Does it Make Sense to Pay Off Your Mortgage Early?
By Bryan Lee, CFP®, MBA
With record-low inventory, low interest rates, and high demand, (1) the housing market is currently booming. Once the stress and drama of offers and counteroffers is over, you can finally enjoy being a homeowner—right? There’s no denying the hefty price tag, and as most of us are unable to purchase a house in full, we are saddled with a mortgage as soon as we cross the threshold. This debt is unavoidable, so how do you handle it moving forward?
We all know the basics regarding debt: smart utilization of debt is a healthy financial goal (especially when it comes to avoiding high-interest debt such as credit cards or student loans), and it’s important to minimize consumer debt for plenty of reasons. Do these principles also apply to mortgages? Is it better to put every extra dollar toward your mortgage or invest that money instead? Like most financial decisions, the answer depends on your unique situation.
To gain some clarity, let’s go over some pros and cons of each strategy.
The Best Use of Your Funds
If you are considering paying off, or paying extra on your mortgage, we can assume you have extra cash each month, or a lump sum you need to make a decision with. Of course, leaving additional funds sitting in a savings or checking account where you’re earning less than a percent of interest would never make good financial sense. You want your money to work for you, so the question to ask is, “What option will give me the biggest payoff?” Many clients choose the simple comparison between their mortgage rate and the rate of return on their investment or portfolio.
Like most financial decisions, there are plenty of factors that could affect the outcome, and the decision can’t be made in a vacuum. And as we all know, even the best estimates aren’t guaranteed. It is important to run a thorough analysis and consider a variety of factors: the current interest-rate environment, potential taxes on new investments, the loss of mortgage interest deduction (if applicable), your risk tolerance and expected return of your investment portfolio, and private mortgage insurance, among the other elements of your financial life. An experienced financial planner can provide the needed guidance and direction when it comes to such a decision.
Weigh Your Options
There are some pros and cons to each choice that go beyond the raw math. Liquidity is a significant benefit of investing since, depending on which type of account you invest in, you may have greater access to the funds in case of an emergency or for your other financial goals. By placing the money toward your mortgage, thereby increasing the equity in your home, your options become more limited. The only way to access those funds would be to sell your house, do a cash-out refinance, or obtain a home equity loan or line of credit.
The advantages to paying down your mortgage are obvious. The additional cash flow created from the savings once the home is paid off can be redirected to your longer-term goals or strengthen your monthly budget once retired. The savings created could also potentially be used to offset your healthcare or long-term care costs once retired as well. However, paying extra towards your mortgage during your working years means less cash available to invest in securities with a higher expected return – which, if done wisely, could outperform the guaranteed return you get by paying down your mortgage.
Is Being Debt-Free Important to You?
While avoiding extra mortgage principal payments is oftentimes the right “financial answer,” there is more to the decision than just the numbers, as paying off your mortgage can have other non-financial benefits as well. Transitioning into retirement debt-free can provide homeowners with peace of mind at a time when they are feeling financially vulnerable. Living solely off one’s investments and/or Social Security can be intimidating, and having one fewer monthly bill can help with that transition. So, while the numbers don’t lie, they often don’t tell the whole story.
It’s Not Necessarily All or Nothing
Which option is best for you? A combination of these two choices may make the most sense for some people. This could mean adding more money to each mortgage payment to bring down the principal while still putting the bulk of your extra money toward other investments.
It’s critical to consider several factors before taking any action; and as with any major financial decision, it’s wise to first consult with a financial planner. Before you pay off your mortgage, we at Strategic Financial Planning would love to help you evaluate your options. We can provide personalized financial planning advice, and maybe even show you alternative investment strategies you hadn’t considered. Our ultimate goal is for you to be able to enjoy your home without worry keeping you up at night.
To see if we are the right fit to help you navigate this financial decision—and all the others on the road to your ideal financial future—please call (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting. We look forward to hearing from you soon!
About BryanBryan Lee is the founder and President of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With over 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and MBA in international finance from the University of North Texas and is a Certified Financial Planner (CFP®) practitioner. Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including serving as President and Chairman of the Dallas/Fort Worth Chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, the CITY House Board of Directors President and Chairman, Editorial Review Board of the Journal of Financial Planning, Family Services of Plano, as well as a Junior Achievement Volunteer Teacher. Bryan has been featured in local and national magazines, newspapers, and journals, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, Dow Jones Newswires, and has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception. To learn more about Bryan, connect with him on LinkedIn.