Paying off your mortgage early really doesn’t make financial sense. Your mortgage interest rate is probably lower than the rate of return you could earn on investments, which means you’ll likely end up with less money by prepaying your mortgage than you would’ve if you’d taken that cash and invested it.
Because of the opportunity cost, I’ve argued against taking out a 15-year mortgage instead of a 30-year mortgage — and I’d argue making extra payments on a mortgage isn’t the wisest use of money. Yet, I’m paying my mortgage off early anyway.
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Here are three big reasons I think this decision is the right one for me — along with some key things to consider if you’re thinking about paying your own mortgage off faster than you have to.
1. I’m already on track for retirement
Before I even considered paying an extra dollar to my mortgage, I set up automated retirement account contributions to a 401(k) and IRA. Because I’m maxing out the tax breaks available for retirement savings, I’m neither jeopardizing my future nor missing out on valuable retirement tax subsidies by prepaying my mortgage.
Unless you’re also taking full advantage of all retirement tax breaks, the opportunity cost of mortgage prepayment is even higher — especially when you consider the mortgage interest deduction reduces the cost of your mortgage. While there’s an argument to be made that prepaying a mortgage provides guaranteed savings while investment returns are speculative, tax breaks from retirement savings aren’t speculative at all.
Plus, while you can always sell your house and downsize in retirement if your mortgage isn’t paid off, you can’t go back in time to take advantage of years of missed tax deductions or the lost opportunity to earn compound interest.
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If your retirement accounts are maxed out, you’re likely on track to have plenty of money in retirement. Under these circumstances, the cost of extra mortgage payments is just missed investment gains — you’re not costing yourself the chance of retirement security, which is a price not worth paying.
2. I don’t like debt
Money isn’t just about math — psychology plays a big role, too. That’s why the debt snowball method has been proven by studies to be the best method of debt repayment. The wins keep you on track.
When I prepay my mortgage, I feel like I’m winning. Every time I send a big payment, I’m happy because I hate debt. I’m more motivated to get that bill paid down than I am to put extra money into an investment account, even though that’s not the rational approach.
And, because I’m driven to attack the debt, I spend less so I can have more to send in to the mortgage lender each month. If you feel the same, you may be better off giving into your impulse to prepay your mortgage if doing so helps you to be better about money overall.
However, if you have other high-interest debt — and especially debt you don’t get a tax deduction for — pay that off first in all circumstances. Otherwise, you’ll needlessly waste a lot of money in interest.
3. I have an adjustable-rate mortgage
A final reason I’m prepaying my mortgage is because my husband and I have an adjustable rate mortgage and want to get the balance paid off before the rate could potentially adjust upward.
The mortgage we have is a 7-1 ARM, which means the rate is locked in for seven years. We refinanced into that mortgage two years ago, taking extra cash out of home equity to pay off the last of my student loans. There’s five years left before the loan adjusts upward, and I want the mortgage paid off before that can happen.
Often, ARMs are too risky to consider because of the chance of foreclosure if payments go up and you can’t pay. However, we had a plan to pay the mortgage down, we have very secure income, and we made sure we could afford the payments even if our plans didn’t work out and payments went up. Because we accounted for the risks, taking advantage of the lower interest rate an ARM provided was a gamble worth taking.
If you’re already in an ARM, prepaying the loan down may also sense because most experts think interest rates will rise. The lower your loan balance, the more likely you’ll be able to successfully refinance if your rate goes way up in the future.
Is prepaying your mortgage right for you?
Ultimately, everyone’s situation is different. While the math clearly points against prepaying your mortgage, my situation — and perhaps yours — means paying down a mortgage isn’t necessarily a terrible idea since there are other factors in play besides straight math alone.
To decide if paying your own mortgage early is right for you, think about how motivated you are and what opportunities you’re sacrificing. Be sure to carefully assess the true cost, because once you’ve made extra payments, you’ll have to sell, refinance, or take a home equity loan to get the money back out again.
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