Should I Pay Off My Mortgage?

“Should I pay off my mortgage,” you might ask yourself in moments of goal-setting or daydreaming. Let me warn you right from the get-go: you’re about to get an answer from a guy that is pretty darn close to being totally anti-debt.

Now that I’ve disclaimed my bias, let’s discuss an early mortgage payoff.

Should you pay off your mortgage early? Maybe.

I discussed a lot of the issues with mortgages, interest, saving that interest, tax-deductible interest, etc. in a discussion on the 15 vs 30 year mortgage question.

We’ll just breeze over the issues once again here, then you’ll be armed with the information you need to answer that immortal question: Should I pay off my mortgage early?

The Advantages of Having a Mortgage

Alright. Everyone needs a roof over their head. There’s a cost involved there, whether you own your home outright or are still trying to pay off the mortgage. You need shelter. That’s a fact of life.

It is relatively easy to get quite a bit of money from the bank and be pretty well leveraged with your mortgage. Also, mortgage rates are extremely low right now. This is cheap money! That is another advantage to a mortgage.

Finally, your interest may be tax deductible if you choose to itemize your deductions. This makes an already cheap interest rate even cheaper!

The Disadvantages of Having a Mortgage

The disadvantages of a mortgage? The interest cost is huge. For a $315,000 home, you could easily be looking at close to $230,000 in total interest on a 30-year mortgage!

Another disadvantage is the fact that you lose that monthly cash flow. If your home was paid off, you could put those monthly mortgage payments to good use in an investment. Also, there is a lot of peace of mind that comes from not owing anybody anything. And you wouldn’t.

Should I Pay Off My Mortgage or Invest?

Consider the following scenario before you decide if you should pay off your mortgage early. Let’s take Ron, who is just crazy about owning his own home. He has an emergency fund in place with 3-6 months’ expenses. So he just goes to town paying off his 30-year mortgage in 13 years by paying an extra $300 per month. The result? In 13 years his home loan is paid off.

But what could he have done with that $300 over the last 13 years? Invested it in the S&P 500. What would it have grown to? Without calculating all of the numbers, we can be reasonably assured that it would have amounted to a lot more than the interest he saved when he decided to pay off his mortgage early (alright, alright, his investment would be worth just above $95,000 invested at 10% for 13 years).

The general rule is this: if you have to decide between the early mortgage pay off or investing that surplus cash into something else, you would financially choose the one with the highest annual return (your after-tax interest rate is your rate of return because every dollar you spend paying it down is a dollar you don’t have to pay interest on). So if you can invest that $300 at 10% in a low-cost index fund, or save 4% after-tax, you would always choose to invest the money.

Is that 10% guaranteed? Heavens no! But over the long-term you’d be hard pressed to make an argument otherwise. Is that 4% return guaranteed? Heavens yes! That must be included in your decision to pay off your mortgage early.

A To-Do List Before You Pay Off Your Mortgage

You need to make sure your foundation is well-laid before you consider paying off your house early. Establish an emergency fund, get rid of all non-mortgage debt, start investing 15% into a retirement account, and then work towards paying off your mortgage early.

What this amounts to is that if you are already sitting on 3-6 months’ expenses in cash (money market, savings account, i.e. liquid), you don’t have any debt except for your house, you’re contributing 15% towards retirement savings (taking advantage of those possible 10% returns from the stock market and the great tax benefits that come along with investing for retirement), and you still have excess cash left over to pay off your mortgage faster? Man—go for it!

Forget about the possible 10% return in the S&P—you’re already making a killing investing 15% of your income consistently—make a guaranteed return of 4% on that excess cash. And when you’ve paid off the house, take that payment you were making and go on a vacation. When you get back from the vacation, start socking it away toward retirement planning.

So, if you’re asking yourself, “Should I pay off my mortgage early?” My answer is yes. But yours may be different—and that is what makes personal finance personal! Choose the option that works best for the life you want to live.

Want to see how making extra payments will affect the life of your loan? Sign up for a free trial of YNAB for 34 days to explore our Loan Planner feature (and create a budget!)