With Stocks Down, Should I Pay Down My Mortgage Faster?

by Kevin on November 25, 2008

It’s no secret that the stock market has tanked over the last year. A common question I hear through comments, e-mails, or even in conversations with my co-workers is essentially should I stop investing? Should I pour my investment money onto my home mortgage?

Paying Off Debt is Good

For starters, any time you pay off debt you are making a positive step forward. I’m a big fan of that. Imagine owning your own home, but not having to pay your mortgage payment. Sounds great, doesn’t it? This is a goal we are striving for ourselves.

However…

Doing Anything, Including Paying Off Debt, Without a Plan is Dumb

Sure, paying off your mortgage sounds like a great idea. Yet you need a plan to move forward.

Stocks are down (except the last two days!). Fear has run rampant since the major selloff in October. The economy is tanking. Consumer confidence is down. This is expected to be one of the worst retail Christmas seasons ever.

Why not stop investing and start paying off something that is tangible and important to you?

Stock prices are at historical lows. Remember that whole “buy low, sell high” mentality? Today is the perfect opportunity to be buying low. It takes guts to do it. It’s hard to click the confirm button when the markets are in a decline. Psychologically, when things are going well it is easier to invest.

When the markets are up and everything is going well your brain tells you everything will continue to go well. The opposite is true. When things are down you see nothing but despair and down times in the future. Being a contrarian is extremely difficult.

Financial Planning is Key

That’s why a plan is key to your success. For example, we invest in the last few days of the month or the first few days of the new month — wherever the trading date falls. We invest the same amount and we invest it consistently.

This takes my emotional, human, subjective nature out of the equation. Even if I don’t want to the money gets invested. If I really want to (because the market is up), I can’t invest more than our normal amount. Our investment plan… or system if you prefer… prevents me from making boneheaded mistakes.

So Should You Pay Down Your Mortgage?

I can’t tell you if that is a good idea. What’s your interest rate? What’s your cash flow? How much other debt do you have right now? Do you have the ability to continue to invest? Could you cut spending rather than investing?

That’s just the tip of the iceberg of questions I would ask if someone came to me for advice on paying off their mortgage faster. Each individual situation is different. I can’t guarantee you your investment in the stock market today will be worth anything tomorrow. Paying off your house is a “known” thing.

For us, when we first bought our house we put 5% down. No, we weren’t one of those “no money down and hope to flip the house” buyers. We had the cash flow to save up a down payment. We would have to wait another two years to do so, but it was definitely possible. But we also didn’t plan on living in our house a year and then moving.

So we found a house we loved, got two mortgages, and quickly started to pay off the second mortgage to get us closer to the 10% equity range. With all of those extra payments we now “own” 8% of the original home price. I point to the original home price because home prices fluctuate. Ours hasn’t fallen terribly, but it might not be exact. Today’s home value is unknown, but what I paid is fact. We calculate off of fact.

So we’re above 8% — but we stopped the extra payments. We made a change in our plan and it didn’t make sense to continue on that path. We’ll be paying the mortgage off over time instead.

Your situation is probably different. Sit down and come up with your own plan. Work the plan. Stick to it. See success.

I’m curious to see if anyone out there is still paying off extra on their mortgage. Have you sacrificed investing to get to that point? Leave a comment and start the discussion.

{ 10 comments }

Ashley @ Wide Open Wallet November 25, 2008 at 11:49 am

My mom asks me this every time I talk to her. She could have her house paid off in two years if she stopped contributing to her IRA and sent it all to her mortgage. Tempting. But I keep telling her no, keep investing. You don’t want to miss it when it comes back. And it will come back.

Mr. ToughMoneyLove November 25, 2008 at 12:06 pm

Depends on your time horizon. Anyone 55 and older should probably be paying off that mortgage – guaranteed 6% return. No telling when we will see that return year over year in the markets again.

Steve in Denmark November 25, 2008 at 3:57 pm

“Imagine owning your own home, but not having to pay your mortgage payment.”

One could argue that you don’t own your own home UNTIL you pay off your mortgage. Until then, you’re just borrowing it off the bank.

vilkri November 26, 2008 at 6:00 am

Whether you pay off a mortgage depends on many factors such as the person’s age as toughmoneylove said. It is true that you need plan, but that goes for any financial decision.

LAL November 26, 2008 at 10:27 am

Depends on age, income, etc. We don’t, but then again we like the tax break and we have other expenses like tuition.

Kevin November 28, 2008 at 4:11 pm

@Ashley: Yea I don’t think I would ever recommend 100% stopping of investing. But if she is only $20,000 away ($5,000 IRA allowance + $5,000 catch up allowance per year?) from paying it off that would be very tempting! Then again, she is probably in the “meaty” portions of the payments where most of her payments are going toward principle.

@ToughMoneyLove: I agree, but I wouldn’t stop investing completely.

@Steve: True, but you own it in that you can do stuff to it (generally).

@LAL: Yea but is the tax break worth the interest cost (if you had the option of paying it off today)?

Robb Hurst November 28, 2008 at 5:08 pm

I make one extra payment each year in July when I finish a big job at work. I know theoretically I should pay it on some other non-deductible debt or credit card or retirement account BUT I know I am going to get that benefit in a few year and that is part of my long range plan to be debt free. I’m afraid it would be a temporary fix just going to a credit card or adding to my retirement accounts.
rwh

LAL November 28, 2008 at 7:43 pm

Yep, it is. Because it wouldn’t be a balanced networth portfolio. I put down $120k on our condo. THAT is what most people pay for a home.

I don’t need more cash tied up in our house. It doesn’t make sense financially.

So no way will it get paid off faster.

Kevin December 7, 2008 at 8:07 pm

@Robb: Well at least you know yourself. If you’re afraid to put it on the credit card for fear that your balance will go right back up again, I have to ask, why don’t you stop using the credit card?

I’m all for responsible credit card use, but if you can’t handle the heat get out of the kitchen.

@LAL: $120k down payment?! Holy cow! Nice…

Start-Up January 8, 2009 at 3:18 pm

It’s been awhile, but I’m starting to catch up on my blog readings. I agree completely that you need a plan with investing and paying off your mortgage. Everybody is different and everybody’s plan should be different.

As far as not investing to pay down the mortgage because of today’s stock market, I say that’s like trying to time the market. Ideally you would pay down your mortgage when the stock market is at it’s peak and declining, while increase your investments when it’s at the bottom and climbing. Just like trying to time the market, this strategy will end up costing you money.

So do you pay PMI on your mortgage? Or does the second mortgage prevent that?

I enjoyed the first subscriber swap saturday by the way. Great idea.

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