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I'm curious to how many FW'ers actually pay extra principal payments towars a NON HELOC mortgage?

wither adding money to the payment or doing a biweekly payment to generate an extra payment each 2 years or so?

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Makes sense. So when the big ones hits, instead of owning just your primary pile of rubble outright, you'll instead own ... (more)

debtblag (Apr. 28, 2015 @ 12:52p) |

Bump

fattywallace (Oct. 25, 2016 @ 7:14p) |

Now three years later, and I haven't pre-paid anything, though I am sitting on a lot more cash than usual.  I am about t... (more)

DavidScubadiver (Nov. 07, 2016 @ 9:02a) |

Pros to paying extra
1. 'psychological' peace of mind
2. reduced interest payments = cost savings
3. in some jurisdictions, greater protection from creditors (primary residence)
4. reduced exposure or risk of losing home when losing income

Cons to paying extra
1. reduced liquidity/cash flow (ie, in case of job loss or other surprises)
2. potentially lower investment returns (opportunity cost of other investments)
3. in some jurisdictions, greater protection from creditors (if used to fund retirement accounts instead of prepaying mortgage)
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I used to, but not any more. The main reason is that the mortgage rate is low in my case and tax deductible.

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None. Current investments are earning more than the after tax cost of interest on the mortgage(s).

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We are currently dumping a fair amount (~$1000) of extra money into our mortgage each month. After considering the fact that the interest is tax deductible, we're basically not paying about 3% interest on the money we put into our house. We're doing this because we plan to move into a new house within the next year or two. There aren't many investments that yield 3% post tax for a short period of time. If rates keep going up on MM/ING type accounts, I may have to rethink this decision.

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I don't care what anyone says, there is nothing better than having a house free and clear. We bought our first home in '97 and paid it off this month. Mortgage was for originally $135,000. House is now worth $285,000.

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Keeping a huge mortgage for a long time may not be the best secret in personal finance. The tax deduction on that mortgage interest is zero for many married couples. Investment returns do not consistently beat the mortgage rate. If someone justifies their argument by saying over the long run, average returns are higher. Then the question is "how long?" because you could be dead before you see the end of the long run.

There is one risk, among a few, to paying off your mortgage. If you're underinsured and your house is destroyed, you take the loss, as opposed to the mortgage holder. Many new homeowner's policies do not cover full replacement cost. Instead they cover the value of the house up to the amount specified in the policy. So if each year the cost of replacing your house increases, you need to raise the coverage value, too.

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Not paying extra principal here...I'm saving up to buy a condo or house near San Jose. Current mortgage balance is $130K (7/1 ARM at 5.375%, on a 2BR condo in Central NJ, originally purchased in 2002 for $165K, similar units now selling for $250K).

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We have a 5/1 mortgage with about 3 years remaining before the rate starts adjusting, and my husband plans on leaving the rat race about the same time, so we're aggressively paying down our mortgage (using MBNA billpay!) Even though our rate is currently only 4-5/8, it's still the best risk free return we can get (with a 3 year time frame.)

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veryhungry said: I'm curious to how many FW'ers actually pay extra principal payments towars a NON HELOC mortgage?

wither adding money to the payment or doing a biweekly payment to generate an extra payment each 2 years or so?
If somebody is willing to give away money at only 4 or 5% interest (as mortgage rates have been recently), it makes little financial sense to pay extra on the loan. Consider these two scenarios:

1) You pay as much extra cash towards your mortgage as you can. 5 years down the road, you run into financial trouble (lose your job, medical problems, etc). All of your money is tied up in the equity of your house, so in order to get to it you need it either take out a home equity loan (if you can still qualify) at the current interest rates (which may be much higher), or sell your house.

2) You invest your extra cash and pay the minimum on your mortgage. Even plain old index funds can easily beat the a 5% mortgage, so you would be earning more money than you would be saving if you were paying extra on the loan. 5 years down the road, you run into financial trouble. You have a nice little bundle in an easy to access investment account to survive on without selling your house or taking on more debt.

