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Should You Pay Off Your Mortgage Early?

Ojibwe wigwam, from a 1846 painting by Paul Kane

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.

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13 Comments

  1. MarkNo Gravatar says:

    His comment is true if you end in forclosure, but for pretty much any other situation you will get your return on “investment.” Pouring your money into your house also makes it very illiquid which I think was part of his problem with paying off a mortgage, but that wasn’t what the article was about.

    1. sraskieNo Gravatar says:

      Thanks, Mark. It may be true if it ends in foreclosure, but that implies we’re not paying it at all. :) While putting money into the house may not be liquid, it does earn a guaranteed rate of return on the mortgage interest and doesn’t negate the possibility of a home equity loan or line of credit if absolutely necessary.

  2. I’ve never thought of this argument in those terms but I might have to steal that approach. Obviously every situation is unique but as a general rule of thumb the younger you are, the more it makes sense to not pay off your mortgage early and the older you are the more it does.

    1. sraskieNo Gravatar says:

      Sounds good, Harry!

  3. […] Should You Pay Off Your Mortgage Early? from Financial Ducks in a Row […]

  4. sraskieNo Gravatar says:

    In an effort to help this person avoid defamation and maintain anonymity, I’m keeping the name off of the email we received earlier today. Curious to hear our readers’ thoughts…

    “I would agree if this was consumer type debt or anything but a home mortgage. Take a look at Doug Andrew’s book “Missed Fortune” on why paying off your mortgage is not safe, not guaranteed, and in many cases exposes you to more risk.

    Paying off home mortgage debt doesn’t guarantee a return and is far from safe. Home equity returns nothing (home may appreciate, but that is not a return on home equity, that’s a market variable or home improvement component). That 100K is now tied to the housing market. The only thing accomplished by paying off the mortgage is that you don’t have the debt to deal with. Safe and guaranteed shouldn’t be discussed in the same paragraph. Ask the folks who thought like that in 2008 what happened to the money they put into home equity, not only was it gone, but what they did have left was not liquid.”

    1. Jonathan N.No Gravatar says:

      “Help this person avoid defamation” ?

      Very noble of you– but….. shouldn’t they shoulder the burden of their convictions?

      Its one thing to have an opinion that paying off the mortgage is good or bad…. but to say that “it doesn’t guarantee a return”? Sure it does. By not having the obligation to pay x % to a lender anymore you have in effect saved it for yourself. The interest that you would have had to pay the lender is safely back in your pocket.

      If you cancel cable– haven’t you saved the $100/ month you would have otherwise spent?

      I suppose you could say it doesn’t guarantee a GOOD return….. but that- again- is subjective–so we are back to the “it depends” answer.

      I could go on and on and on……….

      1. sraskieNo Gravatar says:

        Well said, Jonathan!

  5. Jonathan N.No Gravatar says:

    I totally agree with the author. It depends.

    After all personal finance is…well, personal. And to assume that a rule of thumb is right for EVERYONE is just insane.

    The best approach, in every circumstance I can think of, is to thoughtfully and carefully look at your situation, examine your goals and your risk tolerance– and make the decision that is right for you under the specific circumstances.

    Personally, I paid off my mortgage last year– at 49 years old– and I could not be happier about it. Could I have obtained a better return in the market? Maybe– maybe not. The certainty of the payoff, the extinguishing of my largest monthly payment, the simple joy of getting off the ubiquitous treadmill was more than enough for me.

    But best of all—- is the boatload of options and the opportunity that comes with it. That monthly payment is gone….forever. And forever is a long time.

    Now I can save the money. Pay cash for cars and tuition. Pump up my retirement savings. increase my giving. Whatever.

    In fact– with my expenses at an all time low every month, I can seriously consider early retirement.

    1. sraskieNo Gravatar says:

      Thanks, Jonathan and congratulations!

  6. msolarimasNo Gravatar says:

    Most people I’ve spoken to want to pay off the mortgage because there’s more certainty than the stock market. But like you said it all depends on each individual’s situation.

    1. sraskieNo Gravatar says:

      Not to mention the leverage home ownership provides using a mortgage.

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