Many years ago, I wrote a short e-book on the pros and cons of paying off (or paying down) your home mortgage.  It really comes down to being a personal choice based on your personal situation.

I tend to be more in favor of paying down or paying off a mortgage as compared to the typical person, including the typical financial person.  But I only favor this in the right circumstance, mainly that you have significant liquid reserves.  I am absolutely against putting extra money towards a mortgage if you still have a lot to pay off and you don’t have a good emergency fund set up.

For those who are adamant about not paying off a mortgage early, the main reason is typically that you can earn a higher rate of return by investing your money.  A secondary reason given is that you can deduct the interest on your taxes (if you itemize), but that reason has become mostly irrelevant for a large majority of homeowners with tax law changes.

In terms of an investment return, I like to remind people that you have to factor in taxes. If you make a 5% gain on your investments and you have to pay a 20% tax on your gains, then your after-tax return is only 4%.  But if you pay down a mortgage with a 4% interest rate, you are essentially getting a 4% “return” without having to pay taxes on it.

The other major thing to consider is that paying down your mortgage is a 100% guaranteed return. If your interest rate is 4%, then any additional you put towards principal is getting the equivalent of a 4% return compounded.  You may think you can get a 6% or 8% return (before taxes) by investing your money instead, but you don’t really know that.  You aren’t going to get that kind of return right now investing in U.S. Treasury bills or annuities.  You could put it in the stock market, but you could also end up in a bear market getting a negative 8% return instead.

If you take a long-term look at history, then statistically speaking you are better off investing in a broad U.S. index fund.  But as the SEC correctly warns, past performance does not indicate future results.  So even from a mathematical standpoint, investing your money instead of putting it towards the principal on your mortgage is not a slam-dunk.

But aside from this, we are human beings living in the real world.  Our emotions are not controlled by mathematical formulas.

Emotionally Empowering

I recently listened to an episode of the ChooseFI podcast, where they talk about financial independence (FI).  The guest on the show talked about how he and his wife were able to pay off their mortgage in just five years, even though it seemed like an impossible task when they first started.  Five years to the day, they walked in to the bank and made their last payment. They documented it with a video.

This has to be one of the most persuasive videos I have ever seen when it comes to paying down and paying off your home mortgage.  It wasn’t about investment returns or planning for retirement.  It was raw emotion.  It showed the great feeling you can get when you can declare yourself debt free, including on your home.  I don’t expect you to necessarily be as emotional as the woman on the video, but you can get that feeling of joy and accomplishment.

The family in this video obviously sacrificed a lot over the course of five years to make this happen. They found ways to make more money while keeping their spending tight (with 3 kids).  It was because of the sacrifice and feeling of accomplishment that she was so overcome with emotion.

If they had invested that same money and invested it in the stock market, she wouldn’t have been making a comparable video.  You don’t get really excited because your investment portfolio just hit $200,000.  Maybe some people do, but I don’t think it would be to this extent.  And unless you sell all of your stocks when you hit a particular milestone, then it could easily fall back the next day.  After you hit $200,000 (or whatever milestone you are going for), you could check back in a month and see it is back down to $190,000.  With a paid off house, this doesn’t happen.

The other important thing here is that you should enjoy the journey.  I am guessing the parents made it into something of a game, or a challenge, if you will.  There was probably a lot of gratification along the way watching the loan amount go down, slowly at first, and then faster.

I hear entrepreneurs talk about this all the time.  They talk about enjoying the journey.  Even when they hit a roadblock, they look at it as a challenge to be overcome in their little game.  They want to hold the Super Bowl trophy at the end, but they also want to enjoy playing the games that get them there.

If you decide to choose to pay extra towards the principal on your mortgage, make it fun. Even if it is just 20 dollars extra a month to start, as the couple suggests, it is something.  You can hang a spreadsheet on your wall and make a tick mark every time it goes below the next thousand-dollar mark.

Personal finance is fun to some people, believe it or not.  You can make it fun for yourself by turning it into some kind of a game or a challenge.  This is easier to do with paying down your mortgage than it is with investing, and you will find you have more emotional attachment to paying down your mortgage.