Is There Any Benefit to Paying Off Your Mortgage Early

The answer to this question is generally “no”. But it’s not as simple as that, and there are still some reasons why I like to pay a little extra on my mortgage every month. The general argument for not paying off your mortgage goes something like this. Most of us who have bought homes in the past few years have very low APRs. Mind is under 4%, as probably is yours. By paying it off early, I am saving myself 3.625% every year, a very small return when it comes to investment allocations. It barely beats inflation. Compare this to other things you could do with the money. If you take the extra payments you’ve been routing to your mortgage and use them instead to buy something like mutual funds, you could be earning 9% a year, a much better return. Nobody likes to have debt (in this case in the form of a mortgage) hanging over our heads, but the reality of the situation is that debt is part of wealth-generation. If you’ve got a mortgage with a low APR (Refinance if you don’t), then it’s best to let it ride. Here are some exceptions to this rule.

  • Pay a Little Extra Every Month. Buying a house has been really nice. But I don’t forget what it was like to rent. My wife and I were renting a house smaller than the one we have, for $250 more than we spend each month on our mortgage. Every month, I put an extra $150 into the principal of my mortgage balance. Over the course of the 28 years remaining in our mortgage term, we’ll end up saving thousands of dollars. Of course, I could still get a better return just putting this into retirement savings or another investment, but it has for me a . . .
  • Psychological Benefit. This has to do with my disdain for having large debt hanging over me. Killing off my mortgage is a project. It’s something that I feel on a primal level, something that motivates me to work hard and make more money. It’s like an enemy I can see. I want it gone. I don’t have the same drive when it comes to retirement savings. Sure, I still do it, and my investments are going nicely. But I don’t have the same tenacity and drive that a real debt gives me. Sure, this doesn’t have the mathematical rigor that allocating your investments to the most beneficial destinations does. Maybe I’ll get there. But for now, I don’t mind working to kill off my mortgage a little quicker. After all, it’s certainly not a bad Paying off debt never is. What’s more, because you are keeping everything you spend in the form of equity, you can still have the confidence that you are building wealth every time you throw a dollar at your mortgage.

American Equity Buys Mortgages, but that step isn’t for everybody. If you are planning to keep your mortgage, it’s best to let the payments take a long time. It’s what the low interest rates are for. If you can’t bear to let the mortgage live, don’t feel bad about paying a little extra every month. Just make sure you are investing most of your money toward ends with better returns.