Should I Pay Off My Mortgage Early ?

Should I Pay Off My Mortgage Early?

When it comes to personal finance, it is the question I get asked most often. So what should you do with your mortgage?

For the 72% of American homeowners that still carry a mortgage it is a question you probably ask yourself.  If so, you are definitely not alone. In our family, it is a question that we go back and forth on quite regularly. It comes with a lively debate when you consider the average mortgage in the U.S. is over $225,000.

The good news is there is no right answer. It is a debate that has gone on for a long time and one that will continue.  I don’t see it going away any time soon.

Remember, life is a game never won or lost, only played!

In my view, there are two ways to look at it.  Either lead with your head or lead with your heart.  Let me explain.

Lead With Your Head

If you ask your financial advisor, they will most likely focus on the financial implications of the conversation. Most often, this ends quickly with “you should not pay off your mortgage early if you are locked into a good term (e.g. 15 or 30 year mortgage) and at a reasonable rate, say 4%”. The argument is easy. You would be better investing the money in a diversified investment portfolio, where you should expect to earn 7%.  In simple terms, the 7% rate of return over time is greater than 4% interest rate on your secured debt.  From there the math is simple. You can earn more money investing vs paying down debt.

Lead With Your Heart

The other point of view is the one that often goes overlooked.  Look past the financial implications, the interest tax deduction that you may qualify for and consider your financial freedom.  Trust me, anyone you ask who did the work to pay off their mortgage early (say 20 vs 30 years) none of them regret it. Today, there are nearly 27 million Americans who own their homes outright. You can see it in the smile in their face, the deep sigh they take when you ask.  For some people, me included, it all boils down to the fact they don’t like debt. Nothing more, nothing less.

Lead With A Balanced Approach

As I shared above, this is a conversation that we have regularly.  For that reason, we take a balanced approach. Our strategy has always been to start with maximizing our retirement (both tax-deferred & tax-free), build an emergency fund and pay off unsecured debt.  On top of that, we moved to a 15 year term, lowered our interest rate (currently below 4%) and include extra $$$ each month.

Sure, our home is getting much closer to being paid off, but it’s because we follow the “and” strategy. We have liquidity, no debt, maxed out our retirement accounts, met other financial goals and we are paying down our mortgage. We would not payoff our mortgage faster at the risk of retirement. You need to consider both to be successful long-term.

Mortgage Basics. So What Else Can You Do

If all else fails and you are absolutely incessant about paying off your mortgage early, there are easy ways to make it happen. Whether you have a 15 year or 30 year mortgage, it is still a long time. Debt can wear on you mentally.

Here are a few of my favorite concepts:

Can I Pay Off My Mortgage Early:

Check with your mortgage company first. Some companies only accept extra payments at specific times and/or may charge pre-payment penalties.  Make sure your payment is applied to the principle, not next month’s payment. There is a huge difference!

Bi-Weekly Payments:

This concept is pretty simple, make half of your mortgage payments every two weeks. That will result in 26 half-payments, which equals 13 payments, one more than is expected each year. This will take 4 years off your mortgage (e.g. $225,000 mortgage @ 4% over 30 years). I have included a link to a bi-weekly payment calculator to see what it can save you!

Throw Extra Money At It: 

If you can’t afford to move towards a bi-weekly payment, consider one additional annual payment. It is important that this payment goes towards your principle. Remember, if you have a $1200 mortgage, that is scraping together an extra $100 per month to apply. This will take 3 years off your mortgage (e.g. $225,000 mortgage @ 4% over 30 years). I have included a link to an additional payment calculator. Try it out!

Refinance To A Shorter Term:

You can always pay off the mortgage if you have a shorter term. Today, there are various loan options including 15, 20 and 25 year terms.  These terms typically come with a lower interest rate, but as it is over a shorter duration, it will create a higher monthly payment and refinancing typically carries closing costs. We did it about 4 years ago and it has been the best thing for us. If you have the extra liquidity, this is one to consider.

Downsize Your Home: 

This can be a drastic step if you have a larger family or kids. If it’s about reducing your mortgage it is an option to consider. You can always consider selling your house and finding a place to live that is smaller. This includes one with a smaller price tag. In some cases it may allow you to live completely debt free. While I am not saying move to a tiny house, do we really need houses that are over 3000 square feet? I find it a hard argument.

So should you pay off your mortgage early? Like most things in life, it’s a choice and it is a choice you own.

The goal is to be informed and make the best decision for you.

Remember that life is a game never won or lost, only played.