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Posted: 10:59 a.m. Monday, Aug. 11, 2014

Should I Pay Off My Mortgage Early?

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By Wes Moss, Contributor

ClarkHoward.com


When people ask me whether or not they should pay off their mortgage, my answer is always, unequivocally YES.

There are a number of psychological and financial burdens that are lifted once that proverbial noose around the neck is loosened. There’s a world of happiness and freedom out there just waiting for you once your biggest monthly expense is eliminated.

In my new book You Can Retire Sooner Than You Think  - The 5 Money Secrets of the Happiest Retirees, I conducted a study of more than 1,350 retirees across 46 states to see what makes the happiest retirees.

One of the main recurring themes was that the happiest and most successful retirees had either eliminated or dramatically reduced their mortgage payment before pressing the retirement button. 

A lot of people when faced with the prospect of paying down their mortgage or investing the money would say,  "Why not put this money in the market and let it make some money instead?"

The answer to that is simple—we don’t know that the market is always going to go up.  But we do know that not having the stress of a mortgage every month is worth its weight in gold.

Paying off your mortgage takes one big concern off the plate

Paying off your mortgage by the time you retire will bring you peace of mind.  It will dramatically reduce the amount of income that your retirement safety net will need to produce.  When the burden of paying a mortgage is eliminated, you have the budgetary freedom to spend more money on finding purpose and happiness in life.

Your retirement years are meant to be happy ones; you don’t want to wake up in the middle of the night mid-way through retirement worrying about how you are going to pay the mortgage.  Happiness levels rise undeniably as mortgages vanish.

Read contributor Mike Timmermann's popular article '6 Steps To Pay Off Your Mortgage Early.'

It’s your time to enjoy a deflationary moment

Deflationary moments don’t happen often in life.  There are just not a lot goods and services in our day-to-day that are getting less expensive; prices are generally on the upward trajectory.

Whether it is gasoline, land, day care, groceries, etc., things are just getting pricier.  With all of this inflation, when do you see any deflation?  The answer is rarely—if ever.

But for those nearing retirement and paying off their mortgage, a deflationary moment in their financial planning is actually occurring.  Paying off your mortgage is that break.  You’re deflating the amount of money that has to go out the window, and it’s something that lasts forever, which is a very powerful psychological force.

Paying down a mortgage offers you flexibility

Once you no longer have a mortgage, you gain the flexibility to live where you want to and in the size of house that suits your needs a little better.

For example, without a mortgage you can transition into a smaller home with less maintenance.  Perhaps you could use the money to buy two homes in very different places such as one at the lake and one up in the mountains.  If you’d like to spend several months at a time with your grandchildren or need to go take care of someone in need, you won’t have to worry about paying a mortgage while you’re not even living there.

Flexibility increases dramatically once you pay off your home, giving you the opportunity to live in exactly the way and exactly the place you want to.

When should you pull the trigger on paying off a mortgage?

When people ask me how much they really need in the bank to pay off their mortgage, I don’t give them an actual number.  My advice is to follow the one-third rule: if you can pay off your mortgage using no more than one-third of your non-retirement savings, considering paying of your mortgage—today.

For example, supposed you owe $55,000 on your home and have $190,000 in savings—not including your 401(k) and /or IRA funds.  By the one-third rule, you will be able pay off your mortgage, plus have plenty of cushion left over for unexpected expenses.  If it is going to cost more than one-third of your non-retirement savings to pay off your mortgage, I suggest waiting.  It will cause more long-term stress if you don’t have any cash in the bank because you paid your mortgage.



What if you can’t pay off your mortgage in full?

If you can’t pay off your mortgage in full, but you are committed to the goal of drastically reducing or eliminating your mortgage, there are a couple of options that I like to suggest to people.

The first suggestion is to accelerate your payments each month.  Even if you increase your payments by a small amount, you will pay off your mortgage earlier.  There is a great tool that I recommend, the BankRate.com early mortgage payoff calculator.  You can plug in several different numbers and see how much sooner you can pay off your mortgage.  Even if you increase your payments by just $200 a month, it is possible to reach that mortgage-free status sooner than you might have thought.

Here is a great example:

A man named “Joe” decided to accelerate his payments and get rid of his mortgage sooner than he thought he could.  He is just starting his 30-year mortgage in the amount of $250,000, with an annual interest rate (APR) of 5.0 percent.

Joe’s regularly scheduled payment is $1,342.  In this particular example, let’s add just $300 to that payment each month.  The result?  He will shave 9 years and 4 months off the life of the loan, saving Joe a grand total of $79,684!

Another suggestion is to make bi-weekly mortgage payments.  By this I'm referring to paying 50 percent of the note every two weeks instead of 100 percent once a month.  It’s a small trick that you won’t even really notice.  But the reward is that you will make an entire extra monthly payment per year. 

If you are in a position to do so, paying off your mortgage is a great way to increase your happiness quotient.  You will experience a psychological and financial freedom that will allow you to focus on the other exciting areas of your life.  If you are not quite in a position to pay off your mortgage in full, don’t despair!  If you follow my tips on how to pay down your mortgage a bit quicker, you will be there before you know it. 

About the author: Wes Moss is the host of the Money Matters radio show on WSB Radio, host of the TV show Atlanta Tech Edge on Atlanta’s NBC affiliate, and Chief Investment Strategist at Capital Investment Advisors. In 2014, he was named one of America’s top 1,200 financial advisors by Barron’s Magazine. He is the author of several books including his most recent, You Can Retire Sooner Than You Think  - The 5 Money Secrets of the Happiest Retirees, which has been one of Amazon’s best-selling retirement books in 2014. Contact him at wmoss@yourwealth.com, @WesMoss365, or Facebook.com/wesmossmoneymatters.

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