Hi, it’s Hilary, and I get asked this question at least once a week…
“Does it make sense for me to pay off my mortgage early?”
You can probably guess how I’m going to answer because it’s about giving you great information and the why behind my answer.
The answer is… “It depends.”
It may seem like the answer should be straightforward, but it isn’t so black-and-white.
Everyone’s mortgage (and overall financial) situation is different, including yours.
You have unique needs, risk tolerances, and debt factors to consider the best option for your financial future, not someone else’s.
Of course, when it comes to making a wise financial decision, I recommend looking at the advantages and disadvantages – the pros and cons, as it were.
The pros of paying off your mortgage early:
- The obvious advantage of paying off your mortgage is you no longer have a monthly mortgage payment. This also frees up cash, increases your available disposable income, and can give you more options of what you want to spend your money on, like hobbies, traveling, home improvements, investing, anything.
- Paying off your mortgage early means saving on interest since you no longer have a loan. No loan = no interest on the remaining balance of your loan.
- Another advantage is that it gives you peace of mind. For some, sleep feels more relaxing when you know you own your home free and clear.
- For some people, I have found that paying off the mortgage feels like a fiscal goal they want to achieve. In other words, it’s an emotional goal.
So, with all of these advantages, it may be tempting to think there are no downsides to paying off your mortgage early.
Again, I love showing both sides of the coin so you can make the best decision for yourself.
That said, paying off your mortgage early may not be in your best interest…
The cons of paying off your mortgage early:
- A mortgage is generally considered ‘good debt’ since it’s tied to an asset that should appreciate in value. Of course, there are no guarantees, but having an appreciable asset in real estate is one of the best types of assets.
- Mortgage interest rates are historically low right now, so your expected ROR (rate of return) in other investments is much higher than what you’re paying to borrow money from the bank. You might consider keeping your mortgage and taking advantage of opportunities with higher rates of return, such as investing in a low-cost index fund where you can earn more in tax-advantaged and tax-free vehicles. This is called arbitrage, and it’s actually a very sophisticated and savvy investment technique. Of course, you have to be willing to stick to the strategy during negative market return periods.
- Paying off your mortgage early means a significant amount of cash is no longer liquid. It’s tied up in your home, which can make it more difficult to access cash if you’re in need. For those of you in very high cost areas, this can mean 7-figures or more of your hard-earned dollars that you cannot spend, use, or invest.
- Having no mortgage means you no longer can deduct mortgage interest, which, assuming you itemize your deductions, helps lower your tax liability.
Some of the more important details to consider are how you’re insulating yourself during financially uncertain times.
I highly recommend having what I call a “Curveball Account”, also known as a “Rainy Day Fund”.
If you don’t have money set aside for when life throws you a curveball, you’re in a risky situation.
It’s worth having that Curveball Account in place to cover your living expenses if you’re ever out of work or experiencing a crisis.
With that in place, then you want to see if it’s worth paying off your mortgage early.
Definitely carefully weigh the pros and cons and see if it aligns with your financial ability to pay, the type of loan you have, how many years you have remaining on your mortgage, and when you want to retire.
It’s an amazing experience waking up without a mortgage payment. Done right, it can spark new, exciting opportunities that put you on the path to becoming a true Profit Boss®.
To your prosperity,
Hilary
P.S. – The decision to pay off your mortgage or not should align with your short- and long-term personal and financial goals. If there’s misalignment, take more time before you make your decision. And as always, reach out to my team if you have more questions.
