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Should You Pay Off Your Mortgage Early? The Answer May Surprise You

What's better: Paying off your mortgage early or saving? Photo: AT&T YouTube.

When it comes to home ownership, the American dream used to be quite simple: Buy a house with a 30-year mortgage, make your payments, and someday down the road, you'll own your home free and clear.

Nowadays, people tend to move around a lot more than they used to, resetting the 30-year clock every time they do, greatly decreasing the likelihood that a home will ever be paid off in full. Also, people tap into their home's equity and refinance their mortgages much more today than they used to for repairs, upgrades, etc., often creating a new 30-year loan in the process.

This got me thinking: Does anyone actually pay off their home in 30 years (or less) anymore? Is this a goal younger homeowners have in mind? And perhaps most importantly, is it worth it?

How many people actually live "rent-free"?
The actual number depends on where you live, but almost one-third (29.3%) of U.S. homeowners have no mortgage. As would be expected, the percentage gets higher in the older age groups. Of those homeowners over 85 years old, over 77% own their homes outright, and about 63% of those in the 74 to 84 age group own their homes.

One interesting statistic is the higher percentage in the lowest age group, those homeowners from ages 20 to 24. 34.5% of these young homeowners have no mortgage, and generally speaking, these young homeowners either inherited their money or have some kind of assistance. Another reason could be the fact that most younger buyers tend to buy more inexpensive, or "starter" homes and have fewer financial commitments (like kids), making it more feasible to pay off a house quickly.

The percentage of homeowners who own homes free and clear has dropped steadily over the past several decades, from a high of 42% of homeowners in 1960. However, after years of building up our "debt culture," we are beginning to see younger homeowners make paying down their debts a priority, having witnessed the effect of too much debt on the older generation. In fact, the average percentage of equity in the average home is up to about 45% from a low of around 38% in 2009.

A few actual accounts...
The website has a pretty interesting thread of people who share their experiences with a paid-off mortgage. The first entry is from a 35-year-old whose parents paid off his mortgage as a gift, and he now puts his former mortgage payment into a retirement account. 

Another entry is from a 43-year-old who paid off his mortgage in just over 12 years as a means of financial safety should he ever lose his job. Several other entrants chose to buy fixer-upper houses in order to have the lowest purchase price, and hence the lowest mortgage possible. Another homeowner took a loan from his IRA in order to build a home without a mortgage.

Foolish final thoughts
While not having a mortgage may indeed be freeing, not everyone agrees it's the best course of action. According to many experts, paying off your mortgage may not be the best use of your money. While it certainly would be nice to not have to make that $2,000 house payment every month, it has not been hard to find fairly safe investments at any point in history that offer returns higher than the interest a mortgage is costing you.

For instance, let's say I owe $320,000 on my house on a 3.875% 30-year fixed mortgage and happen to come into some money and have enough in the bank to pay off my balance. If instead of simply paying off my balance, I invest the money in a pretty safe income fund that pays, say 6%, my $320,000 investment should be worth about $1.7 million in 30 years, which far outweighs the $541,713 in mortgage payments I would have made over that time.

Taking it a step further
The recovering housing market has helped families, but millions of Americans have waited on the sidelines since the stock market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their retirement in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Read/Post Comments (13) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2014, at 4:13 PM, jddf wrote:

    And where does one find a "safe income fund that pays, say 6%". Those don't exist anymore.

  • Report this Comment On January 18, 2014, at 5:42 PM, jnhuey wrote:

    There are plenty of index funds with average annual return rates above 6%. Of course anything on the market is not guaranteed, and that's the tradeoff...

  • Report this Comment On January 18, 2014, at 6:08 PM, carmeno wrote:

    Nice logic get an index fund with a rate above 6% and "of course" it's not guaranteed. Yep, ask all of us whose index funds magically disappeared. Maybe if I wait another decade to see If they ever get out of bankruptcy, I may get some of my money back (in my dreams). Oopsy, they lied about where they were really investing the money and we are still waiting for the feds to charge them. Forget it, three more years to go and my mortgage is history. The 2.99% I pay is way higher than the interest banks are paying.

