It’s a never-ending debate when it comes to deciding to pay off a mortgage early. There’s a lot to it, as usually investing that money instead of putting it towards the house will yield greater returns. However, paying off debt is basically a guaranteed return. Besides, there is something to be said about the peace of mind that comes with paying off your mortgage early. So, in the end, which is better? Well – that depends. Let’s dive into all of the details so that you can figure out what’s right for you!
First Off – Is It Worth It?
So, I’d say in most situations you can say it’s worth it, depending on your perspective. However, it still depends on a lot of factors. While it is still worth it, that doesn’t mean it’s the optimal decision or use of your money. This issue is a little more nuanced than that. So, while it’d be nice to say firmly one way or the other, we can’t have a one-size-fits-all solution for this.
Investing Can Often Be More Profitable
I will say, the overwhelming majority of the time, investing in index funds and ETFs will have a greater payout in the long run. A good long-term investment strategy is likely to beat out the cost of the interest on your home. However, paying off the mortgage early is in fact a guaranteed return – which is nice.
For me, debt with interest over 5% gets dicey, and is best paid off. If your interest rate is beyond that, it might start looking better and better to pay it off early. Ultimately, that’s up to you and how well you think your investments will perform.
Peace Of Mind Is Invaluable
As I said earlier, having the peace of mind that comes with no mortgage is wonderful. Any sort of life that is free of debt is wonderful, in fact. If your mortgage is paid in full, think about how much lower your expenses will be in retirement! This is a common trend with lean FIRE, and it’s nice to not have the headache of mortgage payments. Again, investing may be the optimal choice, but personal finance has more to do with your mindset than anything else. How much better would you feel if you didn’t have a mortgage?
The Main Ways Of Paying Off A Mortgage
If you’ve decided to pay off your mortgage, you’ll have multiple options. We’ll go over the main ones here, but feel free to do your own research and see if you can find any tricks or methods that help you out even more.
Meeting Your Monthly Payments
Obviously, depending on how long your mortgage is, you can just meet your monthly payments. If you bought a house with a 30 year mortgage in your early 30s, then you’ll have it paid off by your mid 60s. If the goal is just to have it paid off for your retirement, then you can cruise here and just do the bare minimum. Now, this isn’t paying it off early, but it’s still getting you where you want to be, when you want to be there.
Making An Extra Payment Each Year
If you’re set on paying it off a little earlier, then you can just make one extra payment each year. That may not sound like much, but it certainly adds up. This single act, alone, will probably cut several years off your mortgage. So, if you have a standard 30 year loan, you can probably be safe assuming that will cut at least 3 or 4 years off the length of the loan. However, it could end up being even more than that.
Biweekly Payments
One trick to do this is to set up biweekly payments with your lender. This will end up with you essentially paying for 1 extra month each year. So if you want to automate that extra payment, this could be a good way to do that!
Doing Bulk Payments Or Paying Multiple Extra Payments
Another thing you can do is put money towards your principal in bulk. Instead of doing a single extra payment per year, you could do something else like put an extra $3000 or $4000 down. Alternatively, you can try to schedule it so that you make multiple extra payments each year. For example, every 3 or 4 months you could make an extra payment. By the end of the year you’d have at least 3 extra payments done!
15 Vs 30 Year Loans
Another “shortcut” to paying off your mortgage is to opt for a shorter loan. Obviously, you’ll pay off a 15 year mortgage in 15 years (or less) and a 30 year mortgage in 30 years (or less). I personally don’t prefer that, as with the longer loans I have much more flexibility. That means if I get laid off or lose a source of income, I can still keep the house. However, if I want to I can still make a ton of extra payments and pay it off in a much shorter period.
Refinancing
One option is refinancing. It’s not something I generally recommend, but keep an eye on it. If you got your house in a market with high interest rates, and those rates have since fallen, you may be able to save a ton by refinancing. It depends on several things, but it’s worth passively watching for it.
When It’s Okay To Pay It Off Early
If you want to pay your mortgage off early, then you probably need to be financially secure in other ways. Make sure you’re meeting the minimum investment amounts to reach your retirement goals. For example, meet your company’s 401(k) match first. On top of that, make sure you have paid off debt with a higher interest rate, have a hefty emergency fund, and anything else along those lines.
When To Just Make The Normal Monthly Payments
If none of what I just mentioned applies to you, then you should probably just make normal payments. Focus on your budget, save some money and build up a nest egg, and augment your income with a side hustle if you need to. Once your finances are in better shape, then you can worry about paying it off early.
Pros Of Paying It Off Early
- Eventually, you’ll no longer have the monthly expense of a mortgage payment!
- It can offer peace of mind – who wants all that stress, after all.
- It’s a guaranteed return on your money.
- You’ll save a lot because of interest.
- You can leverage the equity you have in your home, should you ever need to.
Cons Of Paying It Off Early
- It’s entirely likely that you’ll make more with your money if you just invest it.
- You miss out on certain tax benefits.
- You could find yourself at a loss if you have to sell it later.
- Houses are not as liquid as stocks and many other investments.
- It may have a negative impact on your credit score.
Consider All Of Your Options
To reiterate, make sure you look into all of your options. You may decide to pay your mortgage off early, or you may not. Either way, it’s in your best interest to actually consider the options available to you and see what’s the best course of action given your goals.
Rent Out A Room In Your House
For example, if you want to pay off your mortgage faster, you could rent out a room in your house! Not everyone is a fan of this idea, but it does work. Like I said, consider the options – you may be overlooking things like this.
Conclusion
I hope that helped you decide whether you want to pay your mortgage off early or not. If you have any tips of your own, we’d love to see them in the comments!
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