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Should You Pay Your Mortgage Off Early?

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HousingOne of the goals that many people have is to pay off the mortgage early. Once you have paid off your consumer debt, it seems natural to turn your thoughts toward your mortgage. But is it always a good idea to pay off your mortgage early?

It’s exciting to think that you could “truly” own your home by paying off the mortgage. After all, who wants the threat of the bank taking your home away. Plus, there is pride in the idea that you have paid off such a large purchase. However, you do need to consider some of the realities of the current housing market, and look at your situation before you make that decision.

Can You Afford to Lock that Money Up in Your Home?

First of all, consider whether or not you can afford to lock that money up in your home. If you plan to pay off your mortgage early, you will need to make larger payments each month. This means that the money is going to be locked up in your home. Yes, you could potentially tap the equity you build. But you are still at the mercy of a loan approval in such cases. Here are some things to think about:

  • Emergency fund: Do you have a sufficient emergency fund? Is it liquid enough to meet your needs? Before you start paying down your mortgage at a faster rate, make sure you have an emergency fund that is flexible, allowing you to get the money you need quickly and easily.
  • Do you have investment opportunities?: While you certainly want to make sure you aren’t sinking your money in an investment scam, you also don’t want to miss out on legitimate opportunities. Having the cash available to invest in low-cost stocks during a down cycle, or taking advantage of other opportunities that provide capital, can be more valuable than paying off your loan early. Your potential returns might outweigh any interest savings — especially if your home has been refinanced to a low, low rate.

Financial liquidity is important in many cases, and sinking extra money each month into your home mortgage, in an effort to pay it off faster, can mean the sacrifice of liquidity. It can also mean that you are unable to take advantage of investments that offer the chance of higher returns over time. This includes your retirement accounts. You stand to benefit more, in the long run, by maxing out your tax-advantaged accounts and retiring your home loan on schedule than by paying off your mortgage early.

Every situation is different, though. Run the numbers, and consider the possibilities. Look at your own expectations. In some cases, you might already have an emergency fund and maxed out retirement accounts. If there is nothing else left to do but pay off the mortgage, it might make sense to retire it early. However, only you can be the judge of what is best for you.

What are your thoughts? Are you considering paying off your mortgage? Why?

(Photo: james.thompson)

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19 Responses to “Should You Pay Your Mortgage Off Early?”

  1. I don’t want to because of inflation and the fact that my current mortgage rate is one of the lowest I expect to see in my lifetime… why rush to pay off what will be considered an unheard of rate in 10 to 20 years if I can put my money to better use elsewhere?

    • Scott says:

      I think you have to look at the interest rate of your mortgage as an investment in itself. In other words, if your mortgage is financed at 5%, can you get that a better rate elsewhere? If so, then don’t pay it down. If not, then putting extra money into it might be a good idea.

      It also pays to look at your timeline. For instance, we have a mortgage that we will pay off in ~26 years, but we need to send our son to college in ~17 years, so if the expected returns are not completely out of whack, putting money into what we need sooner (college) makes more sense right now.

    • Seth says:

      I agree about the current relative low for rates right now, but when the interest rates do rise, they will do so both ways. Yes, rates for borrowing money will go up, but that also means an increase in rates for lending money. So, at that time, you should be able to put extra money into CDs/bonds/whatever that will be returning a much higher rate than they are now.

  2. Dean says:

    We paid off our mortgage almost 5 years ago, facing this same question. A windfall of cash and savings, I wondered if we’d ever replace. At the time, I figured it would take 10 years to save that back up while simultaneously increasing retirement savings.

    Here we are less than 5 years later, and we have more than replaced the amount of cash on hand that was originally used to pay off the mortgage, prepaid both childrens’ college funds, and significantly increased 401k contributions.

    When you don’t have payments, you actually have more money to save! Amazing how that works…

    The feeling is unbelievably liberating and gives us a great deal of confidence and security.

    10/10 would do again.

  3. Jim M says:

    I face the same decision every month as I write the check for the mortgage payment. So far, I have decided that prepaying the mortgage makes sense – if not from a purely financial perspective, than certainly from an emotional one.

    I hope to be in Dean’s situation soon.

  4. We don’t have a house/mortgage yet, and we have made the conscious decision to wait. Not only do we want to have the flexibility to jump on investment opportunities, but we also want to be flexible in terms of location. If we’re able to wait until we’re financially independent, we may live in a completely different location to take advantage of better climate, lower taxes, etc.

