Tom Smart, Deseret News
Grace Cohen wasnt going to take any chances. When making the last payment on her Henniker, N.H., home in 2003, the 49-year-old divorced mother of two carefully wrote the check and put final payment on it. Then she went to the post office just to make sure.
"When I put it in the box," she says, "I had a moment of gratitude and just a tremendous feeling of freedom. It was a very uplifting moment for me."
But was it the right thing to do? Is paying off a mortgage early a good idea or a fool's errand? The answer depends on whom you ask.
Michael S. Rosenbaum is a mortgage loan originator at First California Mortgage Company in San Diego. He says the American dream is to take out a mortgage on a home, pay it off and retire.
"The bottom line is, from cash flow perspective if you can reach retirement and not have a $2,500 a month mortgage payment, it makes a big difference," Rosenbaum says. "It is like having that $2,500 as income."
But, on the other hand, Rosenbaum says it isn't difficult to find investments that outperform the historically low interest rates on mortgages. Sure, paying off a current mortgage would save the 3 percent or higher interest a person would have to pay, but finding an investment that returns more than 3 percent is not a difficult task.
"Right now money is so cheap," he says. "It becomes the difference between how much money you can make on your investments versus how much you are paying in interest on the other side. If you do it right, you can get to the end of the term and just pay off the loan in one lump sum."
David Rae, vice-president of client services at Trilogy Financial Services in Los Angeles, says for most people, a mortgage is the single biggest payment they make every month.
But if people pay their mortgages off, he says, they lose the tax deduction. They lose flexibility to do other things with the money they put into the house.
Once a person stops working, it is also very difficult to get a new mortgage, Rae says. "All of a sudden you have this big asset that isn't producing any income," he says, "and you don't really have any access to get the money out of it."
Bruce Ailion, a real estate agent with Re/Max Greater Atlanta, also worries about people coming up against "lightning strike events" and not being able to get money out of the house.
But for most financial experts, it is all simple math. Todd R. Tresidder was single, had a large income as a hedge fund manager and bought a nice condo.
"I was just determined to be out of debt," says Tresidder, who lives in Reno, Nev. "I was going to throw all my income at it and pay it off in a really short period of time."
He did it in less than two years. But it ended up costing him more than a million dollars, he says.
It turns out the other investments he made did really well. They doubled the next year and, compounded, have increased in value to this day. He couldn't say the same for all that extra money he put into the condo. "I lost a fortune," he says.
He went from a "pay off your mortgage" advocate to a "never pay off your mortgage" advocate. But the "never" idea didn't last for long.
Chasing the deduction