I know there are some people who simply do not like the fact that they are in debt for anything. If you have a low tolerance of debt, the positives probably don't outweigh the negatives for paying off your loan early, so in the end it comes down to your own personality.

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The big problem with the advice from the Ric Edelman's of the world is:

1) Most people don't get big long mortgages so they can "invest the difference", they spend the difference.
2) Paying off your house isn't like stuffing money under your mattress, it's like paying for the mattress.
3) Home equity is one of the more protected asset classes in most states.
4) Mortgaging your house so that you can invest in the stock market has some upside potential and some
pretty horrific downside potential.

To each his own but I think the Ric Edelman's of the world will end up burning more people than are helped.

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whodini said: There is one risk, among a few, to paying off your mortgage. If you're underinsured and your house is destroyed, you take the loss, as opposed to the mortgage holder. Many new homeowner's policies do not cover full replacement cost. Instead they cover the value of the house up to the amount specified in the policy. So if each year the cost of replacing your house increases, you need to raise the coverage value, too.

Not many mortgage holders are going to let you insure your home for less than the amount of the mortgage. If you are underinsured then it is YOU who is taking the risk, not your mortgage holder. Being underinsured is the risk, not whether or not you have a mortgage.

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dweick said: The big problem with the advice from the Ric Edelman's of the world is:

1) Most people don't get big long mortgages so they can "invest the difference", they spend the difference.
2) Paying off your house isn't like stuffing money under your mattress, it's like paying for the mattress.
3) Home equity is one of the more protected asset classes in most states.
4) Mortgaging your house so that you can invest in the stock market has some upside potential and some
pretty horrific downside potential.

To each his own but I think the Ric Edelman's of the world will end up burning more people than are helped.


I absolutely agree. It seems like he thinks people can find guaranteed 10% returns all the time.

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workindev said: veryhungry said:
1) You pay as much extra cash towards your mortgage as you can. 5 years down the road, you run into financial trouble (lose your job, medical problems, etc). All of your money is tied up in the equity of your house, so in order to get to it you need it either take out a home equity loan (if you can still qualify) at the current interest rates (which may be much higher), or sell your house.

2) You invest your extra cash and pay the minimum on your mortgage. Even plain old index funds can easily beat the a 5% mortgage, so you would be earning more money than you would be saving if you were paying extra on the loan. 5 years down the road, you run into financial trouble. You have a nice little bundle in an easy to access investment account to survive on without selling your house or taking on more debt.

I know there are some people who simply do not like the fact that they are in debt for anything. If you have a low tolerance of debt, the positives probably don't outweigh the negatives for paying off your loan early, so in the end it comes down to your own personality.


1) No need to wait until you run into financial trouble to get a HELOC. Having to pull money from an investment account when you run into financial trouble can mean having to sell an asset class at a time that may be inoportune.

2) The Nikkei index has taken 30 years to double. It's trading at the same level it was 20 years ago. Of course the US markets are different but anyone who says something can "easily beat a 5%" return is wet behind the ears. The S&P 500 has had about a 0% return over the past 7 years, real tough luck for someone who might have started "investing the difference" in 2000 and needed to liquidate some assets due to financial troubles since then.

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dweick said: workindev said: veryhungry said:
1) You pay as much extra cash towards your mortgage as you can. 5 years down the road, you run into financial trouble (lose your job, medical problems, etc). All of your money is tied up in the equity of your house, so in order to get to it you need it either take out a home equity loan (if you can still qualify) at the current interest rates (which may be much higher), or sell your house.

2) You invest your extra cash and pay the minimum on your mortgage. Even plain old index funds can easily beat the a 5% mortgage, so you would be earning more money than you would be saving if you were paying extra on the loan. 5 years down the road, you run into financial trouble. You have a nice little bundle in an easy to access investment account to survive on without selling your house or taking on more debt.

