When I pay off my mortgage loan, what would really happen?
The underlying investment is usually somewhat independent of your mortgage, since it encompasses a bundle of mortgages, and not only yours. It works similarly to a fund. When, you pay off the old mortgage while re-financing, the fund receives the outstanding debt in from of cash, which can be used to buy new mortgages.
Hold onto that money, put it in savings. With such a change in the US government, who knows what will happen - and if things start to go sideways, having savings - so that you can continue paying your mortgage, and thus keep your house - is going to help you more than being able to throw more money at your mortgage principle. (Unless you can pay it off totally. Then do that.) I would build more of an emergency fund (2 years, just to be on the safe side), THEN see what other things are going on in your life, and what's going to be more advantageous for you. (That's a nice low interest rate. Not many other loans these days are going to have an interest rate that low.) "You can hire a good CPA for a really low price.  They can advise you on how to do exactly what you said and many other aspects of your business.  Mine does this as a courtesy with the filing of my taxes.  And the filing of my taxes is not all that much.  It is great value for the money. Recently I had to make a decision that is a potential audit situation and can go badly if not properly documented.  It was not hard to document (with the CPA's help), but now that it is so I don't lose mental energy on if I am going to get ""caught"" by the IRS.  Let them come, I have the necessary documentation. Beyond the IRS, I really like the documentation that you are trying to put behind this loan.  Having this in writing helps smooth this potentially bad situation between you and the BIL.  I would go above and beyond writing conditions and contingencies down in order to keep this relationship happy.  With these kinds of things, cover the applicable 5 ""Ds"" of partnership agreements: However, I would add another:  Boom.  What happens if your business takes off?  Perhaps there should be a clause to retire the loan prior to you expanding beyond a certain level. Please understand I am not suggesting that any of these bad things are going to happen to you (except the Boom, I really hope that happens to you), but it is a way to communicate contingent actions if one of the risks of small business materializes.  Having agreements ahead of time helps avoid crisis." "TARP was ~$475 billion of loans to institutions.  Loans that are to be paid back, with interest (albeit very low interest).  A significant percentage of the TARP loans have been (or will be) paid back.  So, the final price tag of the TARP was only a few $billion (pretty low considering the scale of the program). There is ~$10 trillion in mortgage debt outstanding.  That's a much higher price tag than TARP.  Secondly, paying off the mortgages = no repayment to the government as there was with TARP.  The initial price tag of your plan would be ~$10 trillion, instead of a few $billion. Furthermore how does a government with >$15 trillion in debt already come up with an extra ~$10 trillion to pay off people's mortgages?  Should the government go deeper into debt?  Print more money and trigger inflation? (Note:  Some people like to talk about a ""secret bailout"" by the Fed, implying that the true cost of TARP was much higher than claimed by the government.  The ""secret bailout"" was a series of short-term low/no interest loans to banks.  Because they were loans, which were paid back, my point still stands.)  Some other issues to consider: Remember that the principal balance of your mortgage is only a small portion of your payments to the bank.  Over 30 years, you pay a lot of $$$ in interest to the bank (that's how banks make a profit).  Banks are expecting that revenue, and it is factored into their financial projections.  If those revenue streams suddenly disappeared, I expect it would majorly screw the up the financial industry. Many people bought houses during the real estate boom, when housing prices were inflated far beyond the ""real"" value of the house.  Is it right to overpay for these houses?  This rewards the banks for accepting the inflated value during the appraisal process.  (Loan modification forces banks to accept the ""real"" value of the house.) The financial crisis was triggered by people buying houses they could not afford.  Should they be rewarded with a free house for making poor financial decisions?" "It is true that all else being equal, you will pay a lower amount of total interest by paying down your highest interest rate debts first.  However, all else is not always equal.  I'm going to try to come up with some reasons why it might be better in some circumstances to pay your debts in a different order.  And I'll try to use as much math as possible.  :) Let's say that your goal is to eliminate all of your debt as fast as possible.  The faster you do this, the lower the total interest that you will pay.  Now, let's consider the different methods that you could take to get there: You could pay the highest interest first, you could pay the lowest interest first, or you could pay something in the middle first.  