Should You Grow Your Nest Egg Or Pay Off Your Mortgage?

If you have ever found yourself in a position to ask yourself, “Should I save more money or pay off the house?”, first I should congratulate you because you are gem in matters of personal finance. With the majority of people living paycheck to paycheck, having this problem is a pleasant one indeed.

Be sure to check out the other articles written by my fellow Money Mavens team listed at the bottom of this post. A little diversity on the subject can’t be bad.  :D

So…should you grow your investments or pay off your mortgage? Just as I tell anyone that asks me this question, I am not going to tell you what you should or shouldn’t do, but I will tell you what I would do if I were in this situation. Personally, the way I see it, this is a trick question. For me, being completely and totally debt free has a tremendous influence on what I would do.

Some people will try to argue that paying off your mortgage is stupid because you lose your “tax benefit“. This makes absolutely no sense to me since what you are doing is giving the bank more money to keep from giving Washington less.

Others will likely tell you to invest what you would have used to pay off the mortgage and take full advantage of compounding interest. This argument at least makes sense to me. What they are suggesting is that you avoid paying off low interest debt, and instead invest the money in something that will give you a higher return. The bottom line for me is that you still have debt. This argument seems to encourage people to ride out a 30 year mortgage, and I personally believe that not having a mortgage is more beneficial than having one.

If you have absolutely NO DEBT, how fast can you build wealth? You can do it super fast!! I would much rather have a giant emergency fund, no debt,  steady retirement savings, and the opportunity to build one heck of a diversified portfolio, than continuing to sludge along on a 30 year mortgage hoping that something doesn’t happen that will put me in a situation to lose my house.

When the economy plunges into the dark, cold abyss a paid off home is a blessing. A paid off home doesn’t drag behind you when times are hard, instead it gives you strength.It puts you in a position of strength rather than one of weakness. You are in control.

When I decided I didn’t want to be a slave to any lender ever again, I really meant it. It wasn’t reliant upon my disbelief in my own ability to live life without borrowing money to own a house. I’m not saying that anyone who takes out a mortgage is making a bad decision, because to them depending on their mindset, it could seem like the only way. It’s not the only way to own a home, it’s just the simple way to own a home. Simple is not always better.

How has society influenced your position on this matter? If more people were completely debt free and less people had mortgages, how would you feel about it then?

I am a firm believer in the saying “anything worth having, is worth waiting for”. If you live your whole life convincing yourself that you can never save up enough money to buy a house without a mortgage, you are selling yourself short.

Then there are those people that really do not want to make the sacrifices it takes to buy a home without a loan. They are completely content with having a mortgage until the risk catches up with them. Then they suddenly feel entitled because life just isn’t fair and everyone deserves to own a home.

Personal finance is personal. You have the ability to just cruise through life virtually any way you wish, handling your money as you please. To some having a mortgage might not be so bad, but to others, the ones who have experienced the pain of what having a mortgage can do to their family when life hits them hard, the risk is all too real.

For me it comes down to one simple belief. NOT HAVING DEBT IS ALWAYS BETTER THAN HAVING DEBT!

What would I do? I’m paying off the mortgage early baby!! Once the house is paid off there will be plenty of time to invest later on. I have also NEVER heard someone who had a paid for house complain about it!! I have however, heard plenty of people with a mortgage complain about the “what if’s” in life until my ears bleed. What if…you didn’t have a mortgage?

What would you do? Share your thoughts in the comment section. This is certainly an interesting and very thought provoking topic. Add to the discussion.

Save or pay off the mortgage?

photo credit

Related Money Maven Network Articles on this Topic:

12 Good Reasons Why You Should (and Should Not) Pay Off Your Mortgage Early – Len Penzo

Pay Off Mortgage Sooner, Invest, Or Save? The Math Analysis – Money Help For Christians

Should You Put Extra Money Towards Your Mortgage or Invest? – Wealth Pilgrim

Money Mavens: Pay Off Your Mortgage or Invest Your Money? – Green Panda Treehouse

