Does it Always Make Sense to Pay Off a Mortgage Early?

December 27, 2013

pay off mortgage earlyOne of the goals of those who long to be debt-free is to pay of the mortgage early. The idea is that once other debts are taken care of, it’s time to focus on paying down the mortgage.

There are a number of strategies you can employ to pay off your mortgage early, from switching to a bi-weekly schedule to aggressively making extra payments when you can. Some homeowners refinance to 15-year mortgages to pay off the mortgage faster and pay less in interest.

But is that really the best course of action?

While the idea of being completely and truly debt-free is one that pulls at the imagination, the reality is that paying off low-interest, tax-deductible debt isn’t always the most prudent course of action – at least from a strictly numbers standpoint.

What Else Could that Money Be Doing for You?

One of the first questions you have to ask yourself, as you begin considering how quickly you can pay off your mortgage, is what else the money can be doing for you.

Right now, you might have a very low mortgage rate. My mortgage rate is below 4 percent. However, in the past year, my annualized investment returns have been right around 11 percent. Averaged out over the last five years, my annualized returns are right around 6 percent. That means that paying down my mortgage debt only gets me – at most, since I’m not even considering the tax deduction – a 3.75 percent return on my “investment.” On the other hand, actually investing that money provides me with the potential for better returns, especially over time.

So, the interest I do pay on my mortgage is tax-deductible, which means that keeping the mortgage reduces my tax liability to some degree. And, at the same time, I have the potential to earn better returns by investing the money. Paying off credit cards as quickly as possible makes sense, since there are no tax benefits and you aren’t likely to earn investment returns that beat a credit card interest rate.

However, mortgage debt is a little bit different.

Choosing to Be Debt-Free

Of course, the financial possibility of better overall returns isn’t as important to someone who is more interested in being debt free. It comes down to priorities. For some, the principle of the true debt freedom and true home ownership (although there are arguments that it’s not true “ownership” as long as the government can nail you for property taxes) is more important than the potential for investment returns that might not actually materialize.

Before you decide which path you will take, it’s important for you to carefully consider your situation and your own priorities. I would rather invest the money than worry too much about paying down my mortgage early (the same is true of my student loans – interest rate below 2 percent).

However, if something happens to my income, I run the risk of foreclosure if I don’t have my mortgage paid off. There’s a certain amount of security in feeling as though you truly own your home.

What do you think? Would you rather pay off your mortgage early or invest the money? Leave a comment!


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Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

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2 Responses to Does it Always Make Sense to Pay Off a Mortgage Early?

  • Sophie LaFontaine

    I hate debt, so yeah, my priority is to get rid of debt. I also use my hatred of debt to motivate myself to work overtime to pay it off. I live in a paid-off trailer. Took out a loan, bought a rental house. Paid it off. Took out another loan, bought a second rental house. I estimate I’m a year away from paying that off.

  • Debt BLAG

    I think every case is special — even when you hold the person constant. For rental properties, I certainly wouldn’t pay them off early provided that the interest rate on the mortgage wasn’t significantly higher than my other debts or the returns I expected on investments.