Because it just feels so good to be debt free!
Even at the very low interest rate of 3.6%, investors that choose to pay down their mortgage vs. investing the proceeds will earn this rate as a guaranteed rate of return on their funds. With FDIC insured deposit accounts and Treasury Bonds yeilding less than 1%, where elese can you earn a GUARANTEED rate of 3.6%? I know, I know. . . Maybe a municipal bond, or a corporate bond, but the small diffence in yield really isn't worth it in my opinion.
For the reader that is screaming "YOU CAN DEDUCT THE INTEREST FROM YOUR TAXES YOU IDIOT," simmer down. Yes, you can. But from my chair at the bank, I see WAY too many people blindly using this as an excuse to buy too much house, and eliminate any discretionary income they could apply to retirement savings. Besides, if you do the arithmetic, its like being excited about getting a discount on taxes for paying interest to a bank. THAT MONEY IS LEAVING YOUR WALLET.
+1 for paying off the mortgage
Peace of Mind
In a poll of over 20 clients that recently paid off their mortgage, I asked if any had any doubts or regrets about the decision. The answer? NONE. All were very glad to have done this, most commonly citing that the best benefit has been a deep, relaxing sleep unlike anything they have experienced before. There's NOTHING like owning your home free and clear.
+2 for paying off the mortgage
Extra Cash Flow to Put Towards Retirement Savings
That $1,200 mortgage payment will no longer be coming out of your checking account every month, offering the prudent investor an opportunity to increase their savings rate to the 30% of gross target I've advocated in previous posts.
For those of you that choose to follow my advice and pay off your mortgage, do yourself a favor. Have DISCIPLINE and invest the extra cash flow in your tax-deferred accounts and watch that money grow substantially over time. Its easy to alter your spending on discretionary items after your mortgage payment goes away so be aware of this.
***Note-be sure to tell the bank you are paying off the mortgage note and would like a final payoff amount. If you are not paying the full amount off, ask that your payment be applied to principal. This will avoid a portion of the payment to be put towards "pre-paying" 3 months of interest!
Don't get me wrong, this is a very hotly contested topic. I want to be clear though. . .of the two "camps" (paying off vs. investing) I am 100% in the "paying off" camp. Guaranteed return, peace of mind, and extra cash flow you can put towards tax deferred accounts.
Ultimately, would you take a mortgage on a paid off house to invest? If the answer is no, then pay your mortgage off NOW!
If you'd like more information on this, including a mathematical evaluation there's a great resource for you in the Bogleheads Wiki.
Until next time,