'Is it worth it to pay off my mortgage early? Or is there a better use for my money?'

  • A reader asks: Is it worth paying off my mortgage early or better to invest extra cash?
  • If you compare the raw numbers, you’ll earn more by investing your extra cash in the market.
  • But there can be other benefits to early mortgage payoff, like having a secure place to live.
  • Have a personal-finance question for Tanza? Fill out this anonymous form.

Is it worth paying off the mortgage early or investing and paying the mortgage off when it’s due?

Reader,

Early mortgage payoff is a hotly debated topic among homeowners (which I am not) and personal-finance geeks (which I am). You’re in good company.

When you buy a house with a mortgage, you agree to pay a certain amount of money every month for 15 or 30 years as interest accrues. Talk about a ball and chain. I’m kidding — for most people, this arrangement works. They like the idea of making steady payments over time and using more of their income for other expenses, or in the case of investing, to make more money. Others would prefer to be free and clear of debt as soon as possible.

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Average 401(k) balance

On the question of whether it’s worth it to pay off your mortgage early, that depends on what your goals are. I’m going to assume that if you’re toying with the idea of putting extra money toward your debt, you already have a fully-funded emergency fund and your immediate needs are taken care of.

If you’re trying to optimize every dollar you earn, it’s better — on paper, at least — to invest extra cash in the market instead of throwing it at your mortgage if you have a low interest rate (if you don’t, you might consider refinancing).

The reason for this is a simple comparison of rates and a basic rule of thumb: It’s better to put more money toward the higher number.

You can earn more in the stock market

The average mortgage interest rate is about 3% right now. By putting additional funds toward your mortgage every month, you would speed up your repayment period, thus saving money on interest over the long term (though mortgage interest is a tax deduction, so gutting that benefit could increase your tax burden). That’s good, but the stock market can do better. 

The average stock market return over the past decade is around 9%. When you prioritize investing your extra cash, you give yourself the opportunity to at least earn back — and potentially even double or triple — the amount you spend on interest over the life of your mortgage. You may even consider doing this for a few years until you have a lump sum to pay down your balance in one fell swoop; there are multiple ways to approach early mortgage payoff. 

It’s worth acknowledging, though, that the stock market is a relative wild card. Returns like the ones we’ve seen over the past 10 years are not guaranteed. Plus, you may earn less if you’re a conservative investor.

By comparison, when you put more money toward your mortgage than is required every month, you’re guaranteed to pay it off sooner than your due date (assuming you have a fixed rate and not an adjustable rate). 

Sometimes it’s not about the money

The truth of the matter is that you shouldn’t make a decision based solely on the numbers. It’s a financial decision, yes, but there are other things to consider. 

For instance, my colleague Liz Knueven bought a house last year and never planned to pay off her mortgage early. But after talking with several people who did, she discovered that having substantial equity in a home can make it easier to buy the next property. Also, owning a home outright offers peace of mind and physical security. Being debt-free means a job loss or other income interruption won’t jeopardize the roof over her head.

If we all went around making choices based on how we can earn the most money, I bet our life satisfaction would plummet. So before you decide what to do, think about the bigger picture. 

Tanza Loudenback, CFP®, is the personal-finance correspondent at Insider. She writes most frequently about saving money, planning for retirement, taxes, debt management, and strategies for building wealth. Have a money question for Tanza? Fill out this anonymous form.

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