Should I pay off my mortgage early?

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The decision to pay off your mortgage is a personal and complex one, based on several different factors.

Let’s look at some compelling reasons for paying off your mortgage early and some sobering reasons why you might not want to hold that mortgage burning party.

Paying Off Your Mortgage – The Pros

Here are some of the reasons you might want to consider regarding paying off your mortgage.

• Save Some Moolah: The first and most obvious reason to pay off your mortgage early is it can save you tens of thousands of dollars in interest costs. Check out this calculator to run your numbers.

• Serenity: The second reason is the peace of mind that comes from owning your own home. By paying off your mortgage early you get that warm-fuzzy that comes from knowing you have a secure place to live and won’t be living under a bridge at the first sign of hard times

• Reduction In Cost of Living:  Mortgage payments are your biggest monthly expense after taxes. Without a mortgage payment, you can save more and work less.

• Lost That PMI: As you accelerate paying down principal, your home equity will reach a threshold where PMI should not be required. This has the effect of saving you money long before the mortgage is paid off. It also allows you to accelerate the principal pay-down while at the same time making the same monthly payment.

• Plan For Your Golden Years:  If you are entering retirement with a fixed income –such as Social Security, pension or fixed annuity – then it can be a real benefit to pay off all debt rather than put money in fluctuating investments. After retiring having a monthly mortgage payment can force you to take money from tax deferred accounts when that money would be better off left to grow. Additionally, if your taxable income is reduced in retirement, the mortgage interest tax deduction benefit can be reduced, favoring a payoff.

• Your ROI Is Guaranteed:  It can be comforting to put your money toward your home and know with certainty what the return on investment will be.

Paying Off Your Mortgage – The Cons

While all the above reasons might seem compelling to you – let’s take a long pause and consider the downside to paying off your mortgage early. There are some complicated financial issues for paying off your mortgage early

• Bye, Bye Tax Break!

• Low Return Investment: If you take a close look at it, a home mortgage is likely the cheapest money you will ever borrow – and the interest is usually deductible making the effective cost even less. This means that higher cost, non-deductible debt should be paid off first, and long-term investment returns will likely provide a higher return. Let’s face it, the rate on a mortgage after the tax deduction for many is less than inflation right now.

• Cheaper Savings: Consider that all the savings you are expecting only come after the mortgage is paid off. The savings must be discounted for inflation. You must think in terms of the present value of money. For instance, if you pay off a 30-year mortgage in 25 years, you’ll see that $1,000 saved 25 years into the future is only worth $375.12 in today’s terms at a 4% inflation rate. You should discount all savings by inflation because the payments you avoid will be in depreciated dollars.

• Lost Diversification: A residential real estate mortgage is the only practical way for most people to short their domestic currency and hedge against inflationary economic policy.

• Interest Rate Below Expected Inflation: It is entirely conceivable that the interest rate on a fixed rate mortgage could turn out to be lower than the inflation rate. If that ended up being true, then a bizarre financial situation is created. You are quite literally paid to borrow money in real terms even though you’re paying interest every month. In this strange circumstance, you make more by owing than by owning.

Of course, there are many other factors to consider regarding both the pros and cons of paying off your mortgage.

The list of positives to paying off your mortgage discussed earlier are easy for anyone to see.

However, the negatives require a fair degree of financial sophistication – from esoteric tax strategy to long term inflation effects. You also need to consider short hedges on currency, and discounted present value equations.

That can be way beyond most of us “mortals”, yet it’s every bit as valid to your bottom line as the more obvious reasons for paying off your mortgage early.

What are your thoughts with paying off your mortgage early? Have you done so already? Comment below

2 COMMENTS

  1. I often ponder the thought of paying off my mortgage. I still have a big chunk left ($500K) but my mortgage rate was 3.12% on a 30 year fixed.
    But at the rate I’m saving I can probably pay it all off in 3 years or less. I have 28.5 years left on the loan.
    I know I can place my cash in investments but I’m afraid the market is too high right now and will eventually come down.
    But I also hate having to pay my mortgage every month. I don’t think I’ll live there forever so what would you do if you were me?

    • With a rate that low I would leverage the money and ride the loan out. Maybe not for all 30 years, but maybe 15. Assuming you qualify for the interest deduction on the loan the effective interest is just 2.34% and that is hovering right around inflation making it a break even point when considering the time value of money.

      In regards to the market, we have been over due for a correction for over 6 years. Nobody can predict the future and the best returns come from investing over the long run. In addition the investments in accounts for retirement, healthcare, or college savings have significant tax advantages that can’t be ignored.

      Since you are thinking of moving I would just consider the cost. When combining the costs of selling and buying it typically equates to 15% of the value of the home.

      There are numerous factors at play and some are emotional and some logical. If everyone acted logically the field of behavioral economics wouldn’t exist.

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