  • Report this Comment On January 18, 2014, at 6:25 PM, BaravelliIce wrote:

    I assume you included a small tax bite in achieving 1.7m (I calculate 1.837m). Meanwhile you'll be short 541,713 that you managed to pay each month for 3 decades, leaving you with (1.7-.54 =) 1.16mil. If, instead you sink all 320k into paying off the house then take the $1,504.76 that you were going to sink into the mortgage and invest it in the same pie-in-the-sky constant 6% fund, you'd have 1.43mil after 30 years. So take your pick - 1.43 mil(less taxes) after 30 years and zero mortgage the whole time, or 1.16 mil after 30 years and a mortgage payment for 3 decades. The choice couldn't be any easier. Of course, all of this closed system analysis is fictitous anyways. Going a full 30 years without refi or any other significant changes is absurd even for the most steady lives among us. And an investment that pays so well so consistently also doesn't exist. Instead tricking people into doing the wrong thing and maintaining a mortgage, pass algebra and promote the freedom and TRUE investment opportunity that no mortgage and potential cash on hand offers.

  • Report this Comment On January 18, 2014, at 9:50 PM, Money78 wrote:

    This is the silliest thing in the world. Pay off your mortgage at all cost. It's the smartest thing you will ever do. If your mortgage is $2000 a month and you pay it off, you can save $24000 a year. In 5 years that's $120000. If you want to invest money then take a chunk of that $120,000 and "invest" a.k.a gamble in the stock market. Otherwise it makes no sense to carry a mortgage debt. Do the math people. Unfortunately most people wont have the option to pay off there mortgage early , but for those that will. Do yourself a favor and get it done. Cash Out$$$$$$$$$$$$. Goodluck

  • Report this Comment On January 19, 2014, at 3:36 AM, ewro wrote:

    I think with rates so low there is a really big argument for not paying off your mortgage. But at the same time you can't just look at the balance 30 years later you have to look at cash flow right now. Not having a mortgage frees your money up and gives you a lot of freedom.

  • Report this Comment On January 19, 2014, at 12:44 PM, FireBreather wrote:

    Sorry Motley...a $100k house really costs $300k.... in this housing one will get their money back. And with another Housing Crash on the horizon.......get out of debt as fast as you can.

  • Report this Comment On January 19, 2014, at 11:29 PM, Wswegner wrote:

    100% of foreclosures are on houses with a mortgage. Pay off your home as soon as possible. In these articles they always talk about higher yielding investments, but don't take into account risk or inflation.

  • Report this Comment On January 20, 2014, at 12:44 PM, fallop wrote:

    You are sorely mistaken Wswegner. Many, many foreclosures are caused by a failure to pay property taxes. My current city is going through and foreclosing on clost to 500 properties for back taxes.

    Paying off your property is a safe, conservative way of spending your money but I personally would not want $100,000+ sitting in a property with the inability to grow. That money won't even hedge inflation. I'd rather take the risk of putting in the market to make even 2% a year (pretty easy to do in reality). You might say that the the property value will go up and that's equivalent to the growth, but the value going up benefits both the person that paid in cash and the person that paid with a mortgage. The better cash on cash return goes to the guy that used the mortgage though.

    Yes, there's risk involved, but it wouldn't be life without risk.

  • Report this Comment On January 20, 2014, at 1:31 PM, anderson6902 wrote:

    I am of the age of 33 years old and I own ten properties around the Chicagoland area. The houses are free and clear of any loans. I bought them during the crash and they have appreciated almost double. Five of the properties have a HELOC just in case I need quick cash.

    I would suggest having your mortgage free and clear in a more upscale area. If you ever lose your job unemployment would not cover your mortgage. You can take the money you would have used to pay the bank and just invest it in the market.

    What I'm saying is there is no crystal ball on how the market will do, but the one safe idea I have is I have a house over my family paid off. Markets and economies change.

    I could tell you the stories I have heard from realtors and I have dealt with some people that I bought there old house at auctions. My suggestion is pay off your house and then invest your money. You never know how your life can change at a moment.

  • Report this Comment On January 20, 2014, at 3:45 PM, Carrot1530 wrote:

    If you're worried that your $450K house might become a $250K property......DON'T PAY IT OFF. Why: Because you can strategically default and walk away. If the house was paid off, you just took a $200K blood bath.

  • Report this Comment On January 20, 2014, at 4:22 PM, rrtink wrote:

    Yeah with mortgage rates so low and the mortgage interest tax write off - which they don't even mention in the article - paying off your mortgage seems silly. Heck with the 3.75% I got when I refied give me 100 year mortgage for all I care! If you don't want to take any risk investing in the market then you probably shouldn't be reading Motley Fool.

  • Report this Comment On January 23, 2014, at 2:44 AM, BUSHPILOTS wrote:

    you guys need a new investment strategy if you cant average 6% over 30 years.

    BaravelliIce, you have double counted the $1504 monthly payment...once in subtracting 541k (1504*360) from the 1.8mil and again in investing 1504 per month.

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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