Does it Make Sense to Pay Off Your Mortgage Early?
Ryan Guth
Founder & CEO
Ask anyone about the definition of the so-called American Dream and the words “own your own home” will no doubt be part of the response. For decades, being a homeowner has been akin to “making it” in America. Your grandparents probably ascribed to this notion as did your parents and, likely, you as well. Owning a home is paramount to the image of being successful.
However, do you interpret the phrase “owning your home” as meaning truly owning your home without the encumbrance of a mortgage? Has paying off your mortgage always been one of your major financial goals?
It is for many Americans. Clients consistently talk to me about paying off their mortgage and ceremoniously burning their loan papers. For many, it’s a point of pride. You can’t put a price tag on that. So if waking up in a paid-off house lets you have a better day, then you’ll probably just go ahead and do it.
But, financially, is this really the right thing to do?
Maybe not.
While it might seem financially prudent to pay off such a large debt as a mortgage, in the scheme of things, mortgages are generally cheap money, so to speak. It’s unlikely that anyone who holds a mortgage today has an interest rate that’s in the double digits. Instead, many are probably borrowing at a rate that’s below 6 percent.
Certainly, in the Covid days of sub 3% rates, borrowing to buy a home was a virtual steal, which is why paying it off early – even at slightly higher rates – could leave lots of money on the table.
A potentially better use of your extra funds?
Those who hope to pay off their mortgage in a shorter amount of time than that which is indicated by their loan (15 years, 30 years) often choose to pay extra principal each month. So, for example, if you’re paying $3000 in principal and $1000 in taxes monthly and you have some extra cash available, you might consider paying another $1000 in principal perhaps, which goes directly to paying down the loan.
But when you’re only paying 6% (or less) in interest, does that really make sense or can you put that extra cash in a vehicle that could make you more money in the long run? Even with rising rates and certainly in this current down market, you may be better off investing your money elsewhere.
Think about this. The historical average yearly return of the S&P 500, according to Berkshire Hathaway, has been approximately 10.5% since 1965, as of the end of June 2022. This assumes dividends are reinvested. So, if you were to invest your extra payments, or that lump sum inheritance you’re considering throwing at your mortgage, in the market instead, you could fare much better.
The biggest, longest mortgage possible
American investor and author Ric Edelman, who’s penned a number of widely-read personal finance books, advocates for taking the largest mortgage possible with the longest terms available. He maintains that mortgages are one of the best financial tools available, if you use them correctly. They put money in your pocket in ways other investments can’t. Why?
- Your mortgage doesn’t affect your home’s value
- A mortgage won’t stop you from building equity in your house
- Your mortgage interest is tax-deductible and tax-favorable
- Mortgages may allow you to create more wealth than you otherwise would
- Mortgage payments get easier as your income rises
- Mortgages give you greater liquidity and flexibility
Remember, leveraging your mortgage may be the difference between a prosperous and not-so-prosperous retirement, so it’s worth taking the time to understand how paying off your mortgage early can severely impact the money you could reap on other investments that Guth Financial can make for you.
If you’ve been paying extra principal on your mortgage or are considering paying it off in its entirety but would like to know more about the ramifications of such a move, take a few moments to schedule an appointment to chat with us about other alternatives and to learn where your extra cash might make more of an impact.
Securities offered through SCF Securities, Inc. • Member FINRA/SIPC • Investment advisory services offered through SCF Investment Advisors Inc. • 155 E. Shaw Ave., Suite 102, Fresno, CA 93710 • 800.955.2517 • 559.456.6109 FAX. • Atria Wealth Solutions, Inc. (“Atria”) is not a registered broker-dealer or Registered Investment Advisor and does not provide investment advice. SCF and SCF Investment Advisors, Inc. are subsidiaries of Atria. SCF, Atria, Charles Schwab, and Guth Financial are independently owned and operated.
