Should You Really Pay Off Your Mortgage Early?

December 14, 2016

One of the most common pieces of advice you are likely to hear about your mortgage is that you should pay it off early. But is this really the best course of action?

You might be surprised to find that paying off your mortgage early might not be in your financial best interest.

Paying Off Your Mortgage Early vs. Investing

When you decide to pay off your mortgage early, you take a portion of your monthly cash flow and divert it toward paying down your mortgage. Whenever you pay off debt, it’s like getting a guaranteed return equal to your interest rate. So, if you are paying 4% APR, getting rid of debt early is like getting a guaranteed return of 4%.

Could you be doing something else with that money, though?

What if you invested the money you use to pay off your mortgage early? Using a stock index fund, you can benefit from the potential for larger gains. Instead of a return of 4%, you might see an annualized return of 7% or 8%. Even though there are stock market drops sometimes, over time that trend line smooths out. The stock market hasn’t come up negative in any 25-year period in its history.

If you are interested in long-term wealth building, you might be better off taking the money you would put toward early mortgage payoff and investing it instead.

Don’t forget, too, that mortgage interest is tax-deductible. While that doesn’t mean you’ll save a ton of money through the tax advantage, it does reduce the total cost of keeping that mortgage. That means that (if you take the mortgage interest tax deduction) investing is even more efficient than you might have thought.

Before you decide to commit money to paying off your mortgage early, consider the investing angle. Depending on how much you set aside each month, your interest rate, and your tax bracket, it could make a big difference. You might save tens of thousands of dollars in interest by paying off your mortgage early, but it could mean losing out on hundreds of thousands of dollars in investment gains.

Is it really worth it to save $50,000 in interest while giving up $250,000 in potential investment gains over the course of 15 or 20 years?

Debt Freedom and Your Ability to Sleep at Night

Of course, sometimes our decisions aren’t just about the money. You might be interested in debt freedom, and the thought of having any debt hanging over you might cause stress. Any debt is an obligation to others, and you might not feel comfortable with that. While some people are just fine with carrying certain low-interest debt, others aren’t. You need to figure out where you fit on that continuum. The idea of owning your home clear of a mortgage might offer you breathing space in your monthly budget, as well as peace of mind knowing you won’t have to worry about being foreclosed on if you can’t make your payments later.

If your peace of mind depends on paying off your mortgage, there’s nothing wrong with paying it off early. Just pay attention to your other long-term financial goals. You don’t want to put so much toward paying down your mortgage that you fall behind on things like retirement savings and setting aside money for your kids’ college. It’s possible to put a little extra toward paying down your mortgage while still making room for other goals.

Run the numbers and consult a professional. Figure out what helps you sleep at night. Put together a plan that can help you meet more of your financial goals — even it means holding onto that mortgage just a little longer.

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