I know there are some people who simply do not like the fact that they are in debt for anything. If you have a low tolerance of debt, the positives probably don't outweigh the negatives for paying off your loan early, so in the end it comes down to your own personality.


1) No need to wait until you run into financial trouble to get a HELOC. Having to pull money from an investment account when you run into financial trouble can mean having to sell an asset class at a time that may be inoportune.

2) The Nikkei index has taken 30 years to double. It's trading at the same level it was 20 years ago. Of course the US markets are different but anyone who says something can "easily beat a 5%" return is wet behind the ears. The S&P 500 has had about a 0% return over the past 7 years, real tough luck for someone who might have started "investing the difference" in 2000 and needed to liquidate some assets due to financial troubles since then.
Valid points. I guess it comes down to 3 things: You personal tolerance for debt, your confidence in beating a 5% mortgage rate with your investments, and your discipline to actually invest the money and not spend it.

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I toss in an extra $500 a month. I just do not like debts, including mortgage and even though the interest is tax deductible.

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We just got a new (first) home, and we pay about $900 extra principal per month (and max out IRA contributions, and have money going into investment accounts). We just want to get out of debt, even if it's 5.5% fixed.

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I max out my company 401K with 10% pre-tax plus pay an extra $3-4K a month in principal on my mortgage. I almost have my place paid off with the agressive principal payments. I have a 3/1 ARM at 3.75%.

I hope to purchase a larger second house soon so will start banking more for a large down payment.

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dweick said:

Not many mortgage holders are going to let you insure your home for less than the amount of the mortgage. If you are underinsured then it is YOU who is taking the risk, not your mortgage holder. Being underinsured is the risk, not whether or not you have a mortgage.
This may be a local thing, but many homes in CA are only insured for 25-35% of the mortgage balance, and the lenders dont have a problem with it.

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i have an 80/15/5 mortgage and are paying extra towards the 15. my house interest is too small to (in my current situation) make it worth it to itemize, so no deduction here. i like the idea of not having the bill of a mortgage every month, but i also fund retirements and other savings before paying extra to the mortgage.

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SUCKISSTAPLES said: dweick said:

Not many mortgage holders are going to let you insure your home for less than the amount of the mortgage. If you are underinsured then it is YOU who is taking the risk, not your mortgage holder. Being underinsured is the risk, not whether or not you have a mortgage.
This may be a local thing, but many homes in CA are only insured for 25-35% of the mortgage balance, and the lenders dont have a problem with it.


Wells Fargo let me insure for less than the mortgage amount (and I have an 80/20 mortgage with them). Because remember, the home selling price includes the price of the land. Per my insurer, which BTW, Wells fargo recommended to me, I only need a full replacement cost insurance for the house itself.

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Yes, you really only need to insure the value of the improvements, not the land.

However, your experience with Wells Fargo is the opposite of mine. I bought my home for approx $130K. My insurance agent told me that they value the land at $30K and the house at $100K, but that Wells Fargo requires the insurance to cover the entire value of the mortgage (so they told me that as the house appreciates, I will still be covered enough without having to raise my value of coverage for a few years).

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it all depends if you have replacement calue or not.

in NY at least, you must have coverage for the mortgage amount..

don't forget, unless you get replacement cost, you are basically going to get very watered down payments based on what the property is "currently worth"...

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Here in VA, I have Travelers through Geico. My lender required a 125% replacement cost coverage, but Travelers provides 150%.

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I do what Edelman talks about, but I learned it the hard way.At one time I needed a quick 15K for an emergency.I had 84K equity in my house, but was unable to obtain a loan at ANY rate because of my credit.I had a good payment history,just bad credit from exhusband's charge offs, which I had paid. My credit is now better, but I never know when there will be a mistake on my reports that will take months to fix.And yes,I check consistently. So I keep as much out of the equity on my house as I can, and I plan to never pay it off(Let's see,30 years from now...I'll probably be dead).

