One of the biggest debates among financial professionals is whether you should pay off your mortgage early. There are pros and cons and the answer will depend on your risk tolerance and alternative investing options.
Arguments for Early Payoff
The biggest argument for paying off your mortgage early is that doing so allows you to actually own the place where you live. There is a great freedom associated with owning your home yourself and not owing the bank. It can protect you if you hit a financial rough patch, since you wont have to worry about losing your home. It ensures that you should always have a place to live without fear, even if you are suddenly faced with a situation where you cannot make monthly payments.
When you pay off your mortgage early, you also eliminate a monthly debt payment on your secured loan, freeing up your cash to put towards other things. You can then use the extra money you have each month to save or to accomplish other financial goals and dreams. Other things, such as early retirement or quitting your job in favor of a lower paying dream position, can also be possible if you dont have a house payment to worry about.
Finally, another argument for early mortgage payoff is that you get a guaranteed return on your investment equal to whatever your mortgage rate is. For instance, if you were paying 5 percent a year on your mortgage and you pay it off early, you are essentially gaining the 5 percent of your money that would have gone to interest every year.
Arguments Against Early Payoff
While the arguments for early payoff are good, there are equally strong arguments suggesting you shouldnt pay off your mortgage early. One of the biggest is that mortgage debt is generally low-interest debt, as it is a secured loan. This is especially true now with interest rates at record lows. You should be able to invest the money youd spend to pay off your mortgage in another investment that pays a higher rate than the interest you pay to your mortgage lender. For instance, if your mortgage interest rate is 3 percent, but you can invest your money at five percent, youd be giving up the extra 2 percent you could make by investing the money elsewhere. Mortgage interest is also tax deductible, so this needs to be taken into account as well when comparing the value of paying off your mortgage early to save on interest.
Opportunity cost associated with lost investment time is another reason to avoid early payoff. When you invest money and earn interest, that return can then be invested and begin earning more interest for you. This is referred to as compound interest and it allows you to keep making more and more money without investing any additional cash. When you spend years paying off your mortgage instead of investing the cash, you lose out on the magic of compound interest for your lost investment dollars. It can take a while to catch up on all that interest you would have made.
Making Your Choice
Ultimately, it is up to you whether to pay off your mortgage early or not. Remember, since mortgage debt is a secured loan, your home is always at risk if you cant make the payments. However, if you have a large nest egg saved, you could always tap into that nest egg to repay the mortgage if something happens in the future that prevents you from doing so.
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