Should You Pay Off Your Mortgage Early?
Many financial gurus talk about the dangers of debt, and for good reason. Borrowing money, getting a loan, or putting purchases on credit cards leaves you paying more for whatever you use that money for thanks to interest and other fees.
If you fail to make payments on your balances, that interest starts compounding and the total amount of debt you’re in grows. The longer you take to repay your balance, the more you’ll pay in interest.
For these reasons, it makes sense to avoid debt in the first place. And if you find yourself with student loans or credit card debt, making more than the minimum payments and getting rid of the balance as soon as you can means losing less money than if you only stuck to what you had to pay each month.
But what about your mortgage? That’s a big debt to repay, but it’s also providing you with a big asset (although it is an illiquid one): your home.
Does it make sense to pay off your mortgage early, too — or should you stick to your regular monthly payment and do something else with the money you could have put toward your home loan?
How Much Does Your Mortgage Really Cost, and Should You Just Pay It Off?
Let’s say you have a $200,000 mortgage and the interest rate on that home loan is 4%. Over a 30-year period, that loan will cost you at least $343,739 — because your interest payments total up to $143,739
(You can run your own, specific numbers on this mortgage loan calculator.)
The higher your interest rate or the more money you borrow, the more you’ll need to repay over the life of the loan.
For that reason, many families consider doing what they can to pay off their home early so they can own the property free and clear and reduce their liabilities. Getting rid of your mortgage can provide more peace of mind and make it easier to sleep at night — and it can clearly save you a lot of money.
The biggest downside? The money you use to pay off your mortgage accumulates in an illiquid asset and reduces the amount of cash you have on hand for other purposes.
This is what makes the question “should I pay off my mortgage?” a challenging one to answer.
Obviously, your mortgage costs you more than just the money you borrowed. With interest, you can pay tens of thousands of dollars more than the actual list price of your home.
Which Path Should You Take?
But paying off a mortgage isn’t just a financial decision. It’s an emotional one, too. Here are some of the factors you need to consider before you choose the right action for you:
What’s your mortgage interest rate? The lower your interest rate, the less pressing the financial need to pay off your mortgage. A rate in the 3 to 4 percent range is relatively low.
If you just look at the numbers, you’re more likely to receive a better rate of return by taking the money you’d put toward your mortgage and investing it in the market instead.
How fast can you really pay off your mortgage? If you only have a little extra money left each month, it may not make sense to throw it into your home payment.
For one, you lose liquidity, which could put you in a precarious position if you needed cash for an emergency. And two, throwing an extra $100 per month at a $2,000 mortgage payment won’t make a significant impact on your repayment.
It makes more sense to allocate that money toward another financial goal, like building your emergency savings or contributing more to your retirement accounts.
What do the other parts of your financial life look like? Asking if you should pay off your mortgage is the wrong question if you’re struggling with credit card debt, have a lot of student loans left to pay back, or don’t have other savings in place.
Before you worry about paying off your mortgage, consider:
- Building your emergency savings
- Funding higher-priority financial goals if you have them
- Contributing to tax-advantaged retirement accounts (and even maxing them out)
- Paying off consumer debts and other loans with high-interest rates (over 10 percent)
How do you feel about debt? Let’s say you have the cash flow to double the amount you pay on your mortgage each month. That will make a huge impact to how fast you can pay off the loan (and save on interest).
You could still debate the numbers involved, and ask what makes more sense: building equity in your home, or investing in the stock market? Neither offers a truly guaranteed return, but we can reasonably assume the market will return more than 4 percent when taking a long-term perspective.
Just looking at the numbers, hanging on to your low-interest rate mortgage and using all that extra cash to invest elsewhere for a better return makes more sense.
But again, this isn’t strictly a financial decision. How that debt impacts you emotionally and mentally means something, too.
If you absolutely hate having your debt and you want to remove that stress or burden from your life, it might be better for you to focus on paying off the loan and enjoying truly owning your home yourself.
All these variables illustrate why it’s critical to get an objective, educated, and trained third-party on your team to help you sort through the options and identify the path that makes the most sense for you.
A fee-only financial advisor can help build a comprehensive, values-based financial plan that takes into account not just the numbers, but what’s important to you and the kind of life you want to live. Your financial planner can go beyond just that plan: they’ll also provide you with peace of mind and confidence in your financial choices.
To find out more about FamilyVest and how we can help you achieve your goals, feel free to schedule a quick call!