I've created a lot of content around the benefits of a paid-off house. One thing I haven't dived into much is the disadvantages of paying off your mortgage.
I received a question from Maria on YouTube and here it is …
“I am very tempted to pay the house. But everyone tells me that it is a waste of money and that by investing we would earn more. I don't know what to do. I am afraid of choosing wrong.”
The paying off your mortgage early idea is one that I absolutely love. But I am incredibly biased …
- I’ve been burned by mortgages in the past
- We currently live completely debt-free after paying off our $200,000 mortgage
- And we’ve had the privilege to also invest for our retirement and set ourselves up for Coast FIRE (essentially not needing to invest for retirement anymore because time and compound interest are going to do the rest for us)
On the other hand, I know that not everyone’s situation is like mine. There are billions of people on our planet and everyone has unique needs and their personal finances are personal.
So with that spirit in mind, I wanted to look at the pros and cons of a paid off house.
I’ll share one pro and then one con and then hopefully you can see if the disadvantages of paying off your mortgage outweigh the advantages.
Alright, let’s have some fun …
Pro #1: Peace of Mind
The feeling of never having to pay your mortgage again is simply wonderful. The peace of mind is out of this world.
For the longest time, I worried about being able to make enough money to pay my mortgage.
“What if I totally mess up at work and lose my job?” OR …
“What if I decide I want to change industries and it requires a pay cut?”
After we got rid of our mortgage — our largest monthly payment ever — I was sleeping easier at night.
This is my perspective, but I’ve now interviewed dozens of other mortgage-free families who share the same reaction. It is a consistent and largely unrefuted benefit. The vast emotional benefits are undeniable.
Con #1: You Could Make A Lot More in the Stock Market
This “con” I completely agree with.
During the period of time that we paid off our mortgage (2014-2017), our family could have made A LOT more money in the stock market.
We eliminated a mortgage with a 3% interest rate and we could have been earning almost 10% (on average) in the stock market during that time. In theory, we lost out on our money earning 7% interest annually!
Two things, I’ll add to this scenario:
- We were investing for our retirement in addition to paying off our mortgage early. The whole “pay off your mortgage or invest debate” can be quickly squashed in my opinion by asking “Why not both?”
- Us losing out of 7% per year is definitely with our hindsight glasses on. Today, could I guarantee 10% growth per year in the stock market for the next 3-4 years? Uh, nope! I have no clue what’s going to happen. Yes, a good, low-cost index fund that tracks the broad market is going to do you well over the long term, but in the short term, no one knows.
That being said, I don’t argue we could have made more money. If making the most money possible is your end goal (and you don’t care as much about the life simplification, fewer worries, and peace of mind stuff) then I don’t think paying off your mortgage early is for you.
Pro #2: Easier to Save for Retirement (and Early Retirement)
For years, it’s been drilled into our heads that we’re not saving enough for our retirement. The statistics show that the average American is far behind where they are supposed to be with retirement savings.
What if we needed to save a lot less for retirement because our cost of living was lower?
That’s why I like mortgage freedom. The largest monthly payment you’ll probably ever make is gone. And it’s gone forever if stay in your house or only move to a new one when you sell your house and use the proceeds to buy the next one.
For example, Nicole and I used to spend around $75,000 per year with our mortgage. Now, after we paid it off we’re closer to $60,000 per year.
That means we only have to save around $1,500,000 to comfortably retire if you use the 4% rule. If we still had our mortgage, we’d need around $1,875,000! That’s a lot more!
We’d also love the option of early retirement as well in our 40’s or 50’s. Without a mortgage, early retirement becomes a lot easier as well.
When you can live happily for less, then you have more options.
Con #2: Less Liquidity
Another counterpoint to a paid off house is less liquidity. Again, I could not agree more.
Our home is paid off and it’s valued around $450,000. That’s $450,000 that we can’t touch, invest or use unless we sell the home or borrow from it with a Home Equity Line of Credit.
If we had a need for this money fast, we would be in a tough spot.
And there’s been some times already that it would have been nice to have the money. For example, we were considering buying a rental property but we didn’t quite have enough money for the down payment we wanted. With less cash tied up in the mortgage, this would have been a lot easier for us.
In the end, we both decided that buying a rental property wasn’t for us right now anyway. We have too many other responsibilities with our two young kids, our careers, and businesses. Real estate investing can be wildly profitable but it does involve a lot of work. We weren’t (and still aren’t) willing to put in that work right now.
Instead, we’re investing in REITs – real estate investment trusts. This is our passive way of investing in real estate and it’s working out just fine.
Pro #3: Gives You Permission to Have More Fun Today
This may be all psychological, but after we paid off our mortgage I felt more free to enjoy our money today.
We’ve gone on more vacations after paying off our mortgage than we ever have before as a family.
Over the past couple of years, we’ve updated our kitchen, laundry room and furniture throughout the house. We loved our house before and love it even more now!
Recently, we upgraded the family car a new to us SUV and said goodbye to our 14-year old car.
Now could we easily get carried away with this spending? Oh, for sure! But we do track it all in a monthly budget and have certain buckets of money for long-term spending in a high yield savings account.
Either way, I didn’t feel ready to enjoy our money as much with a mortgage hanging over my head. Now that it’s gone, I’m having a lot more fun.
Con #3: Eliminates Tax Deduction Benefits
When you have a mortgage, you can get a tax deduction based on the interest you pay on your loan. This helps homeowners save a bit of money come tax time.
For example, let’s say you’re paying $10,000 in interest to the bank each year and your mortgage tax deduction saves you $2,000 each year. That’s a lot of money!
But my counterpoint to this “con” is that by eliminating your mortgage, you’re saving $10,000 of interest per year instead of $2,000 .
It’s not that this “con” point doesn’t make sense because it does! If you factor in all of the other financially motivating reasons like making more money in the stock market and having cash available for other investment opportunities, it could be a tough argument for some people.
For me, we’d rather save the $10,000 today than the $2,000.
Final Thoughts on the Disadvantages of Paying Off Your Mortgage
As I was writing these pros and cons of paying off your mortgage, a new thought has popped into my head. Maybe it answers Maria’s question more easily.
“Are you more motivated by living a simple life or making the most money possible?”
I would agree that the most financially optimal route would be to NOT pay off your mortgage early. But where I am, I’m not looking to maximize all the levers in my life to make me the richest person in the world. I’m striving for more time, more freedom, more relaxation, and fewer commitments.
That’s why I chose mortgage freedom and if given the chance to do it all over again … I’d make the same decision.
What do you think are the disadvantages of paying off your mortgage? Do they outweigh the advantages?
Please let me know in the comments below.