Savings vs. Payoff

Jason and his wife owe $90,000 on their mortgage. They should have the cash to pay the house off within the next three or four years. Should they pay it off or hang on to the savings?

QUESTION: Jason in Illinois and his wife are able to save about $20,000 a year. They owe $90,000 on their mortgage. His wife likes the savings, but they should have the cash to pay the house off within the next three or four years. Should they pay it off or hang on to the savings?

ANSWER: Let’s pretend your house was paid for. Would you borrow on your home so that you had enough cash that your wife liked it? You say you wouldn’t, so what’s the difference? If you had a paid-for house and you wouldn’t borrow on it to have cash laying around to feel better, why wouldn’t you use the cash laying around to pay off the house? It’s the same thing.

Obviously, the first thing you want to have is your emergency fund of three to six months of expenses in place and you are saving 15% of your income toward retirement. Past that, if you have enough cash laying around to pay off your home and you don’t, it’s the same thing as having borrowed on your home in order to have cash laying around.

As soon as I have the emergency fund in place, and since your wife likes the security factor, then you can go with the six-month range, and you are putting 15% of your income away for retirement. I will take all other monies and throw them at the house and pay it off as fast as I can.

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