Should I pay my mortgage off early?
Updated: Feb 18, 2019
The simple answer to this very personal and complex question is...it depends on you. Personally, I have no desire to pay extra to my mortgage...but my goals, risk tolerance, investment experience and overall financial plan is probably very different than yours. So let’s try to figure the right decision for your situation.
Here are the characteristics of someone where it could be a good idea to make extra mortgage payments:
They plan on living in the house for a long time.
Their interest rate is not the greatest, but not bad enough that it's worth the cost of refinancing. (Maybe currently around 5.5%)
Their income is very consistent. They have a very stable job with very little chance of ever being laid off or changing careers. Maybe even a pension at retirement.
They have absolutely no other debt. No credit card balances, no car loans, no student loans, no personal loans.
They have at least 6 months of expenses saved in the bank maybe even a little more.
They are maxing out retirement accounts - IRA, 401k, 403b, and 457 plans.
They have solid medical and disability insurance.
They have saved for other major expenses like kids college education or a trip around the world.
They are somewhat risk averse, not interested in learning about different investments (like real estate), will probably not pounce on investment opportunities if the economy goes into a recession.
They love the idea of not having a mortgage.
That ended up being a pretty long list. Most people are not going to be in this situation. If you are - good for you! Go ahead and throw some extra money at your mortgage principal.
Just the fact that you are considering paying extra to your mortgage tells me you are in a strong financial position. Continue learning about different investment vehicles before you make any big decisions.
Here are the reasons why I am against paying off my mortgage sooner than required:
If I can borrow money at 4% (plus tax deductions) and invest it for a higher rate of return I want to do that all day long. That is working smarter not harder. Make your money work for you! Yes I know...investment returns are never guaranteed but beating 4% is very realistic.
Once you send that extra mortgage payment you can’t get it back unless you borrow it again at a cost. Life happens and situations change.
Cash gives you options. What if you want to start a business or change careers? Having a lower balance on your mortgage is not going to help you.
Your monthly cash flow is not improved. Yes, the balance you owe is getting reduced, but your payment is still the same.
I look at the opportunity cost for that money. I don’t see it as I am paying unnecessary interest on my mortgage, but rather that I would giving up the opportunity to use that money to earn more money if I send it to the bank.
As you can see, I very rarely think it is a good idea to pay extra to your mortgage. There are just too many other ways I would rather invest that money to improve my current life and cash flow. I'm not talking about using that money to buy a nicer car or upgrade my wardrobe. Im talking about investing in assets. Things like rental properties, private lending and stock market index funds. Obviously, these things involve risk and tons of education so they are not for everyone, but it doesn’t hurt to start learning about them.
With that said these decisions are very personal and emotional. Having the peace of mind of being debt free might make you the happiest person in the world and at the end of the day that is what this is all about.