Pay the Mortgage Early or Save? – Joe Taxpayer

About Brad Chaffee

35 Responses to “Should You Grow Your Nest Egg Or Pay Off Your Mortgage?”

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  1. I think you said it best when you said waiting. The decision isn’t usually, ‘do I take this lump sum and pay off my mortgage?’ It is usually about paying off their mortgage early. If you are looking to pay off your mortgage in 20 vs 30 years or something similar it would be beneficial to look at saving on the side. I put a stress on saving, not investing. Stocks should not enter the conversation they are too risky. This is money you can’t lose and needs to be liquid and be there when you need it. The power of compound interest can beat the simple interest of a mortgage pretty easily. Plus you would get liquidity that putting extra money towards your mortgage wouldn’t afford you if something bad did happen.
    PS-Can you please add a subscribe to comments plugin?

  2. Penny says:

    Very thought provoking. We refininced recently which actually brought our payments up about $5 a month. Even the banker thought we were crazy. The lower interest rate took 5 years of payments off the mortgage. Our budget doesn’t even feel the extra $5 because we were paying extra each month before we refinanced. Those 5 years of payments amount to over $75,000. It won’t be like opening a bank account and seeing $75,000 sitting in it and wondering how we can spend it, but it is a pretty warm feeling to know the bank didn’t get it from us.

    • Brad Chaffee says:

      Good for you Penny! Saving yourself 5 years of payments is definitely worth refinancing! And no, it’s not like having the money sitting in a bank but there is definitely something to be said for saving yourself from paying the banks even more interest than they’re already going to get. Great job!

  3. Brandon says:

    I couldn’t agree more. I currently do not own a home so I may be out of my league here but I am making plans on buying one soon. After fiddling with mortgage and extra payment mortgage calculators, I honestly don’t understand why anyone would choose not to make extra payments. One extra payment every two months will save you 15 years of making payments on a 30 year mortgage. On a $200,000 home that’s nearly $150,000 saved in interest you would have paid. Crazy!

    • Brad Chaffee says:

      Check out the difference on getting a 15 year mortgage Brandon. If I were ever going to get another mortgage I would definitely be getting a 15 year as opposed to a 30 year. The amount of money that can then be used to save, invest, and give is ridiculous. Willingly paying the banks interest that you don’t have to just doesn’t make any sense to me.

  4. Anthony says:

    I still have student loans before I work on my retirement savings and mortgage. BUT! Once I’m done with my student loans, I am fortunate enough to be able to max out my 401(k), max out an IRA, and pay extra (approx. 15%) towards my mortgage. That’s having my cake and eating it, too!

  5. We do both. I contribute the minumum to my 401k to get the maximum company match, we fully fund a Roth IRA, we overpay our mortgage so it will take 10 years total to pay off, and we overpay our one remaining car loan in order to pay it off 2 years early (the end of this year or the beginning of next).

    I hate debt too, but I’d hate giving up free 401k money or Roth IRA compounding interest even more since our biggest financial goal is early retirement by age 52 (25 years away).

    We are putting off a 2nd Roth IRA in order to pay off the car really fast, but that’s because the car is a depreciating asset that I really hate having a loan for. If we only had the mortgage left, we’d have 2 Roth IRA’s and overpay the mortgage with any extra.

    • Brad Chaffee says:

      How nice would it be to retire with no mortgage debt? early retirement will be much easier to make happen with no house payments to make each month. I definitely like that you are able to do both! :D Rock on!

  6. Donna says:

    I am going to pay off my mortgage. I have 7 years left so the principal is much more than the interest. I have some in an emergency fund. The crux of the matter is I really want to hit retirement with a paid for house (I have no other debt). To me this is a no-brainer. Great post today! :-)

    • Brad Chaffee says:

      A no-brainer indeed Donna! Congratulations and good luck getting that sucker paid off before you retire! I am on the sidelines cheering fr you all the way!!

  7. Mrs. Money says:

    A few months ago, I wrote about how I couldn’t bring myself to pay extra on the mortgage because it felt like the money was disappearing. It’s still hard for me to do, but I add a little extra every month. :)

  8. Julie says:

    Brad, I am with you on this one. I am hoping to pay off our mortgage in 10 years. We have been paying extra almost every month except for months I’m on unpaid leave. I am currently on unpaid maternity leave but am ok with it since I am getting some time to spent with my baby. I also have taken unpaid time to just take my older daughter somewhere or play with her for a day. I don’t regret doing so because I can’t put a price on that time with her.

