Are There Any Disadvantages Associated With Paying off a Mortgage Early?

I’m often asked if it makes sense to pay off a mortgage early or invest the cash in the markets. As is often the case in personal finance, the answer is, wait for it… depends.

The disadvantages, if any, may stem from the financial trade-offs that a mortgage holder needs to make when paying off the mortgage. Paying it off typically requires a cash outlay equal to the amount of the principal. If the principal is sizeable, this payment could potentially jeopardize a middle-income family’s ability to save for retirement, invest for college, maintain an emergency fund, and take care of other financial needs.

If you have the financial means to pay off a mortgage, consider the following:

  • Your feelings about debt — Some homeowners like the feeling of security that comes with owning a home free and clear. Knowing this may help you sleep better at night.  If this describes you, it may be to your benefit to pay off or reduce the size of your mortgage. Should conditions in your local real estate market decline, there’s less of a chance of owing more than you own.
  • Your current interest rate — If you currently have a low fixed interest mortgage rate, and having mortgage debt doesn’t bother you much, then investing the sum may yield better after-tax returns. Just keep in mind that markets may move down, so there is a risk here. You should discuss this option with your financial planner so you understand it well.
  • Your timeline until retirement — If your mortgage is relatively small and you pay it off, you may be able to invest the money formerly used for mortgage payments for retirement or other long-term goals. Your timeline until retirement may be a factor when making this decision. With 10 years or more remaining until you expect to retire, you could have time to build a nest egg if you invest the money formerly used to pay a mortgage. If you plan to retire sooner, entering retirement without a mortgage could provide you with more flexibility during your later years.
  • Your tax savings — Mortgage interest typically is tax deductible. During the early years of a mortgage, when the interest payments are highest, many homeowners benefit from a sizeable deduction. This could be important if you are in a higher tax bracket. If your interest payments are relatively low, the tax savings could be less of a factor. The amount of your other itemized deductions may be a factor if their total is close to your standard deduction.
  • Your future plans — Owning a home outright could be an advantage if you plan to sell it during the next few years. You could potentially leave your existing residence with more home equity.
  • Your overall debt load — If you are carrying other forms of debt, such as credit card balances or a college loan, consider whether you could benefit from paying off other debt first before reducing or eliminating your mortgage.

There is no “right” answer for everyone when it comes to potentially paying off a mortgage. Consider your feelings about debt, current interest rate, your timeline with respect to long-term goals, your tax savings, and other factors before making a decision that is in your best interest.

After-Tax Value of Home Mortgage Deduction

One of the big benefits of home ownership is the mortgage interest deduction. The federal government lets you deduct mortgage interest on a first or second home, up to $1 million per year.

30-year conventional mortgage pix


Wealth Management Systems Inc. Monthly payments assume a conventional 30-year fixed-rate mortgage at 5% APR, excluding escrows for taxes, insurance, or other fees. Mortgage deductions are based on first month’s interest. Assumes that other deductions exceed the standard deduction. (CS0000218)

If you would like to review your current mortgage payoff options, your investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

The Bears Invade Shanghai

With all eyes on Greece, a bigger and potentially more disturbing market disruption is taking place—in a much larger economy. As you read this, the Chinese stock market is experiencing the kind of free-fall not seen since the 2008 drop in global markets. Some are comparing it to the 1929 crash in U.S. stocks.

Bears in Shanghai

As you can see from the chart, the fall has been fairly dramatic, even if it has not yet taken share prices on the Shanghai Composite Index below where they were previous to a perilous bull run that began in February. The fall has apparently alarmed the Chinese government, which has authorized extraordinary interventions. Among them: twenty one Chinese brokerage firms have agreed to invest the equivalent of $19 billion in stocks, in an effort to create more demand. The stock exchanges suspended initial public offerings so as not to put any more shares on the market. The Chinese central bank has cut its benchmark lending and interest rates rates. And the government itself, through its pension system, has now been authorized to “play” the market.

Perhaps the most ominous intervention, however, came when China’s market regulator decided that brokers should not force people who have bought stocks on margin (borrowed funds) to engage in forced selling in order to cover their debts. Instead, the brokers were told to extend additional margin loans that would be collateralized by investors’ homes. If the market continues to plunge, observers wonder, how will investors (or banks) liquidate those houses? Is it wise to spread the risk from the stock sector to real estate valuations?

The brokerage pledge to buy shares is reminiscent of 1929 Wall Street, when the great banking houses of J.P. Morgan and Guarantee Trust Company committed their resources to propping up the U.S. stock market. That experiment was not a notable success; the Dow Jones Industrial Average fell 13% the following Monday and dropped another 34% over the next three weeks. The Chinese intervention fund, led by Citic Securities Co. and Guotai Junan Securities Co., faces a similar uphill battle; the war chest represents only one-fifth of the Chinese market’s daily trading volume.

So far, Chinese investors have lost $2.7 trillion of stock value—the equivalent of six times Greece’s entire foreign debt. Much of the pain has been borne by individuals, who own four-fifths of China’s stocks, far more than in Western markets where institutional investors are the dominant owners. Many of these common folk borrowed money to buy their shares, contributing to a nine-fold increase in margin lending by brokerage firms over the past two years. This dramatic rise in speculative investing has echoes both in the runup to 1929 and 2008, two periods when reckless betters (individuals in the earlier era, Wall Street in the latter) were able to borrow 90% of the money they “invested.”

