital harmony, it may be a good idea to pay off the mortgage
to remove the house from any economic risk.
Second, consider your investment return. If a person maintains a home mortgage
and yet has available cash to make other investments, he is implying that he
can earn “risk-free” with his other investments more than he is paying
on his mortgage. I say “risk-free” because paying off the home mortgage
is not a risky investment. Let me illustrate: If I owe $100,000 on a 10% mortgage,
then I pay $10,000 a year in interest; I’m out of pocket $10,000. If I
pay off my mortgage, then I don’t have the outflow of $10,000 and so in
essence have earned $10,000 on my $100,000 investment. I earned the $10,000 without
any risk; I simply paid off my mortgage.
If I elect not to pay off my home mortgage and invest $100,000, I must earn more
than 10% with my investment of $100,000 to have the same net worth at the end
of the year. However, if one keeps debt (even home mortgage debt), then he is
implying that he can earn “risk-free” on his investments more than
he is paying on the debt. However, my experience tells me it is very difficult
to earn more year-in and year-out consistently than the interest rate one is
paying on his home mortgage on a risk-free basis. Therefore, the repayment of
the home mortgage as the first use of excess funds is a good investment move.
Third, consider your liquidity. If I have only $20,000 in cash, it probably is
not a good idea to use that entire amount to pay down the mortgage. If I did
that and then had an emergency, I would have to borrow at a higher interest rate
than my home mortgage to fund the emergency. One should maintain an ample level
of liquidity (usually three to six months’ living expenses) to meet emergencies
and then use excess funds to pay off the home mortgage.
Fourth, consider why you would not want to pay off your home mortgage. The answer
to this is typically a feeling that you can earn a higher investment return with
the money somewhere else. You need to weigh your motive and make sure it is not
greed driving you. Paying off your home mortgage not only gives you a decent
investment return, but peace of mind, a strengthened marriage relationship, and
If you factor in all these considerations and decide to pay off your home mortgage,
how do you go about it? If you receive a windfall and have a lump sum of cash,
you could pay the whole mortgage off at once (provided it didn’t take all
your cash). Another way is to pay little by little on a monthly basis or with
periodic payments toward the principal.
What are some ways to prepay your mortgage? The most common method is to add
a little bit extra to your monthly mortgage payment. In the example below, by
adding a $100 extra a month or $1,200 per year, a normal 30-year mortgage is
converted to a 17 ½-year mortgage. By paying an extra $21,000, (17 ½ x
$100/month x 12 months) the borrower is able to save $78,047.72 in monthly mortgage
payments that would have been made in years 17 through 30.
Another alternative is the biweekly mortgage. Many people get paid twice a month.
If disciplined individuals could make a half-payment every two weeks, or 26 payments
per year, the two extra half-payments in effect squeeze an extra monthly payment
each year. Any of those alternatives – the 15-year term, payment of an
additional $100 per month, or the biweekly method – allows the borrower
to save several thousand dollars in interest payments over the lifetime of the
Be careful: When prepaying your mortgage, only deal directly with the company
who issued your original mortgage. Make sure that any extra payment is applied
directly to the principal and does not go into an escrow account.
A radical option, but certainly not one out of the question, is doubling the
monthly mortgage payment. A 30-year mortgage is thereby repaid in 7 ½ years.
A strong commitment and setting a faith goal can result in a young married couple
being debt-free by age 30. The discipline of prepaying a few extra dollars per
month on the mortgage payment will allow a couple to increase net worth faster
than investing the money into an alternative investment. Why? Because the mortgage
prepayment is more of a focused savings, and can become more of a discipline
than alternative types of investment.
If you do not have a lump sum available, the next common way to prepay a mortgage
is to increase your monthly payment.
Services such as Home Equity Company of America can give you some guidance and
help in prepaying your home mortgage on a bi-weekly basis. Check with your lender
about how to pay your mortgage down on a monthly basis.
In summary, the best use of excess funds after you have established an emergency
account seems to be to pay off your home mortgage. Just think – once your
mortgage is paid off, you can be living in a debt-free home the rest of your