    • Brad Chaffee says:

      That is great news Julie! Maternity leave is a great opportunity in my opinion. I absolutely loved it when my wife and I were both able to spend so much time with our little ones. My wife’s was paid for two of the three months but I was not paid for the 6 weeks I took off. I wouldn’t do it any differently. We had to cut back on some things at the time to make sure we didn’t have to spend out of our EF, but it was completely worth it.

      Balance is key and what better way to find balance in your life than to spend extra time with your kids. To me that’s what life is all about. :D

  9. Brandi says:

    I personally am working out Baby Step 2 of Dave Ramseys plan and I fortunately will be done with that by fall of 2011. All I have left are Student Loans!!

    And I made a promise to myself that I
    1) Would not buy until I was debt free (or really close because Student Loans are so low interest that they aren’t hurting me as bad as a credit card would)
    2) When I did buy I would pay that baby off as fast as possible!!

    So in this situation, just like my current ‘save for a house or pay off Sallie Mae’ situation, I would throw all my extras at the debt. Mortgage, student loans, credit cards, car payments…they are all debt! Get rid of it!!

  10. Can you stand a contrary opinion???

    I tend to favor building up the nest egg over paying off the mortgage early. Three reasons:

    1) I’m a big fan of liquidity. Having enough of it tends to neutralize disaster and minimize a mortgage. A lot of people got into trouble on their mortgages because they lacked liquidity; that turns a short term problem into a long term one.

    2) Once the nest egg gets big enough, you can begin paying off the mortgage out of savings rather than income.

    3) A growing nest egg preserves options for a later date; you can build enough savings until you have enough to pay down the mortgage in big chunks.

    On the last point, if you plow your money into your mortgage from the start, the money paid in is liquidity lost, but the payment stays the same until complete payoff.

  11. I’m a big fan of low interest debts and high investment returns ;-)

    However, in order to make it viable over long term, you better have a good job (i.e. high income) and a nice safety net. The power of compounding interest can work its magic only if you can actually hold your investment for several years (read more than 10-15 years).

    On the other side, I can’t argue that being debt free is bad either ;-) It is just that I think you can do a lot more with others people money ;-)

    The key is to use this money to create assets while most people use their equity to buy a new car, do home renovations and go on vacation… this is sad.

  12. Mizé says:

    I agree, not having a mortgage is always better than having one.
    I´m one of the lucky who doesn´t have a mortgage and I´m almost totally debt free (except home ownership costs). It´s great to reach this point, I already feel more free and in control of my life. My next step is investing on a simpler/healthier country lifestyle, I´m tired of living in a flat :)
    Enjoyed finding your website, will be back :)

  13. Frugal Dude says:

    I believe in being completely debt free. I’m 64, plan or retiring at 66 (if I can hold onto my job that long)…a real concern with this economy. My wife and I have zero debt. No credit card, no house payment, no car payment…zero. Having a home owned free and clear is the most liberating feeling. We own a 2001 Camry with 103,000 miles purchased used in 2002. We also own a 2003 GMC pickup purchased used in 2010. No credit cards are used in our home. All purchases are cash. My wife and I have an income pre-tax of $110,000 per annum. We are able to save $60,000 dollars per year (put into bank…no stocks….no bonds…and believe that interest rates will sky rocket giving us a better return than the market).
    I have no trust in the stock market, believe it is ran by theives and bandits. I watched my friends (one died of a heart attack from the stress) during the last market turn down and was sickened by what the wolves on Wall Street did.
    At retirement my spouse and I will not live the life style of the rich and famous but we never have. We should however be able to enjoy a modest life style and enjoy those things that are important to us (family, friends, church) without the constant pressure of debt. Unfortunately I can’t say the same for many of my “high roller” friends.

    • Brad Chaffee says:

      I love your attitude and mindset about debt! I want to be like you when I grow up! :D

      Great job on saving so much every year, that is so awesome! Thanks for sharing your thoughts! :D

      Come back soon!

