No, Forbes, Paying Off Your Mortgage Early Doesn't Mean You'll Destroy Your Finances

On April 18th, Garret Gunderson, a contributor for Forbes, authored an opinion piece outlining how paying extra on your mortgage leaves you vulnerable to foreclosure, that it’ll take longer to pay off your mortgage, and how your money is tied up in “equity jail.”

I recommend you read the article, but I disagree with most of it. I agree, that when you make extra payments on the principal of your mortgage loan, those dollars are in equity jail. You have increased your equity in your home, but until you pay off the mortgage, you haven’t actually purchased anything with those dollars. They sit there in jail until the balance is paid, title is transferred, and the grass under your feet feels sooooo amazing because then you’re standing on YOUR land, because YOUR home is yours, not the bank’s. I understand the opportunity cost argument, and appreciate Garret highlighting this aspect of the risk of having a mortgage. (Opportunity cost synopsis: once money is spent, it’s gone, you don’t have an opportunity to apply that anything else, to do so, you’d need new, different, money.)

However, I take issue with a big assumption Garret makes in the article. He uses fictitious neighbors, Jack and Jill, as an example. Jack pays extra, trying “his best” to pay off his mortgage early. “Jane, on the other hand, has an interest-only mortgage and often makes payments late.” Garret goes on to describe how if both Jack and Jill were “suddenly affected by an unexpected financial crisis and can no longer pay their mortgage,” that the bank would target Jack over Jill because Jack paid more into the house. Because Jack paid down his mortgage, it’s easier for the bank to get its money back by selling Jack’s house for what’s left on the mortgage, “versus losing cash upon the sell of the house” presumed with Jill’s house.

Okay… Time out. My turn to make a big assumption. If Jack is “doing his best,” I’m interpreting that as, he’s made a series of other smart financial decisions to enable him to be in a position to pay extra on his mortgage. Perhaps this is my bias, as I am admittedly a fan of Dave Ramsey’s baby-step method for building a solid financial foundation. However, to be financially in a position to pay extra on anything takes deliberate planning and execution for all of us that weren’t born with trust funds. Very, very few people just have ‘extra money’ around that they can ‘pay extra’ for something. Even if it is the roof over their heads!

Because of Jack’s demonstrated mortgage paydown enthusiasm, I’m assuming Jack has no other debt. I’m also assuming Jack has a savings account. That’s a might bit assumption, since 40% of families cannot afford an unexpected $400 expense. But if he’s pouring money into the place that he lives, I’m guessing he has also set aside some funds to at least maintain or improve his abode rather than be up a creek without a paddle for the inevitable fix-its required. So, if Garret is right, and Jack used his home equity as his “savings” account, then okay. But that’s a pretty big “if” when talking about making extra payments on something that is generally such a large portion of family budgets.

PS- your home is a liability, not an asset, so do not fall into the trap of “saving” by paying down your house!

And Jill, making poor financial choices, well she might be losing the house to foreclosure with or without the redundant “unexpected financial crisis.” (Side note: whoever expects a financial crisis? If you were expecting one, wouldn’t you do something about it to make it less of a crisis and more of an anticipated event/circumstance?)

Instead, Garret offers that Jack would have been better off saving that money in a high-interest rate account, letting it grow, and paying off the mortgage at once. He offers this would give Jack more stability, and be able to maximize his (mortgage) tax deductions.

I would completely agree, if savings accounts actually paid interest rates higher than mortgage interest rates drained. Except these unicorns don’t exist (and if they do, please comment below and set us all straight!).

In April, 2020, while the world is battling COVID-19… and markets are a mess… and the Fed is doing some creative accounting… Interest rates have plummeted, which means they’re mere beans-and-rice for us little people at the bottom of the economy. Personally, I keep getting notices on all my savings accounts that rates are being reduced. Thank goodness I have some CDs that had locked in a higher rate! (But wait! Those are an opportunity cost as well! Can’t spend what’s tied up in the bank!)

If you have a savings account that accrues at a higher rate than the rate of your mortgage, it makes sense to save. And if you do, again, please, please share this wisdom with us! I’m not talking about stocks, mutual funds, or index funds, I’m talking about a savings account.

Garret recommends a “Cash Flow Banking” account of 4-5% where you don’t pay taxes. I knew nothing of this before this article. A dividend-paying whole-life insurance policy is the basis of this, enabling you to be your own banker.

Okay… time out. Again. Whole-life insurance policy? Paying higher premiums for life-long coverage?

Woah, Nelly! I don’t need to read into this “banking” account any more. The first few search engine results boasted “guaranteed returns” based on an insurance policy. This screams of leaches sucking your account dry. You want to talk about opportunity cost… while paying for extra insurance? Do you really need to keep paying for an insurance policy after you’ve accumulated enough wealth to be financially independent? And do you really want to pay someone to manage your money for you, for a fee, aka treating you as a means of an income?

If Jack is trying to pay off his mortgage early to own his own home, why would he pay a different “banking” account for his entire life? I don’t see it. More likely, Jack figured, hey, I just need term insurance, because I’m planning on paying off my mortgage ## years early… so my family wouldn’t need a $$$/month life insurance policy to settle my debts and expenses, since I won’t have debts nor expenses for my family to worry about in ## years!

You know who cares the most about your money? Who takes the best care of your money? YOU!

Nope, nope, nope. No way, folks. Sorry, Garret. Again, I’m assuming a level of financial literacy here, with financial independence as the goal. This isn’t everyone’s goal? Because it should be! But if Jack is making extra payments… it seems reasonable to assume that Jack is trying to remove the bank’s shackles so his home will be HIS home.

Let’s assume Jack has looked into the math, even just a little bit, to figure out that he can make extra mortgage payments, and considered various scenarios so he could outline his strategy. If he went through the extra effort to have “extra money” available to put to work, seems like it would be logical for Jack to spend a little extra thought on how to spend all of his money.

So, no, Forbes, paying off your mortgage early doesn’t mean you’ll destroy your finances. That was worth repeating. If you do the math, you can compare the return rates against your goals. Maybe it’s worth it to you to own your home, instead of paying the bank, because you value stability and are more risk-averse. Or maybe it makes more sense to invest in an account of some kind, such as a low-cost ETF with Vanguard, designated specifically for a future mortgage payment, to just let that grow for a future lump-sum mortgage payment. Wouldn’t that be exhilarating! (Nerd joy!)

As with anything you do buy, you do have opportunity cost. When you purchase something, such as freedom from the bank to actually own your home, you can’t put that money to work any other way.

Being pretty risk-averse, that opportunity cost is worth the price for us. We want to be mortgage-free ASAP, because this is a critical part of our FI path. We want to own our homestead so that we know we’ll always have a solid home, on self-sufficient land, forever.

What makes the most sense to you?