Don't Pre-pay Your Mortgage

This past week the old discussion of the pro's and con's of paying of your mortgage early flared up again. While good points were made on both sides of the argument, I'm firmly of the opinion that it doesn't make sense to pay off your mortgage early while you can enjoy a low interest and tax write-offs.

Of course, as all things personal finance, it's personal. In my case, a 3.875% interest rate, and the ability to deduct interest from my income makes it a no-brainer to pay the minimum amount. If I had an extra $1000 each month I could put that in LendingClub or in Dividend Stocks and expect at least a 4% return, very conservatively. My returns are higher than that.

Another thing I've learned from people that did pay off their mortgage: they now have a majority of their net worth in their house. It does not produce any income. Values fluctuate, but if they want to take a trip they cannot simply sell a piece of the house and spend the money. And if they want to move they are subject to the market conditions for real estate in their area, the tax situation, and interest situation. 

A large loan is also a great inflation hedge -- the relative value reduces by itself over time. We live in a low inflation environment, but still wages grow by 2-3% annually and my mortgage payment stays the same, making it a smaller percentage of income going toward the mortgage.

If you have good steady income from other sources, it's nice to get rid off your biggest monthly bill. Psychologically it makes sense not to owe anything. But financially I don't think it makes sense to put so much in one basket and a non-income generating one at that. You know your max possible return, which is the interest you save over the remainder of the term. 

If you have a high interest mortgage and cannot refinance lower, and you cannot beat that rate in the market with a stable div portfolio then it is worth considering. 

So I'm going to keep my mortgage at the minimum payments, write off the interest at tax time, and invest any extra money in income generating vehicles. 

Thoughts ?