  14. I have a saying that goes, “a debt-free life is a stress-free life”. I think being able to pay mortgages as soon as possible takes off much pressure and it has freed me from the feeling of just “working to pay debts”. After the mortgage had been paid off, I was able to start saving up for a new business I would be launching soon.

  15. Mel says:

    I was searching for articles on the pros and cons of paying off a mortgage, especially as retirement nears. The psychological effect of being “debt free” is very powerful for many of the posters above, but alas is a very “risky and costly” proposition. This is why:
    In 2012, you can obtain a mortgage refi at less than 4%…after tax the rate falls to less than 3%.
    Use of your mortgage proceeds:
    1) pay off higher interest debt…credit cards, car loan, etc. And of course the monthly mortgage payment.
    2) invest the cash in a conservative blend of investments that allows you to beat the 3% cost over time…this is easily achieved…for the non-investors you might consider an annuity.
    3) the savings can be used for extraordinary expenses such as an illness or to help with co-payments that will be increasing under Medicare in the future. Note this is much cheaper cost of funds than waiting to some future date to do a reverse mortgage…at much higher mortgage rates!
    With the passage of time, the almost certain increase in the US inflation rate (and related increase in interest rates) will make the provisions of #1 & 2 above easier each year (you’ll be paying pennies less on every dollar compounding along with the higher inflation rate). Thus very likely to turn it into an ever increasing net positive cash flow when compared to the low mortgage rate from 2012 (70 year historic low)
    The ONLY reason to not follow through with my suggestion is that you will frivolously spend the money rather than save and invest. If you calculate the tax and inflation adjusted price paid over the next couple decades for “peace of mind” for having no mortgage, you will realize that you can find much cheaper ways to pay for that state of mind. Dom Perignon any one?
    I hope some day, someone will be helped by this reasoned commentary to balance out the purely/mostly emotional arguments surrounding such an important financial decision.
    Good luck, Mel

    • Brad Chaffee says:

      Mel,

      Thank you for weighing and I’m glad you found enemy of debt in your search. I certainly respect your opinion and am not going to sit here and say your wrong though I definitely disagree with some of your reasoning on some of the things you listed but here is what it boils down to.

      Your way is like playing a math game. Most people don’t want to spend all that time thinking about how to game their finances when a much simpler solution exists. Simple is first eliminating all of your non-mortgage debt and then focusing on the mortgage and being done with it. At that point you have ALL OF YOUR MONEY to aggressively invest for retirement. Simple.

      To me risky is not owning my home outright and having the mortgage debt hanging over my head not to mention the mortgage payments that could be used for saving. You say a benefit is the ability to pay off higher interest debt but everything on Enemy of Debt suggests already having non-mortgage debt paid off before you even begin to tackle the mortgage. Car loans are expensive ways to own a vehicle when there are ways to buy cars and upgrade using cash every few years on cars that do not lose value as soon as they’re driven off the lot. You use the word savings a few times in your example but with mortgage debt taking the biggest chunk of someone’s income (all debt considered) the money you wouldn’t be paying on a mortgage could be used to save as well. So it seems like you are saying don’t pay off your mortgage because the extra money that would be used to pay down the debt could be used to save instead. I know you’re referring to the great benefit of compounding interest versus paying extra on mortgage debt but someone would also be able to save money if they didn’t have a mortgage payment to make each month.

      There are two factors to personal finance and debt. Psychological factors and mathematical factors. I’ll admit that depending where you are in your life (age) your financial plan might need to be adjusted more one way than the other but you have to admit that someone in their 20′s, 30′s, 40′s, and possibly even the 50′s depending on their income would be better served by eliminating their debt early on and taking advantage of their income without the burden of minimum payments to build wealth and save for retirement.

      Again, I respect your opinion and am not saying your way is wrong and I’m also not saying my way is right for everyone in every situation. I want to live my life without having to crunch numbers in an effort to “beat the system” because in the end using your way means I still have a mortgage and possibly even other debt while my way leaves me with zero debt in my retirement years so that my income can be used to enjoy life.

