'Why I'll Never Pay It Down'

Susheel writes:

I'd like to tell you about why I'll never pay my mortgage down, EVEN if I come into a nice stash of cash like those folks you interviewed on the last show.

First, the tax break. I've read that the tax break is a wash in the end, but generally I think having that deduction is a good arrow to have in your income tax avoidance quiver.

Second, even assuming the tax break is a wash, it turns into a definite benefit when you consider what you can do with the principal. I'd much rather invest that money in other asset classes to diversify my portfolio, especially since it is the mortgagee, not the mortgagor, that sees all the benefits of appreciation. This is, of course, leverage, which as of late has a bad rap but is a good thing when managed well.

Third, I live in California, so instead of taking earthquake insurance (which I've read is a scam), I just don't pay down my principal. Then in the unlikely case that my home is destroyed by an earthquake (or ravaged by a weak market :) ), I can walk away from the home, and though I will suffer 7 years of bad credit due to foreclosure, I will not be on the hook for the whole value of the property.

Next, I'd like to debunk the main reason folks cling to as reasons to pay down the mortgage, i.e., people say they like the piece of mind of owning their home.

I don't see why folks who own their home outright own it much more than a mortgagee. The bank can't just evict from my home for any reason. Sure, I have made payments, but I've been saving the principal in other MUCH more liquid asset classes, so I can draw from it as need be. I can save the money interest rate, FDIC insured savings account, and then the only difference between my ownership and a person who has paid off their mortgage is a quick wire transfer .

Also, for those who do own their home outright, they may feel better if they get laid off, etc., but they can't eat their house. If I get laid off, the fact that I own my house won't be of any consolation. In fact, by not paying down my principal and instead saving that money / investing it in other non-risky asset classes, I would be better off when I do get laid off, as I can then (figuratively) eat part of my house by using that liquid savings to eat (and continue making interest payments to keep the house). Also, a home equity loan is not an option if you get laid off, so owning your home outright won't help in that respect either.

To sum up, not paying down your mortgage but instead storing it away, even in a low interest rate, FDIC insured savings account, is economically advantageous and also gives one more flexibility.

Of course, my biggest problem with not paying down my mortgage is convincing my wife it is a good idea (she is, like me, a disciplined saver).

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