No matter which path you choose, the quicker you pay everything off, the lower total interest you will pay.  In addition to that, the quicker you pay everything off, the difference in total interest paid between the most optimal method and the least optimal method will be less.  To put this in mathematical notation: limt→0 Δ Interest(t) = 0 Given that, anything we can do to speed up the time it takes to get to ""debt free"" is to our advantage. When paying large amounts of debt as fast as possible, sacrifice is needed.  And this means that psychology comes into play.  I don't know about you, but for me, gamifying the system makes everything easier.  (After all, gamification is what gets us to write answers here on SE.) One way to do this is to eliminate individual debts as quickly as possible.  For example, let's say that I've got 10 debts.  5 of them are for $1k each.  3 of them are for $5k each, 1 is a $20k car loan, and 1 is a $100k mortgage.  Each one has a monthly payment. Let's say that I've got $3k sitting in the bank that I want to use to kickstart my debt reduction.  I could pay all $3k toward one of my larger loans, or I could immediately pay off 3 of my 10 loans.  Ignore interest for the moment, and let's say that we are going to pay off the smallest loans first.  When I eliminate these three loans, three of my monthly payments are also gone.  Now let's say that with the money I was paying toward these eliminated debts, and some other money I was able to scrape together $500 a month that I want to use toward debt reduction.  In four months, I've eliminated the last two $1k debts, and I'm down to 5 debts instead of 10.  Achievement Unlocked! Instead of this strategy, I could have paid toward my largest interest rate.  Let's say that was one of the $5k loans.  I paid the $3k toward the bank to it, and because I still had all the monthly payments after that, I was only able to scrape together $400 a month extra toward debt reduction.  In four months, I still have 10 debts. Now let's say that after these four months, I have a bad month, and some unexpected expenses come up.  If I've eliminated 5 of my debts, my monthly payments are less, and I'll have an easier month then I would have had if I still had 10 monthly payments to deal with. Each time I eliminate a debt, the amount extra I have each month to tackle the remaining debts gets bigger.  And if your goal is eliminating debt quickly, these early wins can really help motivate you on.  It really feels like you are getting somewhere when your monthly bills go down.  It also helps you with the debt free mindset.  You start to see a future where you aren't sending payments to the banks each month.  This method of paying your smaller debts first has been popularized in recent years by Dave Ramsey, and he calls it the debt snowball method. There might be other reasons why you would pick one debt over another to pay first.  For example, let's say that one of your loans is with a bank that has terrible customer service.  They don't send you bills on time, they process your payment late, their website stinks, they are a constant source of stress, and you are getting sick of them.  That would be a great reason to pay that debt first, and never set foot in that bank again. In conclusion: If you have a constant amount of extra cash each month that you are going to use to reduce your debt, and this will never change, then, yes, you will save money over the long run by paying the highest interest debt first.  However, if you are trying to eliminate your debt as fast as possible, and you are sacrificing in your budget, sending every extra penny you can scrape together toward debt reduction, the ""snowball"" method of knocking out the small debts first can help motivate you to continue to sacrifice toward your goal, and can also ease the cash flow situation in difficult months when you find yourself with less extra to send in." "This seems to be a very emotional thing for people and there are a lot of conflicting answers.  I agree with JoeTaxpayer in general but I think it's worth coming at it from a slightly different angle. You are in Canada and you don't get to deduct anything for your mortgage interest like in the US, so that simplifies things a bit.  The next thing to consider is that in an amortized mortgage, the later payments include increasingly more principal.  This matters because the extra payments you make earlier in the loan have much more impact on reducing your interest than those made at the end of the loan. Why does that matter?  Let's say for example, your loan was for $100K and you will end up getting $150K for the sale after all the transaction costs.  Consider two scenarios: If you do the math, you'll see that the total is the same in both scenarios.  Nominally, $50K of equity is worth the same as $50K in the bank. ""But wait!"" you protest, ""what about the interest on the loan?""  For sure, you likely won't get 2.89% on money in a bank account in this environment.  But there's a big difference between money in the bank and equity in your house: you can't withdraw part of your equity.  