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

While there is certainly a degree of financial freedom that comes from owning your home free and clear, maybe it's not the best move.

Jan 18, 2014 at 2:00PM


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.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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