DW has to be on board with the plan and she is very risk averse. Probably more than most people. She's not particularly happy about the 401k but understands the company match is free money. In this situation, paying down the mortgage is the best possible use of our money and it is also risk free savings on interest. My wife is happy, and I'm happy that she's happy. Is it the most optimal, no. But not everything is about the most optimal case. Emotions and "sleeping at night" play a large role in everyone's decisions.
I **really** get wanting to have the mortgage paid off. I've done it once before. I'll be glad when we pay off our HELOC in the next few months and even more glad when the mortgage on our new house is paid for, too.
So, first of all, congrats to everyone who has already paid off their mortgage! Bravo!
All the comments by all the posters in this thread about how much better off one's financial situation is once the mortgage is fully paid off are spot on correct.
But...
About that safety issue...
That's where a lot of folks seem to get it wrong.
It's absolutely true that a house that's fully paid for improves one's financial situation compared to one with a mortgage.
What can go wrong between the decision to pay off a mortgage early and **actually** paying it off?
What can go wrong is exactly what you fear. An extended job loss. Inability to work due to illness or injury. The house foreclosed on and taken away from you by the bank and the courts.
Having your house foreclosed on and having to move out are terrible things to have happen.
Everyone is **completely right** in wanting to avoid that scenario!
But is paying extra money on your mortgage every month until it's paid off early the best way to go about it? That's the question I raise and, obviously, I think it's not the best path.
Let's say I have a 30 year fixed rate mortgage that costs me $1000 a month in principal and interest. (Taxes and insurance will be with us regardless so we'll ignore them.)
If I had paid on the regular amortization schedule I might owe $170,000, but I've been very aggressive in paying it down quickly and only owe $140,000. We put in an extra $30,000.
Bad stuff happens. We lose our jobs and can't find a new one for a goodly while. It's part of a general economic malaise and home prices have dropped by 30%. We exhaust our emergency fund.
We can't pay the mortgage payments and bank forecloses. We have just lost $60,000 that we had invested in the house. The bank, by the way, is very happy we paid the house down so quickly. That will make it much easier for them to sell the house at a break-even point. It was certainly nice of us to look after the bank's interests so well.
Now, let's instead suppose that we put that extra $30,000 worth of money in the stock market instead of the mortgage. The stock has grown at the historical average rate of 10% per year for the last 2 years and we reinvested the dividends. So we have $30,000 + $3,000 + $3,300 or $36,300 in stock when the economy tanks. Stocks drop 50% and stay that way for a goodly while. Our $30,000 investment is now worth $18,150 and stays that way for the duration of the depression. We sell it off at the rate of $1,000 a month. We're able to hang onto our home for an extra 18 months before it gets foreclosed on. We have an extra 18 months to land a job that will cover the mortgage. So, in this horrible scenario we lost $11,850 of the $30,000 we invested but we saved the other $30,000 we had already put into the house, for a net gain of a keeping a roof over our heads and $22,150 over the pay-into-the-mortgage scenario.
Of course, if we lost our jobs due to illness instead of an economic collapse, our stock would not have lost value. In that case, we would have had over 36 months worth of payments out of our stock investment before the house was foreclosed on. And, since we're only pulling it out at the rate of $1000 a month, the remainder will keep growing in value. It turns out we would have about 44 months of safety margin, not 36!
Now, once the stock value is high enough to pay off the mortgage, then we can sell the stock and pay off the mortgage early, if that's what we value. If the market happens to be down at that point in time, we wait a bit until the market recovers, then sell. Either way, we pay off the mortgage and get that freedom form it that we want.
Now, it turns out that the Australians have come up with a banking product that's an awesome compromise between the pay-extra-as-you-go and the invest-up-until-full-payoff-possible scenarios.
They have what's called an "offset account" at the bank with the mortgage. If they pay extra into the offset account, it offsets (reduces) the principal balance when the amount of interest is due. However, they can withdraw that cash at any time. This has the benefit of reducing the amount of interest due but also preserving the flexibility to keep that cash available in true emergencies.
I bring up this example to all the bankers I talk to, hoping they'll introduce this product in the US.