I do not spend the money,but invest and know I can get to it no matter what my credit looks like. For me,this is security.

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MaxRC said: Here in VA, I have Travelers through Geico. My lender required a 125% replacement cost coverage, but Travelers provides 150%.

you pay more for that, i assume?

overinsurance will not get you a bigger payout if calamity strikes...

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veryhungry said: MaxRC said: Here in VA, I have Travelers through Geico. My lender required a 125% replacement cost coverage, but Travelers provides 150%.

you pay more for that, i assume?

overinsurance will not get you a bigger payout if calamity strikes...

Well, the lowest extra replacement cost coverage that Travelers offers in our case is 50%, which satisifes the 25% required by the lender. So I am sure it cost extra, but I don't think I had a choice.

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For those of you who own homes free and clear or are close to it: take out a HELOC on your home to the maximum possible amount permitted by the bank. This will place a lien on your property by the lender but you won't be in debt unless you draw on the HELOC.

This gives you the advantage of liability protection as the mortgage lien will make litigious people think that you don't own the house free and clear and thus don't have much assets to your name. Think of the HELOC as free financial liability insurance as well as a ready source of cash for emergency purposes.

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dcwilbur said: Never Own Your Home Outright. Instead, Get a Big 30-year Mortgage, and Never Pay It Off — Regardless of Your Age and Income

I think it's a good rule of thumb to never trust anyone to give you financial advice when they can't even handle simple arithmetic:

Ed, though, is in much better shape. With $40,000 in savings, he's easily able to make his payments each month. In fact, even if he doesn't find work for a long time, his home is not in jeopardy. At the rate of $586 a month, Ed won't run out of money for nearly eight years!

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zak3056 said: dcwilbur said: Never Own Your Home Outright. Instead, Get a Big 30-year Mortgage, and Never Pay It Off — Regardless of Your Age and Income

I think it's a good rule of thumb to never trust anyone to give you financial advice when they can't even handle simple arithmetic:

Ed, though, is in much better shape. With $40,000 in savings, he's easily able to make his payments each month. In fact, even if he doesn't find work for a long time, his home is not in jeopardy. At the rate of $586 a month, Ed won't run out of money for nearly eight years!


* Well, he's assuming Ed makes 8% interest on that 40k for those eight years. Its truly an unfounded assumption, and that is what makes the arithmetic fail. If the economy is that good, all one needs is an emergency fund to tide you over to the next job.

* He is assuming that the other guy has absolutely no savings whatsoever. Most people who have enough to put extra into their homes also have a safety net.

* What he says about the mortgage being insignificant in 20 years *used* to be true. Now it is not. Now people get mortgages for *way* more than they can handle, and remain house poor for the first 10 years of their mortgage. Or, as soon as they build up some equity they take it out immediately in the form of a 2nd or a HELOC. In fact, he even goes so far as to *suggest* this as a strategy, negating the "payment will be smaller in the future" factor. In his scenerio, the mortgage monkey will ALWAYS be on your back at the very maximum payment that it can be.

* Further, good jobs go away, or go down in pay. Ask doctors, airplane pilots, SW developers, etc. It happens to real high paying jobs in the real world. Your mortgage might still be a monkey on your back in 20 years if someone can figure out how to do your job for less, and you have to retool your skills and start over. The author's examples assume that you will make more forever. That is no longer a realistic scenerio in the real world.

* The author claims that a mortgage is against your income. BS. The ability obtain a mortgage is against your income, but the mortgage is against the property.

*The distinction of the previous point is critical, as he fails to ever make the point that they guy who loses his job *could* sell his house and pocket the gains. If the economy is clipping along at the rate he says, it should be no problem!

* The author assumes that the reader is fiscally responsible and will take the extra $$ and invest it. What he says makes sense if the reader has the discipline to follow through and the economy has the ability to perform at the level he suggests.

