Why Pay off the House Early?

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A number of commenters have asked me why I want to pay off my house early, when I could simply be piling up that cash and putting it in treasury bonds.

This is a good question.  After all, cash has an advantage over house:  it's liquid.  On the other hand, at the moment, interest rates on savings accounts or similar, which is where you want to have your liquid emergency money, are lower than the 4.5% I could get for a 30-year fixed mortgage.

For me, there are a few reasons to pay off the house early:

1)  It's a fairly effective form of forced savings.  Dave Ramsey is right about this:  for most people, the problem is not how to find the most mathematically sophisticated use of their savings. The problem is to save.  In theory, you could take the extra payments, invest them wisely, and get a slightly better return.  In practice, having cash sitting around is tempting.  We see paying down the house as a way of disciplining ourselves to live below our means.

2)  Mortgages do cost money.  Yes, you get a tax deduction on your interest--but you still have to pay interest.  You also get a tax deduction on your charitable donations.

3)  I am not as sold as many of my interlocutors on the likelihood of high inflation.  If the CPI goes up above the interest rate on my mortgage, I will probably reconsider paying it off early.  However, it is simply not true that all the money we're printing today has to show up in a permanently higher rate of inflation.  While I expect that there will be a short burst of inflation when the economy starts to recover, the Fed can, and in my estimation will, start to withdraw the liquidity.

4)  I hate paying bills.  Fewer obligations to keep track of = more happiness for Megan.

5)  It's a place to live, not an investment.  We are interested in minimizing our fixed costs in order to give us the most stability and the least worry--not eking an extra 0.25% out of our housing strategy in order to get closer to some theoretical maximum.

However, my questioners do make a good point:  you should not pay off the house as your only savings strategy.  What I perhaps should have mentioned is that paying off the house is part of a more comprehensive savings strategy:

1)  Pay off all consumer debt before you start paying down the house.  Consumer debt is higher interest rate than housing debt, and it's foolish to keep it around. Thanks to my Dave Ramsey obsession, we were doing this anyway, with the exception of a student loan at 2%. 

2)  Have a 6-9 month emergency fund.  Here I part ways with Dave Ramsey; in today's economic environment, 3 months may not be enough.

3)  Max out retirement savings   The 401(k) and IRA need to be filled before you start paying down the house

4)  Sinking funds for foreseeable events.  In our case, these include home renovations, car repair and maintenance, car/tire replacement, gifts, computers/equipment we need for our jobs, replacement electronics, any travel, and so forth.

As you can see, we've given this some thought.  Paying off the house is a terrible savings strategy if it's all that you're doing.  But it's a decent idea if it's part of a comprehensive, diversified savings plan.  Which is hopefully what we will maintain going forward.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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