MoneyWatch details the reasons -- then the author tells why he paid it off anyway.
Here are the reasons he gives for why you shouldn't pay off your mortgage:
- You need the liquidity.
- You could probably do better investing the money elsewhere.
- You expect inflation.
- You expect housing to rebound.
Then he tells why he paid off his mortgage anyway:
The logical explanation is that I had enough risk in my portfolio, and as for the low-risk portion of my money, it made no sense to borrow at 3.0% after taxes and invest it at 2.2% in, say, Treasuries. That would be acting like a very dumb hedge fund.
But there’s a less rational reason too. Like a lot of post-crisis Americans, I’ve had it with debt. I don’t want to be beholden to a bank and in an uncertain world I’d rather not have the certain obligation of a mortgage payment every month.
I asked Meir Statman, a behavioral finance professor at Santa Clara University about this caution, expecting a lecture about “availability bias,” or the exaggerated fear of a bad event simply because it is fresh in memory. Instead, I was relieved to hear Statman admit that he’d paid off his mortgage too. “Maybe you could earn a higher return by arbitraging the difference between your mortgage and the stock market,” he said. “But you have to ask yourself what your money is really for,” he said. “Personally, it gives me satisfaction to know that I own the four walls around me. Satisfaction and peace of mind are a kind of return, too.”
As you might imagine, I have a few things to say about the thoughts above. Here goes:
- As far as needing the liquidity, if your gap is large enough, you can have plenty of cash and pay off your mortgage as well. I was able to manage both.
- As for investing the money elsewhere and getting a better return, maybe you will do better, maybe you won't. This last year you would have done much better by having the money in the market. The couple years before that -- not so much. And, of course, paying off debt is a guaranteed return. Investing is not.
- Do you expect inflation? Or deflation? I don't know what to expect these days when it comes to our economy.
- As for a housing rebound, this sounds like the best bet to me -- if you have five to seven years to wait.
- And for the "had it with debt" argument, this is why I paid off my mortgage almost 14 years ago. I list "being deep in debt" as #3 on my list of the 10 worst money moves you can make, but for me having ANY debt was a bad money move. I wanted to get rid of it all asap -- and my house was the last to go (I didn't have much before that, though). So for the last 14 years, I've had satisfaction, peace of mind, and no mortgage payment. Yes, it's been sweet!
If you're in debt and think you can't get out -- you're wrong. Here are seven steps to get out of debt. Apply them over a long period of time and you WILL get out of debt -- including mortgage debt (if you work at it long and hard enough.)