In short, this guy is still thinking in terms of a 1950s-1970s economy, and factoring in assumptions of 1997-1999 gains. His "new way of thinking" is a new way of thinking about what one might have done 35 years ago.

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The way I look at it, I'm always going to have a housing expense. Period (unless I mooch off my kids when they become self-sufficient adults).

So, in the future, my housing expense might go down and just be property taxes, utilities, and maintenance if my mortgage is eventually paid off

Trying to pay down the mortgage early doesn't make this happen very quickly, unless, like one poster earlier on in this thread, I could afford to throw $3K - $4K a month at it. I can't.

So, for me, refinancing to get a lower payment, even if it means starting over again with a 30 year note, has a more immediate and sustained pay off than any kind of prepayment.

That's about the only part of the Ric Edelman equation that I think holds true. A smaller monthly payment means less money out of my pocket and more money to save/invest, risk free. Taking out another mortgage just to get the cash for investment purposes has no such guarantees.

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The biggest flaw in the entire argument (and mentioned by several people already) is human weakness. I know plenty of people who cleared up their credit cards, paid off their cars, etc. all through an equity loan, only to see it as a chance to buy new cars and max out their credit cards again. I made sure that when I did it five years ago, I cut up all of my credit cards, and to this day I don't owe a penny of unsecured debt. I personally don't pay an extra dime toward my two mortgages (actually that's not true...I often round up to the nearest dollar).

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I believe Ric Edelman's article is flawed in many ways already described by you guys. Another one that comes to mind is say you do invest the money instead of paying off your mortgage and you do about 2% better. You STILL have to pay taxes on that 2%. And by the way, as someone said...Edelman makes investing sound like such a sure thing when most of us have been losing on our stock investments as of late. Who knows...I'd rather have the best of both worlds...pay off my mortgage as soon as possible but still have enough cash on hand or at least resources to tap into cash should any situations arise.

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dcwilbur said: Never Own Your Home Outright. Instead, Get a Big 30-year Mortgage, and Never Pay It Off — Regardless of Your Age and Income

To say this article is flawed would be too kind.

I pay an extra $100 (just under 10%) but I will increase that shortly.


Tom

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WOW - great discussion! You'll notice that I posted the link without any editorial on my own part. While Edelman's position may make sense in some time periods for some people, I would tend to agree that most people lack both the discipline and investing ability to make his theory a worthwhile proposition.

Having said that, I know that there are a lot of people who pay extra on their mortgage because they've been told "it's the right thing to do" even though they have outstanding credit card balances and limited emergency funds. That's just plain wrong.

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Ducker said: The biggest flaw in the entire argument (and mentioned by several people already) is human weakness. I know plenty of people who cleared up their credit cards, paid off their cars, etc. all through an equity loan, only to see it as a chance to buy new cars and max out their credit cards again. I made sure that when I did it five years ago, I cut up all of my credit cards, and to this day I don't owe a penny of unsecured debt. I personally don't pay an extra dime toward my two mortgages (actually that's not true...I often round up to the nearest dollar).

Couldn't agree more. I know people that have Refinanced and rolled in the Car, CC's plus took as much Cash out as they could... 2 years later they are up to their eyeballs in CC debt again, have since traded the "paid off" car (more precisely the car that will NEVER be paid off since it is now part of that Refinance) for a flashy new model and are now worse off than before. House mortaged to the hilt, CC's maxed out, upside down in yet another car they can't afford... The endless "Refinance to the Max" mentality that is pushed so hard today will cause more grief than good in most cases.

Personally - I don't pay extra to my mortgage, but recently refinanced from a 30 year loan to a 15 year loan to take advantage of a very low rate and accelerate the payoff, pay all my CC's in full every month (and use them everywhere I can to maximize the rewards) and have no other debt except one small car payment with an interest rate so low it wouldn't make sense to pay it off.