  5. At present we’re earning more on our investments than the mortgage on our home, so we’re keeping both and pocketing the difference…

  6. AndrewB says:

    I can act on what I know now, which is to pay off the mortgage asap though I may be losing on future earnings by investing elsewhere.
    I also like to plan for the worst and hope for the best: Without a mortgage only one salary would be sufficient to keep us afloat. Who knows what the future will bring? Illness? Layoff? If none of these, then after payoff we can enjoy life, cut back on work hours and travel without the burden of a mortgage payment every month.

    • Kathy says:

      This is exactly what my husband and I believe. You just don’t know what the future holds. Secure jobs just aren’t that secure anymore. Get the mortgage paid off so that no matter what happens you don’t lose your home.

  7. emiliosic says:

    With current low interest rates and volatility in markets; paying off a mortgage early could be a sound investment IMHO. Investment in saving the APR paid in interest every year; and when we’re closer to start paying for college; or getting closer to retirement; we won’t have the burden of a mortgage; particularly in areas where housing costs are high and the income percentage destined to paying off a mortgage and related interest is proportionally high

  8. Tony says:

    Why does everyone assume that you have to make larger payments every month to pay your mortgage off early? I just put away the extra money in savings, and will just pay it off all at once as soon as the amount accumulated is large enough.

    • Alex says:

      This is not necessarily the case. If you owe 300K on a loan and choose one of two options, the following will happen. Option one, pay $1000 extra as additional principal. Option 2, pay $1000 extra into your house savings account. At some point, you will owe X remaining on the house and have X in the house savings account – say in 15 years. However, due to paying additional principal each month, that 15 years is less than 15 years. Check out amortization schedules. I was thinking I would do the exact same thing as you are saying, but after crunching the numbers, it didn’t work out like that.

  9. Edison says:

    Here’s my take on it. I have an FHA loan, as a young fellow just starting out, so I have to pay PMI (the Loan-To-Value was over 80% when I bought the house). If I can accelerate my payments and reach 20% equity, I can end these monthly PMI payments by refinancing, and I think it’s important to get this done while rates are as low as they are. So the return I’m getting on each marginal dollar of principal reduction has got to be greater than my APR. Additionally, with amortization, paying an additional dollar on my mortgage goes fully to reduce the principal, where if I pay the scheduled payment only, my principal isn’t declining very rapidly.

    It’s a similar situation with my car note, because it’s low interest debt, but carrying that note requires me to carry full coverage on the vehicle, so paying it off would result in a serious cost savings there.

  10. Studog says:

    Pay it off now…A hypothetical question. If you owned your home outright (no mortgage)would you take out a home equity loan out on it to invest it in stocks, bonds, or s speculative business opportunity. Since paying off my mortgage, I have great peace of mind and have turned my emergency fund into to a catastrophic worst case scenario fund:) While God doesn’t condemn debt and debt is necessary in many financial situations, there is some metaphor comparing it to slavery…and how true it is…oh, my wife is a stockbroker and she agrees with me:)

  11. Bill says:

    Jim,
    What are your thoughts on hyper inflation. I have 13 years due on $650k and was thinking I am better off to get a 30 year and if we have hyper inflation I would be paying on $625k, but the potential value of the home could be 2 to 3 times it value. In Hyper inflation, are you not better off to have debt?

    Bill

  12. Ryan says:

    Pay off as much as you can in the early stages of the loan. The first half of the loan is almost entirely interest, you want to get your payments to the point were each payment is going mostly to your principal. If you can pay double payments every other month, you can effectively reduce the aggregate of interest payments by half.

  13. I think it can be a great investment strategy to try and pay down your mortgage early depending on your other financial obligations. If you have high interest credit cards or car loan, clearly your extra money should be put towards pay those things off first. I think you have to look at your home as an investment. If you can rent out a room in your home or convert the basement into an income suite these are way that can help pay off your mortage quicker and have more money for other investment opportunities!

    Sally

  14. Jeff says:

    I am 54 years old. I have $112,000 home mortgage at 3.75% that was recently refinanced. I would think I would want to make extra payments to pay off the loan before I retire, if I am able to retire.

  15. Rosie says:

    We paid off our first house in 6 years and second house in 10 years, then bought 58 acres and built our dream house. We paid cash for our retirement house and gave the money from our dream house to our boys. There is not a greater feeling than being out of debt and being able to help out your kids. We ate things on sale, had a garden, went camping, for vacations, but only clothes on sale and still do. But would not change a minute of our life.


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