Moreover, the margin loans carry annual interest rates as high as 20%. Total margin debt, when you add up the brokerage firms, banks and informal loans, could amount to as much as $1 trillion. As share prices fall, investors would be left with far less in stock value than the high-interest loans they owe—making repayment problematic, potentially putting $1 trillion worth of stress on the Chinese banking system.

It gets worse. Many smaller Chinese companies have financed their expansion by taking out loans against the value of their shares. The companies have had to post additional collateral as the share value dropped down to the outstanding balance on the loan. Additional market losses could put these companies in real danger of default, adding to the stress.

Nobody knows if the free-fall will continue to feed on itself, or if the government will somehow manage to slow the descent. But highly-leveraged investing on a mass scale seldom ends well, as most of us remember from the subprime crisis when we had to reach into our pockets to make Wall Street whole again on its disastrous speculations.

Fortunately, none of this is likely to directly affect the portfolios of American investors, since foreigners account for only about 4% of the Chinese stock market. But as the crisis deepens, and especially if the defaults start to mount, companies go under and the banks stop lending into the economy, you could see commodity prices fall on weaker demand, and there could be a hit to large American companies that do a lot of business in the Asian markets. As an emerging market, China’s setback could pressure emerging market funds, which many of us are exposed to in our portfolios. Finally it could be a long time before individual Chinese investors trust the stock market again. That would be exactly the opposite of the Chinese government’s plan.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.


The MoneyGeek thanks guest writer Bob Veres for his contribution to this post


The Brink of Grexit

Well, the Greek voters were asked, once again, whether they would accept additional austerity measures that were demanded by their creditors, including the European Central Bank, the International Monetary Fund and the European Commission. And once again they voted—this time overwhelmingly (61.31% to 38.69%)—to hunker down and move the country to the brink of a Grexit from the euro currency.

Their choice may not have been hard to make. Virtually all of the $264 billion that has been loaned to the Greek government have actually been paid to the European banks who unwisely loaded up on Greek debt before 2009—and the loans and extensions, to them through Greece, has kept the European banking system solvent during the crisis. Virtually none of that money has gone back into the ailing Greek economy.

Over the past three years, the Greek government, following many of the demanded austerity measures, has actually reached the point of budget surplus, aside, of course, from the debt repayments. The cost: a skyrocketing unemployment rate that has reached 25.6%, including 60% of the nation’s young workers, and a steep recession which economists seem to agree would only get steeper if the country accepts the austerity demands. The Greek economy has shrunk by 25% over the last five years.

But the hardship continues. Anticipating a currency shift from euros to drachma, Greek citizens have staged the mother of all bank runs, trying to get as many euros out of the system as they could before they are potentially exchanged for lesser-value drachmas. The government limited the amount of their own money that citizens could withdraw to approximately $67 a day, and has now shut down the Greek banking system at least through end of the week.   Re-opening the banks could be problematic, since they don’t hold nearly as many euros as depositors have put into them.

Some are betting that the European Central Bank will provide guarantees and financial support to keep the banks from collapsing and taking the Greek economy down with them. But you can expect Germany to push back hard on this idea.

Will Greece leave the Eurozone? Nobody knows, but the vote suggests that the citizens of Greece have had enough of European (read: German) control over their economy and political decisions; indeed, some observers saw the extremely hard line at the negotiating table as a ploy to destroy Greek’s ruling Syriza party by forcing Greek voters to abandon it. There are sizable numbers of people in other European countries who feel the same way about losing control over their own affairs, who are closely watching how the European Union responds.

The discussions will be tricky. If the European Union offers further concessions, then you can expect Spain (unemployment rate: 23.1%) to ask for less stringent austerity and some space to get its own economy moving again. Portugal could be next.

And, of course, if Greece leaves, and begins to experience economic growth again, then those citizens in other countries could demand that their leaders also cast off the layer of oversight and control coming from Brussels.

What should you watch for? Greece is already technically in default as of last Tuesday, on $1.7 billion in payments. At the end of July, it will owe the next payment, in the amount of just under $4 billion. One compromise possibility is that the European Union, led by Germany, will reluctantly allow Greece to extend its payments, and also put together some kind of an aid package for the Greek economy that would help it become more able to make payments in the future.

How does this affect you? Once again, you’re going to see turmoil in the markets, and a temporary decline in the value of the euro on international markets. You’ll hear pundits and economists speculate about the “fate of the Eurozone,” and eventually, one way or another, everything will settle down again without affecting in any way the underlying value of the stocks you own. We’ve all seen this crisis a few times before, and each time the predictions of some form of doom haven’t come true. This “crisis” is very real to the Greek people, but the world will go on no matter how it’s resolved.

Now the current severe correction in the Chinese stock markets is a matter for another article, and that could prove much more important than the whole Grexit, if officials don’t wrest control of their markets.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.


The MoneyGeek thanks guest writer Bob Veres for his contribution to this post