Photo by Karolina Grabowska from Pexels
Does it make sense to pay off your mortgage early so you are debt-free earlier in life? Or should you stretch it out if you can?
The short answer is: it depends. Everyone is different, but here are a few things to consider as you weigh your options.
Pay Off Your Mortgage Early if You Hate Debt
The main reason to pay off your mortgage early is if you just absolutely hate being in debt.
Nobody likes being in debt. Owing money to someone every single month isn't fun for anyone. But some people just despise having debt over their heads and want to be out as soon as possible. If you are one of those people, it might make sense to pay off your debt early.
There are a few advantages to this route.
- If you lose your job, you have fewer bills to pay so it's easier to stay afloat until you land another position.
- You may feel like you are finally able to take that big risk you've been thinking of, like starting your own business. No mortgage = fewer bills = less risk if things take off slowly.
- By paying off your mortgage, you free up funds to invest in other things like real estate or the stock market.
Sounds good, right? But it's not quite that simple. There are other things to consider.
Paying Off Your Mortgage Early has Opportunity Costs
Back in high school, we learned that an opportunity cost is what you pay by choosing one thing over another. For example, if you choose to spend a week of vacation at the beach, one opportunity cost is a week of vacationing in the mountains. By choosing the beach, you don't get to visit the mountains.
When it comes to paying off your mortgage early, you're investing a lot of money into the house instead of other things that might make more sense financially.
For example, consider that your mortgage rate is probably around 3.5-4.5%. Meanwhile, the stock market generally increases by about 10% per year. By paying off your home early, you're choosing to make less on your money (~4%) than if you'd have invested in stocks.
But the stock market isn't the only thing you can invest in. You can also invest in other things like real estate or a new business.
Don't Pay Off Your Mortgage Early Unless You Have Emergency Savings
Another thing to think about is your emergency savings. If 2020 showed us anything, it's that life is unpredictable. Millions of people lost their jobs and are still struggling financially because of it.
Before you start dumping a lot of money into your mortgage, make sure you have an adequate savings account. This is your rainy-day fund that supports you in the event you lose your job, have a major medical expense, etc.
Your house is very illiquid, meaning it's hard to get money out in case of an emergency. It's better to just have money in savings, then consider either paying off your home or investing in something else like stocks.
Should you pay off your mortgage early? Maybe – that's up to you. Just make sure you run the numbers and understand the financial pros and cons of each option. And if you haven't refinanced your mortgage lately – give us a call! Our number is (877) 306-0222. We'll help you lower your mortgage rate, saving you money each and every month.