You either have to sell the house (which takes time) or you have to take out a loan against your equity which is likely going to be more expensive than your current loan. This is the basic reasoning behind the advice to have a certain period of time covered.  4 months isn't terrible but you could have more of a cushion.  Consider things like upcoming maintenance or improvements on the house.  Are you going to need a new roof before you move?  New driveway or landscape improvements?  Having enough cash to make a down-payment on your next home can be a huge advantage because you can make a non-contingent offer which will often be accepted at a lower value than a contingent offer. By putting this money into your home equity, you essentially make it inaccessible and there's an opportunity cost to that.  You will also earn exact 0% on that equity.  The only benefit you get is to reduce a loan which is charging you a tiny rate that you are unlikely to get again any time soon. I would take that extra cash and build more cushion.  I would also put as much money into any tax sheltered investments as you can.  You should expect to earn more than 2.89% on your long-term investments.  You really aren't in debt as far as the house goes as long as you are not underwater on the loan: the net value of that asset is positive on your balance sheet.  Yes you need to keep making payments but a big account balance covers that.  In fact if you hit on hard times and you've put all your extra cash into equity, you might ironically not being able to make your payments and lose the home. One thing I just realized is that since you are in Canada, you probably don't have a fixed-rate on your mortgage.  A variable-rate loan does make the calculation different.  If you are concerned that rates may spike significantly, I think you still want to increase your cushion but whether you want to increase long-term investments depends on your risk tolerance." "We payed off our Mortgage early...at first in small extra payments to principal, and finally a lump sum.  Each extra payment to principal reduced the balance, and reduced every payment going forward.  I have, somewhere, an excel spreadsheet where I tracked this...  - =CUMIPMT((interestRate/12),term,pymtNumber,balance,balance,0) computed the interest payment due  - =currentPrincipal + CUMIPRINTresultAbove computed the monthly principal payment Occasionally I would update the month-ending Principal balance against what the mortgage company told me.  It was usually off by a little.   My mortgage company required me to specifically contact them for a payoff amount before I wrote the final check.   I've never heard of a mortgage where prepayment of all expected interest following the original schedule is required.  I would guess it is against federal (US) law.  Lets think about that for a moment...  out of ""interest"", I recently computed that for our 30 year loan at 6-5/8% on about 145, we payed a total of 106000 in interest.  That include a refi to 4-7/8 10-years in to a 15-year loan, and paying it off 20 years after the original loan was granted. As far as not paying all the theoretical interest due...  - If they get a fixed dollar amount of service interest back, there's no incentive to me to pay on-time.  I owe the same amount if I pay it today or if I pay it 6 months late, after I gambled the mortgage money and finally won.  (yea, I know they could write the mortgage to penalize me for paying late, but I'm ignoring that)  - if you were requried to pay off all the interest that might accrue, how could you ever sell your home, or refinance, for that matter?  When I refi'd, the new holder payed the old holder 98,000.  If the original holder had required prepayment of all the interest that would be accrued to the original schedule, the new mortgage would've been 200k.  It would just never be a good deal to buy a home if mortgages worked under that term. I have had a car loan that worked differently -- they pre-computed the total interest due and then divided it over the term of the loan equally.  I could pay off early and they stopped collecting interest." It will reduce the credit ding you will take but why does it matter?  Next cycle when it's paid off your credit score will go back to where it was.  Unless you're looking for a loan right now and your credit is marginal why worry about it? "I will echo the others; your home should be worth more to you than its market value. It is YOUR HOME. It's where you come home every day to your wife and kids, where you build a life. Yes it's an investment, but it's not like a stock or bond that you hold for a little while and then cash out for the profit. The one time you should be worried about being ""upside-down"" on your mortgage is if you're getting out. If you're moving to a new job at a new company in a new city, you have to make good on the remaining loan balance, and that won't all be from the sale of the house. Unless you're at that point however, if you can afford making the payments and have no reason to move or to cash in equity (of which you have none), then just keep making the payments. Hey, it's better than rent; you'll never see rent money again, while even if you're underwater, you're making headway with each payment."