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Should You Pay Off Your Mortgage?

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There's a number of ways to think about this important decision.

Homeowners look forward to the day when the last mortgage payment gets drafted from the account and they own their house free and clear. But whether you should strive to pay off your mortgage early is a widely debated topic. On a Fool Live episode recorded on March 5, Fool contributors Brian Stoffel, Brian Feroldi, and Brian Withers discuss the pros and cons of paying off your mortgage early and different ways you could go about doing it.

Brian Stoffel: I see someone's put a question in the queue that I want to use because I think it will kick us really neatly to the next part. [inaudible] says, "What about the opportunity to pay off the house and have the financial security of having no rent or mortgage payment? Just insurance, property taxes, and any required maintenance." I know that was the next one, is that an OK way to transition?

Brian Withers: Yeah, that's super. Brian Stoffel, why don't you answer that one first from your perspective, because I think we all have a different take on it.

Stoffel: Sure. In general, I think it's a great idea if you can do it in a way that makes sense. For me, first of all, I was lucky enough to get it in 2017 is when we bought our house. Now, compared to today's rates, it might not seem so great, but 4.2% is still pretty good. We can afford to make the payments, but the big thing is to pay off the whole house would require taking a lot out of our retirement funds and incurring penalties to do that, and it just doesn't make a whole lot of sense for us to do that.

We also like the flexibility that not doing that provides us, so that if an emergency should hit or something terrible would happen, then we could pull out [cash], if that were the case. If our situation changes, then that might change the math behind it. But for us, we're comfortable continuing to pay [the mortgage]. Like I said, it's a very reasonable rate and it doesn't stress our family to have to pay that out, so I don't have a problem with doing that. But I know other people choose to view it a little bit differently, like Mr. Feroldi.

Brian Feroldi: Yeah. The usual, do I pay off my mortgage earlier? Do I invest? Talking to a group of investors here. But I paid off my mortgage and I'm very happy that I did so. Because to me, I like the idea of permanently lowering one of my fixed costs forever, and not having to make a mortgage payment is incredibly freeing, and I don't have to ever worry about making enough money in any given month to cover that.

Now, I think the way that you pay off your mortgage is actually important, too. A lot of people that choose to pay off their mortgage put money from an extra payment on their mortgage every month, and what you're doing is you're taking liquid cash and you're putting it into an illiquid form. Because once it's in there, you can't get it back without having to go through a whole bunch of paperwork and all that stuff. If you're interested in paying off your mortgage, I'm a big fan of just putting it into a separate savings account and having it grow, grow, grow, grow, and then knocking it out once your balance on that is bigger than the balance of the payment. Because you can always use that like an extra big emergency fund in case something was to happen with your life.

But if people say, I'm never paying off my mortgage, I totally get that, and I have absolutely no problem with that. Because mathematically, paying off your mortgage early is stupid especially given where rates are today. But I didn't pay off by mortgage because I thought it was a good math decision, I paid it off because I thought it was a good life decision. I love how Morgan Housel frames it. He says, "I want to become financially unbreakable." If you pay off your mortgage, you're a heck a lot closer to becoming financially unbreakable than you would be if you hadn't.

Withers: Yeah, Brian. It's funny you talk about how you would go about paying off your house, and that's what we're doing right now. We have a 30-year mortgage, 2.9%, 30-year fixed, and I put enough in every month to where we will pay it off in 10 years. Your idea about taking the money and putting it into a savings account and letting it grow is like maybe that's a good idea. Then I thought about, once it became big enough, I'd want to invest it. [laughs] It's a little mind trick on myself that I would totally take that money and that's funny, the market's down, let me put it into stocks.

I think that's part of why, when we came into this home, we could have paid cash for it. But I didn't want to sell enough stock and pull money out of the market that was doing just fine all by itself. We pulled enough out that we could put out on a decent down payment. We have a 30-year mortgage, so if anything starts to look bad, I can cut off that extra payment and free up some cash.

Feroldi: That's another way to do it, by the way. If you wanted to put money into a separate account and just invest it, and then once it got to be a certain size say, "all right, now it's going to go into the house" because as long as you can be flexible with the timing.

Withers: Yeah. Well, Jason Hall is doing something similar to that. He's taking his extra payment instead of putting it into his mortgage, he's putting it into the dividend-bearing stocks and then taking the dividends and putting that into his mortgage.

Stoffel: To me, this is very interesting. We could have a whole another show on extra ways of paying off your mortgage early. Brian, what I love about what you did, Brian Feroldi, is the flexibility. Like you said, it's like you had a huge emergency fund, and then when the time came, you were not obligated to use that to pay off your house. You could if you chose to and if it made sense for you and it did. When you're talking about, Brian Withers with Jason Hall, it's another great way of thinking about it. Now, I've got to crowdsource a way for me to start doing that.

Feroldi: The more important point is, there's no right answer. There's just what's right for you. There is no right way to do it or wrong way to do it, there's just different options that you have to do it. But to me, as long as you're using the funds for something productive, like investing or paying off your mortgage, it's a good use of funds.

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