November 20th, 2019 8:35 AM by Jackie A. Graves
own a home, the thought of a mortgage hanging over your head for decades can be
daunting for many people — and it’s natural to want to pay off your mortgage as
soon as possible.
before you decide to use an inheritance, raise or your savings to pay off your
mortgage, (or even before you decide to make extra payments), it’s important to
take a step back and determine whether it really makes financial sense for you.
cases, the amount you save on interest when you pay off
your mortgage early might not exceed what you would earn if you put the money
to work elsewhere. On the other hand, sometimes it’s not about the return on
other investments and more about peace of mind or freeing up cash flow for
you need to know as you decide whether to pay off your mortgage early.
Will other investments beat paying off a mortgage early?
biggest consideration is whether to pay off your mortgage or invest. What if,
instead of putting money into getting rid of the mortgage early, you invested
the cash elsewhere?
the math tells us, it’s almost always better to invest in other places than in
your mortgage,” says Richard Bowen, CPA and owner of Bowen Accounting in
mortgages today have rates of 3.5 percent to 5.5 percent, so if paying off your
mortgage early leads to a return equal to your interest rate, that return is
somewhat lackluster. Compare that to the annualized return for the S&P 500
— roughly 10 percent over the last 90 years.
Bowen points out, you could take the cash you’d use to pay off your mortgage early
and leverage it into buying a cash-flow-positive property like multi-family
real estate or single-family homes that have the potential to offer higher
thing is, no one can give you a guarantee on an investment,” Bowen cautions.
“You can put your money in the stock market and lose it. You can put your money
in real estate and it doesn’t perform as well as you expected it to.”
taking a large chunk of your wealth and using it to pay off your mortgage
early, don’t forget to look at liquidity. Your home is considered a non-liquid
asset because it can take months — or longer — to sell the property and access
start paying down your mortgage too fast, you risk depleting your liquidity,”
says Amanda Thomas, a client advisor at Mission Wealth. “The kind of liquidity
you have is important, too. You don’t want too much cash tied up in retirement
funds because you can get slammed with fees if you have to withdraw early.”
approach is to have an
emergency fund, as well as assets, like stocks, mutual funds, U.S.
Treasuries, bonds and marketable securities available in a taxable investment
account. That way, in addition to having money tied up in tax-advantaged
retirement accounts and your home, you still have some liquid cash or other
investments that are easy to convert to cash in a pinch.
suggests maintaining a cushion that protects you for at least six months before
you consider using a large chunk of your liquidity to retire your mortgage
How will you use the money if you don’t pay off your mortgage
realistic about what you’re likely to do with that money if you don’t use it to
pay off your mortgage early. If you don’t put that money toward making extra
mortgage payments, will you actually use it to get ahead?
points out that it might make sense to put the money into paying off the
mortgage early if you struggle with keeping money in the bank.
right thing to do is the thing you will do,” he says. “All of this has to do
with personal habits. If you’re going to blow through the extra money anyway,
then it’s better that you put it into your house than spend it.”
can be a forced savings tool, and making extra mortgage payments can save you
thousands of dollars in interest over time, plus help you build equity in your
How much do you value peace of mind?
though, it’s less about the bottom line and more about peace of mind. Data from
ATTOM indicates that 34 percent of homeowners have 100 percent equity in their
homes, and that can provide benefits that can’t be measured in strictly
a monthly mortgage payment ahead of retirement can provide mental relief when
considering living on a fixed income.
I’m paying down my mortgage,” Thomas of Mission Wealth says. “It feels good to
have it paid off before retirement. It might not always make financial sense,
but it offers peace of mind and it might allow for better budgeting.”
potential advantage is the ability to borrow against the equity in your home.
Having a large amount of equity can allow you to establish a home equity line
of credit (HELOC), providing a source of emergency income, as
well as make home improvements. HELOC interest rates are near historic lows,
and if the money is used to make repairs or build an add-on, the money might be
Pros and cons of paying off your mortgage early
Tips to pay off your mortgage early
decide that it makes sense to pay off your mortgage early, be careful not to
put your other financial goals at risk.
important to figure out what works best for your situation and is most likely
to help you reach your short- and long-term financial goals. Sometimes, with
financial planning, it’s not a straight assessment of what’s the best by the
numbers. People want to feel good about where the money is going — no matter
what the spreadsheet says.
owing money causes stress and paying off the mortgage early can bring peace of
mind. For people nearing retirement, a paid-off mortgage means they have that
much more free cash flow from their fixed income when they stop working.
likes having money in the bank, whereas I’d rather invest it,” says Bowen. “But
if money is a tool, then that money is buying her happiness, so it’s working.”
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