Have you started thinking about whether or not to pay off your mortgage? If so, hopefully you already have other important financial bases covered. You have an emergency fund in place, you are already saving an appropriate amount of money for retirement, and you are experiencing the budgeting success of reaching the end of the month with money to spare. So you have arrived at the big “what’s next?” question – should you invest your money in paying down the mortgage or invest your money elsewhere?
As with any decision, there are pros and cons. Not all of the reasons for or against are financial, either – you may be someone for whom paying off the mortgage provides a deep sense of security and well-being. If so, that reality may override a financial reason.
Below are some “pros” and “cons” of paying off a mortgage.
Advantages to paying off your mortgage
- Paying off your home mortgage can build equity, reduce expenses, increase cash flow, and provide peace of mind.
- Equity in your home can be used as a cushion for life’s emergencies or unexpected expenses, such as long-term care.
- Paying down a mortgage basically gives you a return of your money for whatever the mortgage rate is. If you have a 4% mortgage, each time you make an extra principal payment you are saving (making) the 4% interest.
- You will pay less interest by paying off the mortgage. Sometimes that can be a substantial amount of money.
Disadvantages to paying off your mortgage
- A fixed-rate mortgage offers an inflation-hedge, with the bank assuming all the risk. Many recent mortgages have very low interest rates, relative to historical rates. If you pay off your mortgage, you are giving up this inflation-hedging aspect of future payments.
- If you have a low interest mortgage, you may be able to invest the extra money in an investment with a higher return.
- Paying off a mortgage before you max out your retirement contributions means you have lost the tax-deferred growth possibilities for money that otherwise could have gone into your retirement plan.
- Paying off the mortgage increases your illiquid investments. You may want or need to instead increase your more liquid assets.
In Pay Off Your Mortgage – Part 2, we will look at how paying off your mortgage impacts your debt, taxes, budget, credit score, and home equity. In Pay Off Your Mortgage – Part 3, we will summarize some questions to ask yourself before paying off the mortgage and also provide 3 strategies for how to pay off your mortgage, if that’s what you decide to do.
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.