The other night we went to our neighbor’s house for dinner and while the kids played video games in the living room the adults hung out in the kitchen drinking craft beer and chatting. My buddy Pete started talking about his family’s finances and he asked me straight out, “Should I pay off my mortgage early?”
I reminded Pete I’m not a financial adviser (I don’t even play one on TV) and it wasn’t for me to decide where he should spend his money. However, I was happy to help him go over the pros and cons of paying down a mortgage early so he can make an informed decision.
Pros to Paying Off Your Mortgage Early
One of the advantages to paying off your mortgage early is that you’ll be eliminating a major source of debt that would otherwise hang over your head. Removing the stress of debt can be rewarding. The house will be all yours and no one else can stake a claim to it.
Eliminating your monthly mortgage payment is an especially good idea if you’re nearing retirement age. Since you won’t be working anymore you’ll appreciate the extra boost it gives your cash flow. You can take that extra money and invest it or use it to live the retirement lifestyle you always dreamed of.
Another pro to paying down your mortgage is that it is a guaranteed, risk free return. If you took that money and invested it you’d have to earn more than the interest rate of your mortgage. That may be possible if you invest wisely and your mortgage rate is low, but there are no guarantees.
Cons to Paying Off Your Mortgage Early
The biggest disadvantage to paying down a mortgage early is that you sacrifice liquidity. If you need cash quickly, it is much easier to access an online bank account or an investment account rather than tapping into your home’s equity. Once your mortgage is paid off you may want to open a up a home equity line of credit so you can access some cash if needed. Senior citizens can also tap into their home’s equity through a reverse mortgage, though there are significant disadvantages to that option.
You also have to consider the opportunity cost of paying off your mortgage early. Put simply, what else could you have done with that money if you hadn’t put it towards your home loan? For example, if you invested that money in the stock market and earned an eight percent return, you would be in a better situation than if you paid off your mortgage which only costs you four percent.
Of course, you shouldn’t even think about paying down your mortgage early if you have high interest credit card debt. It makes no sense at all to pay off a home loan that costs five percent while continuing to pay 15 percent on a credit card.
If you have a mortgage, would you consider paying it off early?
Latest posts by Mike Collins (see all)
- Book Review – Essentialism – The Disciplined Pursuit of Less - September 14, 2014
- Do You Work On Vacation? - September 12, 2014
- The Importance of Life Insurance - September 9, 2014