Is There an Advantage to Paying Off Your Mortgage Early?

Should You Pay Off Your Mortgage Early or Refinance? | Mariner

The general answer to this question is “no,” but it’s a bit more nuanced than that. Despite the common advice against paying off your mortgage early, there are still reasons why I choose to pay a little extra each month. The main argument against early mortgage payoff is that many homeowners, myself included, have secured very low APRs, often under 4%. Paying off the mortgage early saves me only 3.625% annually, which is a modest return on investment that barely outpaces inflation.

Compare this to other investment opportunities. If you redirected your extra mortgage payments into mutual funds, for instance, you might earn around 9% annually, a significantly higher return. While nobody likes having debt, including a mortgage, hanging over them, debt can be a part of wealth generation. If your mortgage has a low APR (consider refinancing if it doesn’t), it might be better to keep it. Here are some exceptions to this rule:

Pay a Little Extra Every Month

Buying a house has been great, but I remember the drawbacks of renting. My wife and I were renting a smaller house for $250 more than our current mortgage payment. Now, I put an extra $150 towards the principal each month. Over the 28 years remaining on our mortgage, we’ll save thousands of dollars. Although I could potentially earn a higher return by investing this money elsewhere, there is a significant psychological benefit for me.

Psychological Benefit

I dislike having large debts hanging over me. Paying off my mortgage feels like a personal project, something that drives me to work harder and earn more. It’s a tangible goal I can see and strive for. This motivation isn’t as strong with retirement savings, even though I still invest and my investments are performing well. The drive to eliminate my mortgage debt gives me a sense of purpose that doesn’t come from saving for retirement. While this approach might not have the same financial rigor as maximizing investment returns, I find satisfaction in reducing my mortgage debt. Paying off debt is never a bad thing, and each extra dollar I put towards my mortgage increases my home equity, building wealth in a different way.

Long-Term Strategy

If you’re planning to keep your mortgage, it’s generally best to let the payments extend over a long period to take advantage of low-interest rates. However, if you can’t stand having a mortgage, don’t feel bad about paying a little extra each month. Just ensure that most of your money is still invested in areas with better returns.

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