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Good post and some interesting perspectives. Personally, I made an additional mortgage payment each year. That should reduce my 30 year mortgage to about 23 years. My fixed mortgage rate is 5-7/8%. Yes, over the long term one could probably beat that rate on an after tax basis. But I would rather build up equity in my house than play the odds on the market. If I was the aggressive type, I suppose I should get an interest only mortgage and in addition- max out my home equity loan and invest it all in the market. Then again, I would rather be able to sleep at night.

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I've got a 5/1 arm at 4.25%, and I'm fairly risk averse so I'd like that paid off. I'm getting married in April and will have had the loan then for approximately 1 year paying an extra $300 in principal each month. My fiance and I agree that she should be a stay-at-home mom, so I don't want to get used to living a higher quality lifestyle because of the money she takes home. My plan is to take $2000 of her takehome a month and put it toward the principle on the house and take the rest of it and put it toward our retirement funds. That way, we don't get used to the money being there so when she starts staying at home it won't require a huge cutbacks. At that rate, we should be done paying off the house in about 5 years which is right about the time we'd like to have kids. We'll have the house paid off and move up into a bigger house ($100-150k) and keep the same payment I was used to paying with my income (or perhaps less).

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Slimbee22 said: But I would rather build up equity in my house than play the odds on the market. If I was the aggressive type, I suppose I should get an interest only mortgage and in addition- max out my home equity loan and invest it all in the market. Then again, I would rather be able to sleep at night.

If you want to build equity in your house then it would be a great idea for you to refinance to an interest-only mortgage if the rate is substantially lower than the rate on your current mortgage.

After refinancing, your monthly payments will go down substantially (assuming that the rate spread is large enough). In that case, you can put the difference into your house PLUS the extra money you already are putting into the house. Here is a very rough math:

Current mortgage payment: $1500
Additional principal payment: $300
Interest-only mortgage payment: $1000

New principal payment amount (after refinance) = Current morgage payment - Interest-only mortgage payment + Additional principal payment

New principal payment amount = $800

So that is $500 more towards the principal per month without any change in monthly expenses if you refinance to an interest-only loan.


Of course, it makes sense to pay towards the principal if you are confident that your house will not be affected by the upcoming housing bubble crash.

Skipping 692 Messages...
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DavidScubadiver said:   
psychtobe said:   
DavidScubadiver said:   For me it usually comes down to opportunity cost. If I can't find a better place for my money, I'll prepay the mortgage. I don't need to borrow money at 3.875%, but don't feel a great need to eliminate that debt either.
We may all lose our livelihood one day, and the question will be whether you can survive longer or shorter as a result of the decisions you make today. Having the house almost paid off without substantial savings, may very well mean losing the house to foreclosure. However, if you didn't prepay and you socked away those non pre-payments into savings/stocks, you might have a whole pile of cash at the time you lose your livelihood and be able to make years worth of mortgage payments, allowing you to stay in the house where being "nearly" debt free leaves you out on the street.

  The problem is opportunity cost now, or later? In your example you are only looking at your opportunities on the 1st of each month. Earn a guaranteed 3.875%, or is there something better? But a mortgage is more complex than that, because you hold it for 30 years but can repay it any time without penalty. So in 5 or 10 or 20 years there may be a return that is not only higher than 3.875% but MUCH higher than 3.875%. So even if there is no better opportunity today for your money, it can be worth holding on to it because a much better opportunity will come along in the future.

  Perhaps, but I don't reevaluate things on a month by month basis.  My mortgage payment is on autopilot and I seldom change it. If, however, I find myself sitting on more cash than I know what to do with, I would change that autopilot and  prepay.  

  Now three years later, and I haven't pre-paid anything, though I am sitting on a lot more cash than usual.  I am about to have my salary cut in half and while it would sure be nice not to have a mortgage payment to make, it is a lot nicer having the pile of assets I can live off of if necessary.

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