Debt freedom is one of the most common financial goals. As part of the quest to become completely debt free, many consumers decide that they want to pay off their mortgages early.
While the idea of paying off a mortgage early and being able to say that you “truly” own your home is tempting, it might not best the best move for your money -- especially in a low rate environment like this one.
What Could You Do With the Money Instead?
When mortgage rates are very low, paying off the mortgage might not make financial sense. After all, there are other things you could do with the money. Think about it: Over the course of 30 years, investing your money in an index fund is likely to return at least 6 percent annualized. If you use extra money to pay off your 30-year loan in 15 years, and your rate is 3.75 percent, you’re missing out on an annualized return of about 2.25 percent.
If stocks do even better than that, you are missing out even more. Chances are that you could put the money you’re using to make extra payments on a low-interest mortgage toward investments that could benefit you more in the long run.
It’s also worth considering the value of a mortgage tax deduction. If you itemize your deductions, your mortgage interest is tax-deductible and that further reduces the financial impact that paying the interest has on you. If you combine the tax deduction with the fact that you could be making more with investments, paying off your mortgage early suddenly doesn’t seem like such a good idea.
What’s Important to You?
Of course, what you really have to decide is what’s important to you. If making the most of your money is the most important consideration, then paying off a mortgage early might not make sense.
On the other hand, perhaps being debt-free is the most important priority you have. If that is the case, paying off your mortgage as fast as you can does make sense. This is especially true if you are skeptical of how well stocks will do in the next couple of decades. If you think that the economy is headed for complete collapse, and your best bet is to have your home paid off so that you can say it’s really yours, then paying down the mortgage early makes sense.
Weigh your choices, and consider your motivations. But realize that you don’t have to pay off your mortgage early to be in a good place for your finances.
