As individuals pursue the American Dream of buying their first or next home the question may arise on whether or not it’s a good idea to pay down the mortgage and have no mortgage debt or pay the normal monthly payment and invest the extra money that would have gone to pay down the mortgage early in a place (the stock market) that offers the potential for higher returns over the long run.
There are many fierce advocates for paying off debt, any debt early. While this is a wise choice regarding high interest debts such as credit cards, student loans and other high interest loans it may not necessarily be the case for home mortgage debt.
Here’s a situation where for some folks it may make sense to pay down early and for others they may wish to consider invested the extra money elsewhere.
Generally, the younger a person or couple is when owning the home and the lower the interest rate on the mortgage it may make sense to forgo the extra payments to the mortgage and invest the money for potential greater returns on the market. With lower interest rates and the potential deductibility of the home mortgage interest the return on paying down the mortgage early may not be as great as long term gains in the market.
On the other hand, for an older couple nearing retirement they may consider paying down the mortgage early and owning their home free and clear when entering retirement. The emotional satisfaction of not having that expense in retirement and being able to take their former house payment and use that money elsewhere can bring great satisfaction. Since the couple has less time to accumulate wealth via the market, they can possibly achieve a greater return by paying off their home.
Another situation to consider is if there’s a need or a want for a safe, guaranteed return on someone’s money. Paying off debt early is an excellent way to achieve these types of returns. For example, if a couple has a 3.5% interest rate on their home and they have 15 years left on their mortgage, by paying off the home mortgage early they can achieve 3.5% returns, guaranteed, by eliminating that debt as soon as possible.
The trade-off here is they may miss out on potential gains in the market that may supersede the 3.5% return on paying off the debt. Again, this is a judgment call based on someone’s desire to get a guaranteed return or completely eliminate their debt.
So the answer is that it really depends on a person’s goals, situation and appetite for debt and risk. Home debt isn’t bad (we are not considering being upside down on a mortgage or buying a home that can’t be afforded). It’s simply a way to own a piece of the American Dream and the choice to pay down the mortgage early is a matter of judgment.