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15: Should You Pay Off Your Mortgage?

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The question of whether or not you should pay off your personal residence is actually somewhat complicated as there is more at play then simply math. There is also an emotional and psychological component to the question so I won’t be strident in any way.

However, let’s look at the math. What kind of interest rate are you paying on your mortgage? Hopefully you were not living in a cave over the past few years and locked in something below 4 percent.

So, if you’re mortgage is at a 4 percent interest rate, you have to ask yourself the question, “Can my investments provide me greater than 4 percent yield?” If the answer is yes, then does it make sense to pay off your mortgage?

Hopefully, the answer to the question of whether your investments can make you more than 4 percent per year is yes and if you are a follower of mine the answer should be a resounding YES!!! In that case, mathematically, it would make sense to not pay off your mortgage.

Now, let’s look at another reason why you might consider not paying off your mortgage. Most of you have a mortgage that is 30 years long. My parents bought a house 30 years ago in a suburb of St. Paul–nothing that would appreciate much per se.

They bought the house for about $150K. I just looked at the Zillow estimate of what that house is worth today and it says $400K. Some of it might be because the neighborhood developed a bit. But a lot of that is because of inflation.

So if my parents had a $120K mortgage on that house when they bought it, what would happen to that debt over time? You guessed it–the debt would erode. Inflation hurts us in many ways. It reduces are buying power. It is a silent tax.

However, the best way to combat inflation is through debt. INFLATION ERODES DEBT. The cost of a $120K mortgage becomes a lot cheaper in inflated dollars over time.

Therefore, the math certainly suggests that you should not pay off your mortgage.

However, there are other issues of course. If you spent too much on your house, it might be absorbing all of your cash flow. If that’s the case, you might have bought a house that’s too expensive for you. You might, therefore, feel uncomfortable with the idea of this ongoing burden.

Personally, I don’t try to pay off my mortgage for all of the mathematical reasons described above. However, I don’t think it’s irrational to do it. Just make sure you have the facts (the math) available when you make your decision.

Don’t do it because Dave Ramsey told you so.

Buck