Is this a good time to prepay our mortgage?

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You know how I feel about debt, including mortgage debt. As a matter of fact, just last week I posted about this very topic. This week I came across an article at CNNMoney.com that asked, “Is this a good time to prepay our mortgage?“. One of the interesting aspects of this article is that it was touted as a crisis question that was answered by a CNN Money expert. I find the answer interesting because the question was considered a crisis question. If someone has a few extra dollars and they want to pay down their mortgage, I for one don’t think that is a crisis. I think it is a very legitimate question and as far as the ‘expert’ advise, I pretty much disagree with everything San Diego financial adviser Jean Sinclair says. Let’s take a look at the two reasons Ms. Sinclair gives for not paying down your mortgage.

You’ll likely earn a better return in the market
If you lose your job — and you run though your cash cushion — it’s easier to sell stocks than to pull the money out of your house.

Let’s take both of these ideas and give some contrarian ideas. First, there is no guarantee that the market will provide a better return than paying off the mortgage. Even at 5.5% (or 4% if you work the tax deduction into the equation), very few people are earning 4% out of the market this year. Even if you were to get 6-8% out of the market, when you factor in taxes on the growth and inflation, you don’t end up with 4%. Although I agree that putting money into the market and saving for retirement are necessary, simply stating a better return is a little bit of an over simplification. Additionally, as we teach, prepaying the mortgage should only begin once you have your emergency fund in place and you are investing for retirement.

Ms. Sinclair’s second reason for not prepaying the mortgage is because it is easier to sell stock than get money out of a house. Again, that is a matter of opinion. There are certain areas of the country where the real estate market is doing very well. If you were living in one of those areas, selling your house would be no big deal. On the other hand, selling stocks that have lost 40% of their value may not be that difficult, it would definitely be painful

I do agree with Ms. Sinclair’s final statement.

A better way to address unemployment fears, says Sinclair, is to take a hard look at your spending. If one of you were to be laid off, what could you cut back on? Doing this exercise now, before any emergency pops up, can help keep worries under control.

This one I think is right on. We teach that every month you should have a new budget that lists in a priority format the way you are going to spend that month’s income. Some expenses can’t be cut out: mortgage, car payment, groceries, etc. Others are not necessary and can be cut out during an emergency: cable and internet, music lessons, eating out, etc. You need to know exactly how much your expenses are each month and have an emergency fund large enough to cover 3-6 months of expenses. I would not be paying extra on the mortgage until the emergency fund was complete.

Since we are being contrarian, let me give you one more reason to pay off your mortgage as fast as possible. When you retire, wouldn’t it be great to not have a mortgage payment? The majority of people take out a 30 year mortgage each time they buy, move or refinance. If you are 40 years old and move into your dream house, with a 30 year mortgage, at age 65 when you want to retire, you will still have five years of mortgage payments. I am no expert, but my advise is to get rid of all debt including your mortgage as fast as possible.