      Thanks again for weighing in Mel! This is a great conversation.

  16. just asking says:

    After reading so many articles, I am still not sure whether to pay off my mortgage early or not. Since 2000, I have lost over $250,000 in the stock market, with a rather conservative portfolio. If, in 2000, I had paid off my mortgage, I figure I would be $100,000 richer today. (Obviously, the math is not exact but pretty close). I still have a modest amount saved, and have no other debt, but I am only working part time and can no longer appropriate funds to a 401k. I have to draw from these savings to make ends meet. If I take the plunge and pay off my $40K @ %5.25 mortgage now, my income will cover my expenses and I will only have to draw minimally on my savings to pay any unexpected bills. I have a two year emergency fund. I have a couple 401k’s and a pension which I can’t yet collect on as I am still 10 years away from retirement.

  17. Robert says:

    A year ago I bought by first house. And yes, the thought of owing someone $120,000 makes my stomach turn. Over the last few years I’ve managed to save about $50,000 and I’ve asked myself if I should use it to pay down my mortgage. I’d still owe $70,000 and I ask what would happen if I were to lose my job. The bank won’t let me suspend my payments for the next five years even though I’ve prepaid by that much. They’re going to want a payment the very next month and I will have no income and nothing in savings to give them. They’re going to foreclose and I’d lose my house. On the other hand, the $50,000 in the bank would let me pay my mortgage for the next five years even with no income. Surely I’d find another job by then and my house is saved.
    You said that to you having a mortgage is risky, but that’s only if a financial disaster strikes, and paying off the mortgage is a way to prepare for that disaster. But you’re in a race against time and you’re gambling that you’ll pay off the mortgage and then build up significant savings before the disaster strikes. If it hits before you finished then the situation will be worse than if you’d just made regular payments. To me it makes more sense to keep all your extra money because you can use it to get through hard times even if you still have a mortgage. And don’t forget that after your house is paid off you can still lose it if you can’t pay the property taxes or home owners association dues. So a paid off house is no guarantee that a financial setback won’t cause you to lose your house. The best defense is lots of cash in the bank.

    • Tom says:

      Robert,

      I am in a very similar situation as you. I have about $100,000 saved that serves as my emergency fund and $180,000 left on my 15 year mortgage at 3.75%. I make extra payments per month that will bring down the remaining 12 years to 8 years.

      Last year I lost my job and was out of work for 6 months so I had to dip into my emergency fund to make ends meet. It was reassuring to have some funds I could access.

      Now I am back working but making less money than I was. I am very keen on eliminating all debt but I agree with you that if you use the emergency fund to pay down a mortgage you can end up in a bad situation if you find yourself out of work.

      I am debating taking 1/2 the money and paying down the mortgage, but even that makes me nervous.

      You caputred my fears perfectly when you said “you’re in a race against time and you’re gambling that you’ll pay off the mortgage and then build up significant savings before the disaster strikes”

      It is not uncommon for people to be out of work for a year or longer in this economy – I know several people who have been.

  18. Richard robinette says:

    We are 64 and still working. We owe 98,000 on our house, only dept. we have 100,000 in a 401 and 13,000 in another 1. We are thinking about pulling enough out to pay off house and taxes. I plan on working for a while, my wife till 66. We want to be dept free. I would love your opinion. I am now saving 40% of my wages.

  19. Rachael M says:

    I’m doing a mixture of both right now. My husband and I are in our mid 30s. I contribute 10% to my 401k and that gives me a little extra on top of the company match. My husband owns his own construction business so we do have to replace work trucks here and there we usually do our best to put a lot of cash down and pay these off right away. I’m currently paying about 250 extra on the mortgage while saving extra cash to build a horse barn. I don’t want finance the barn and want have it built with cash in hand. After this barn adventure. I’d like to pay between 1000 to 1500 on the mortgage every month.

    My dad does not agree with my investing and he thinks it’s stupid that all this equipment, trucks, and personal cars our paid for and that I’m paying extra on my mortgage. He thinks I should be investing it all because the investments will yield a higher rate of return. My dad finances everything and puts the money into investments.

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