The number one question I get from clients is “Should I pay off my mortgage?” If you do a Google search, you’ll find supporting evidence either way. According to Smart Assets[1], a mortgage is frequently the largest amount of debt most people may undertake in their lifetime. As we know, even if you have a low interest rate, depending on the terms of your mortgage, you may spend many years paying interest and not principal. Mortgage interest rates have fluctuated wildly in the last 50 years and while they are on upswing today (around 5%), historically the 30-year rate exceeded 18% in the 1980s, according to research from Freddie Mac.[2]
If you need to quickly boost your contributions to retirement or savings, freeing up money that was earmarked for the mortgage may make sense. However, in most situations, I counsel my clients to NOT pay off their mortgage early.
Here are a few reasons why:
#1 - Save more for retirement – because the mortgage is a fixed expense that doesn’t fluctuate, it should be built-in as part of your overall savings plan. However, if you have the extra cash to pay off your mortgage, you could use that money you are no longer using on your mortgage to invest and save more for retirement.
#2 – Pay off higher interest debt first - if you have credit card debt or outstanding student loans, these are generally at a higher rate and you should get those debts paid down first. Compare the rates on your debt and if your credit card interest rates are higher than the mortgage, you should pay those before making extra payments or paying off your mortgage. Some mortgages also carry a prepayment penalty so consult the agreement (or your financial advisor) before making any decisions.
#3 – Invest your extra dollars - assuming you have a low(er) interest rate on your mortgage than other debt, it makes more sense to take those additional funds and invest, with the hopes of getting a better return than your interest rate on your mortgage. For many years, the average stock market return outpaced the mortgage rates.[3] However, mortgage rates have doubled since August 2021 with average rate on a 30-year mortgage is currently 5.890%, according to Bankrate’s survey of large lenders.[4] Even with these changes, I still recommend investing for its potential pay-off vs. an accelerated mortgage payment.
One last thing to consider:
Are you itemizing your deductions? If so, the mortgage interest on your main home and on a second home may be deductible. Use this calculator to estimate your potential tax savings. https://www.maxwellfm.com/resource-center/tax/home-mortgage-deduction/?utm_source=social-foundations&utm_medium=url-shortener
At the end of the day if you can’t sleep at night, you can start adding more to your principal to pay it down faster. But I recommend an investing strategy where you let your money work for you. Take the money you’d apply to the early mortgage payments and invest it in your retirement, add to emergency funds or contribute to other investments instead.
Katy Ufferman (ChFC) is a chartered financial consultant with Maxwell Financial Management and leads the firm’s practice dedicated to helping women with their investments and retirement planning. Read her latest blog at https://www.maxwellfm.com/blog.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.
[1] https://smartasset.com/mortgage/should-you-pay-off-your-mortgage
[2] https://www.forbes.com/advisor/mortgages/mortgage-rates-history/
[3] https://www.forbes.com/advisor/mortgages/pay-off-mortgage-early-vs-investing/
[4] https://www.bankrate.com/mortgages/pay-down-your-mortgage-or-borrow-against-your-home-to-invest/