Should I Pay Off My Mortgage or Increase My Investing
On the path to building wealth, a common question that arises is what to do with the mortgage. This should not even be a question until all other investing ducks are in a row. Before we consider paying off the mortgage early, we should make sure we are otherwise debt free, particularly when it comes to high interest consumer debt. We should also be maxing out any tax advantaged retirement accounts (HSA, 401K, 529 College Savings Accounts, Roth or Traditional IRA, etc.) before prioritizing extra mortgage payments. If the question is, “Should I pay down my mortgage or invest in taxable accounts?”, then arguments can be made for both courses of action.
Paying off the Mortgage Early
I learned as a teenager from my Uncle Hub that paying a little extra towards the mortgage every month was a good idea. I practiced this idea with our home in Georgia by using a lot of my extra income from my moonlighting gigs to pay the mortgage down quickly. This really helped us out when we ended up selling our house at a significant loss in 2010 after the housing market crash. We were able to walk away with a little cash even though on paper we lost a lot of money.
We have also been paying down the mortgage as quickly as possible on our house here in Colorado. We have paid off large amounts when we had opportunities to do so. And we have also been paying an extra $1000 per month for the last few years. We now owe $328,000 on our mortgage and we are paying down the principle by just over $2,500 per month. Our escrow payment is $581/month and we will pay $958 in interest on our next monthly payment.
If we stopped paying extra on our mortgage from now on, we would pay it off in 15 years in October 2034 (9 years early). We would end up paying another $94,000 in principal over the next 15 years.
If we continued paying $1100 extra every month, the house would be paid off in 9 years and 4 months in February 2029 (14 years early). We would only pay $57,000 in interest, a savings of $37,000. https://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx
If we increased our extra monthly payment to $2100, we would pay the house off in 7 years in October 2026. (17 years early) We would only pay $42,000 in interest, a savings of $52,000.
However, is the mortgage the best place to be putting extra money? It is a guaranteed rate of return and it is an easy to understand benefit, but the money invested elsewhere would possibly yield higher returns, although at a higher risk.
Cons to Paying off the Mortgage Early
Having a mortgage saves me some money as a tax deduction every year. This would not be the case if we were able to begin using the standard deduction of $24,400, but this is unlikely even without a mortgage given our high charitable contribution rate.
The money spent today saves us money in the future but at a discounted rate due to inflation. This is not a huge amount given the short time frame we are discussing above (saving only 5 years or 7 years in mortgage payments), but it is not negligible.
Pros to Paying off the Mortgage Early
I will save money. As detailed above, paying off the mortgage at my current accelerated rate would save $37,000 in interest payments.
Being completely debt free gives a sense of security. This peace of mind may be the biggest reason to pay it down as quickly as possible.
Paying off the mortgage is a risk-free investment.
Having a paid off house, or significant equity in a house, is a way to diversify assets. This real estate asset is different from the assets held in my retirement accounts, which are largely index funds and mutual funds.
Reduced cost of living.
It is easier to reach financial independence with a free and clear house.
It would make it easier to weather the storms of life like unemployment or disability or serious medical problems that could arise in the future.
Even if I would get a higher return by investing money I didn’t use to pay off the mortgage, there is a risk that I would just spend that extra money instead of investing it.
If I am not going to invest aggressively, I might as well take the guaranteed return of paying off this debt.
My Decision
Neither decision is a bad one. Investing in taxable accounts builds wealth. Paying off the mortgage early builds wealth. But since I am already maxing out my tax advantaged retirement accounts, I do want to continue to pay extra money towards the mortgage every month. Assuming I will continue to earn my normal income for the next 11 years until my Minimum Retirement Age at my GS job, however, it would not be a bad idea to have some tax advantaged debt in the form of a mortgage for most of those years. So continuing to pay an extra $1100 per month would allow me to pay off my mortgage by February 2029. I would be 56 years old and about 1 year away from my Minimum Retirement Age. It would save me $37,000 in interest payments and give me incredible peace of mind to know I would be completely debt free before retirement.