Mortgage, pay off early, interest and investments

From time to time I see or hear a discussion about the pros and cons of paying off a home mortgage early, making extra payments and 30 year versus 15 or 20 year mortgages. There was an article in the Charlotte Observer Sunday morning, January 20, 2008. The artcle presented for and against positions. This is a subject worth contemplating for most home owners because it can make a tremendous difference in one’s financial situation, short term and long term. Very few topics in life can be intelligently discussed out of context, and this debate is no exception. Here are the decisions and things to consider for most homeowners in the US.

  • Most people in the US do not remain in their first home and sooner or later your home will be sold. Buy a home that is where people now or later want to live in. This can be from the perspective of selling the home later or renting part or all of it. Even in a city or region that is not as popular as it once was, one can find the most desirable locations.
  • Early in your life, generally buy the most house you can comfortably afford. If you are younger, consider a house you can have a roommate(s) in or rent out part of. Any time that you can, let others help to pay for part or all of your real estate. Choose your comfort level and carefully choose those you rent to.
  • Alway have at least 3 months of liquid assets to cover your bills for emergencies. Also have at least 3 months or preferably 9 months in other assets that can be converted to cash like a 401K or retirement fund. You don’t want to lose that house once you get it.
  • Should one get a 30 year mortgage or 15 or 20 year mortgage? I recommend that most people get a 30 year mortgage unless you know you can always pay the shorter term mortgage and you are not going to invest the difference in the payment amounts and your rate is less on the shorter term. With a 30 year mortgage, you can normally make extra payments each month or whenever you are able. However, with the lower monthly payment, your odds for always making the necessary payment amount are much better. If you want to make extra payments, always make sure you have the emergency money first.
  • Now for the question of pros and cons of paying off your home early. This is a personal decision and requires one to be honest and realistic with one’s self. First of all, follow the rules I have outlined above. After that, look  at your interest rate. Are you locked into a high rate with little chance for changing it. You then have more incentives to pay more. If your rate is low, you then must honestly determine if you will invest the money you would use to pay the house off early. If you will and can make better use of the money, perhaps you should consider investing it. It you are unsure, perhaps you should pay extra on your house until you can use the money in a more productive way.
  • I  recommend you discuss the above with a knowledgeable tax or investment specialist. Paying a little money for sound advice upfront, can make or save you a lot of money.
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One response to “Mortgage, pay off early, interest and investments

  1. It’s thrilling to have paid off enough of our mortgage – in only the last four years – to still have lots of equity after property values tanked! I especially liked your comment…”If you are unsure, perhaps you should pay extra on your house until you can use the money in a more productive way.”

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