Should You Pay Your Mortgage Off Early?
Updated: Oct 22, 2020
(The podcast version of this post is available HERE! Click on episode #12.)
In July of 2019, I wrote a column encouraging you to pay your mortgage off early. I recommended this because paying it off early will save you thousands of dollars in interest, and the amount of money paid in interest can be substantial over a thirty year period.
For example, interest on a 30-year mortgage for a $250,000 home would be $131,876, according to bankrate.com. The total interest paid on a $150,000 home would be $79,125.
Since last July, however, 30-year interest rates have declined almost a full percentage point from 3.95% to 3.05%. With mortgage rates reaching all-time lows, is it still a good idea to pay off your mortgage early?
Some would say no. Instead, they’d advise you to pay the minimum on your mortgage. Any extra money that you could have applied to the mortgage should be invested.
For example, pretend that you’ve just borrowed $150,000 for the purchase of a home. The monthly payment for a 30-year mortgage at 3.05% is $636.46. Let’s say that you have an extra $100 every month after you’ve paid all your bills.
If you apply the extra $100 to your mortgage payment every month, you will only pay $61,542 in interest over the life of the loan- a savings of almost $18,000. As an added bonus, you will pay your house off in 24 years, not 30.
If you instead put the extra $100 each month in a mutual fund that invests in the entire stock market and earns an average of 7%, while also paying the minimum on your mortgage, after 30 years your house would be paid for and your mutual fund would be worth $117,606.
So by investing your extra $100 each month instead of paying the mortgage off early, you come out about $99,000 ahead ($117,000 minus $18,000).
Another path to consider is paying the mortgage off early, then investing the $736 each month in the stock market for the next six years. If your investment earns 7% each year, after six years you’d have $65,549.
It’s still well short of $117,606, the amount your mutual fund would grow to.
There are other aspects to consider though, besides the raw numbers. Are you planning to retire before your mortgage will be paid off? I would make every effort to have my mortgage paid off before I retire. Owning your home will add a measure of financial security to your retirement difficult to get anywhere else.
Also, how do you feel knowing you have a large debt? If it doesn’t bother you, then you’re probably fine to pay the minimum on the mortgage and invest your extra money. If, however, the thought of being tens of thousands of dollars in debt for decades stresses you out, then you should make a plan to pay it off early, and don’t worry what the numbers say.
You might also compromise and split your extra cash between the two. If you’ve got an extra hundred dollars a month, you could always invest $50 and put the other $50 towards the mortgage. That way, you’ll gain the benefit of both choices.
So should you pay your mortgage off early or invest your extra cash? With mortgage rates this low, I’d lean towards investing the cash.
Really though, it just comes down to you. Evaluate each course of action and ask yourself how comfortable you’d be with both. Neither choice is a bad one, and either one will save or make you a lot of money over time.