Managing Money God’s Way

Getting rid of the mortgage

As a Christian it is very easy for me to not fall into the trap of categorizing debt as ‘good’ or ‘bad’. According to Proverbs 22:7, those that are in debt are slaves to their lender. Another way of looking at being a slave is being in bondage, and those in bondage are not free to do as they wish.

I do agree that there is a difference in types of debt. We still owe on our mortgage and that is debt, but we are working diligently on paying off our mortgage, because we have agreed that we want no debt. Even for those who are not Christians, I think most people would agree that having no debt is better than having debt.

The idea of paying off a mortgage early implies that any extra disposable income is paid onto the principle of the mortgage, thereby lowering the amount you owe and decreasing the amount of interest you will pay back. There are many out there that teach you should keep your mortgage as long as possible because of the lower interest rate that comes with a mortgage. The argument usually ends up with a debate over how the extra money could better be served; invested or used to pay down the mortgage. The naive mathematicians would say that investing for the long-term is a better return on the investment than getting rid of the lower rate mortgage. They say that the long-term investment will earn 10-12%, where the interest rate on the mortgage is usually around 6%. On the surface it appears as if investing the extra would net you a 4-6% increase over paying off the mortgage.

This sounds like a great plan, but when you get below the numbers and look at reality, there are some holes that need to be addressed. First, the idea that you are going to get 10-12% out of the market must be dissected. The 10-12% number is an average of the existence of the stock market. While I will agree that the long-term benefit of the market is valid, you have to understand the risk that comes with it. You have to look no further than the last six months of this year. How many people are seeing 25-45% losses on their investments? If you invested $1000 in the market this year, anywhere from $250-$450 of that money has been lost, which means your $1000 investment is now worth $550-$750 (hopefully). How many years does the market have to return 10-12% for you to make back the amount that was lost? Let’s assume the market ends the year with a bang, and you loose only 25% of your investment. Even if the market returns 25% next year, you won’t be back to $1000, ($1000 – 25% = $750 / $750 +25% = $937.50). If you had paid that extra on your mortgage, you would have definitely lowered your principle and would have definitely lowered the amount of interest due the bank.

Another benefit of not have a mortgage is the flexibility and freedom that it gives. Right now the housing market is pretty bad in most areas. If you lost your job and had to relocate, now would not be the time to try and sell your house. Whereas, if you had no mortgage you could move with little effort and little stress.

In short the benefit of paying off your mortgage early is a guarantee improvement to your Net Worth, improved flexibility and very little risk involved.

Related Websites

• Reader Question: Which Loan Should I Pay First?
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