Paying off your mortgage: Is sooner better than later

If having a mortgage hanging over your head is doable because you got such a great rate, then perhaps its better to use your spare cash on making your house more beautiful—or investing the money towards a beautiful future.

A nest of one’s own

My husband and I found our dream house around five and a half years ago, taking out a 30-year mortgage to pay for it. Our mortgage provider lets us pay on a biweekly basis, amounting to 26 payments per year. That adds up to 13 months–which means we’re making one extra month’s payment each year. It’s amazing how much interest we save. Our goal is to pay it all off before we hit retirement, so we can use our fixed income to travel, pursue our passions—and help our kids buy homes of their own.
Homeownership gives people a certain peace of mind, and we’re no different. Home is where the heart is, and the sooner you get to call it your own, the better. But I would never advise anyone to retire their mortgage early without knowing their individual circumstances.
If you’re thinking about overpaying, there are two crucial questions you need to ask:
Do I have the extra cash? Look at your cash flow to see if you’re in a financial position to even consider paying more than the scheduled amount. That should be relatively easy. Once you’ve figured it out, you need to ask yourself a tougher question:
Do I have a low interest rate? Being debt free is obviously desirable, but if you expect to earn a higher rate of return on the investment than you are paying in interest on the loan, it may make more sense to invest the extra cash instead. If you get a 6% return on an investment, and your mortgage is 5%, you’re better off investing the money (with that 1% spread). And don’t forget, for loans lower than $750,000, you can deduct the interest payments on your tax return, plus you can grandfather in deductions from previous years. This generous tax break will effectively lower your rate of interest.
Mortgage rates remain at historic lows. If you took one out in the last few years you may be paying as little as 4%, maybe even less. The problem is, how can you guarantee a 6% rate of return? While your fixed mortgage interest rate is set in stone, your investment returns are not. Investing in something fixed like a Certificate of Deposit wouldn’t guarantee a very high rate of return; you would need to put the money into stocks, where the rate will fluctuate from year to year.1
If your mortgage has an interest rate that is higher than what you reasonably expect to earn on an investment, you may think about paying some down by making an extra payment or two each year. Or, you may consider refinancing—getting a new mortgage to replace the original—while interest rates are low, giving you the opportunity to get a better deal. But the fees and penalties may not be worth it. Run the numbers by your financial advisor.
Ultimately, you want to put your money to work for you as best it can—and that may mean paying off higher-interest debt, such as credit cards, building your emergency fund or boosting your 403(b) savings rate.
Bottom line: When you calculate how much interest you’ll pay on this massive debt over the years, it makes sense to pay it off as soon as possible. However, after looking at the math, it may be better for you to invest your extra cash and just pay minimum repayments on your mortgage. Aside from brute economics, you may just feel more comfortable having your mortgage paid off sooner, freeing up some capital to spend on your retirement, or to invest in your family’s future.
1 Stock investing involves risk including loss of principal.
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June 6, 2018