Ever ask yourself this question?
What’s better – to pay off the mortgage early or to save and invest more money?
My guess is that we’ve all asked this question at some point or another.
Maybe you’re thinking about refinancing your mortgage and looking at how you could pay off your mortgage early.
Paying off the mortgage early is a goal that a lot of folks have and are committed to make happen!
But what is your mortgage payoff?
How much extra cash do you need to throw down on that loan to get to your mortgage payoff?
How much interest would you actually save?
How many years would you cut down on your loan with an early mortgage payoff?
Should you even try to pay off your mortgage early, or is it better to invest your money?
Those are the questions we want to look at today and I’ve got a great little calculator for you as well!!
Benefits to an Early Mortgage Pay Off
- Peace of Mind – you can rest easy knowing you’ve got no liabilities!
- Increase “Imputed Income” - This might be more of an ethereal benefit, but bear with me – Let’s say your mortgage payment is $1,200 per month. If you are in the 25% tax bracket, you have to earn $1,600 to net $1,200 after taxes. So basically not having to pay $1,200 a month is like earning $1,600 tax free!
- Increase Savings – once you’ve paid off your mortgage you can really start socking some big money away.
- Increase Giving – without having a mortgage payment, you can use that money to help the needy, give to your favorite charities or increase the giving to your church.
- Increase Net Worth – this is obvious here, but worth noting. Net worth is simply everything you own minus everything you owe. Take away the liability and your net worth increases dramatically, which is creating wealth!
- Increase Freedom – what I mean is that you no longer have to work just to maintain your liabilities, but rather having no mortgage or no debt frees you up to pursue things like your passions and your purpose!
So, as you can see there are some pretty big advantages to knocking out that mortgage!
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Concerns With An Early Mortgage Pay Off
- Opportunity Cost – If your mortgage rate is only 5%, but you can get 8% in the market, you are giving up 3% by paying off your mortgage.
- Lack of Liquidity – Instead of building up an account (whether a non-qualified brokerage account or a Roth IRA) that you can access should you need it, your money will be tied up in the equity of the home. Sure you can get access through a home equity loan, but you have to pay interest on that.
- Missed Tax Advantages – You can’t write off mortgage interest if there is no mortgage interest.
Those are the three main concerns I see with paying off your mortgage early. Maybe you can let us know of some other concerns or disadvantages to paying off the mortgage early.
Instead of just choosing one way or the other, maybe you want to pay off your mortage AND invest like Nickel is doing from Five Cent Nickel!
Mortgage Payoff Calculator
So maybe you’re wondering what it would take for an early mortgage payoff? How much would you save by paying the mortgage off.
Here’s is a handy Mortgage Payoff Calculator compliments of MortgageLoan.com.
Check out ChristianPF for some advice on how to pay off your mortgage early?
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What Are Your Thoughts?
Readers, what do you think – should you pay off your mortgage or invest?
How many years would you trim on your mortgage by re-doing your budget and throwing some extra cash on that loan?
If you’re just starting out on the journey of home-ownership, I suggest you pre qualify for mortgage and lock in a great interest rate today.
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{ 14 comments… read them below or add one }
If the mortgage is fixed rate, I think keeping it open and saving and investing is the way to go.
Not only are you building up tangible savings that way, but at the same time you are, your mortgage is amortizing itself into extinction anyway, albeit slowly.
The other issue that we might be ignoring with early payment is that it comes close to putting all of your financial eggs in one basket–your house. In theory, you could have an 80% equity position in your house, minimal savings outside of it, and still have a monthly payment in excess of $1000 for several more years.
That’s sort of the definition of “house poor”, isn’t it?
I am on the side that says paying off the house early is a better idea. I don’t suggest that you shouldn’t have a big emergency fund and some other investments, but investing huge sums while you still have a mortgage is like investing on margin. Investing is hard enough, no reason to start out in a 5% hole. sure you might be able to get 8% and beat it, but most people haven’t for the last decade. Paying off the mortgage is a guaranteed 5% return. Get rid of the debt. The freedom gained is huge.
I’m sorry but #2,3 & 5 under your benefits are just wrong. Also, why does the decision have to involve investing? How could you even contemplate putting this money at risk in an investment?
#2. Only the mortgage interest is tax deductible so, if you pay $1200 only a portion of that $1200 will be able to be considered and that portion is going down every year (starting off very slowly).
#3. If you truly wanted to increase savings you would take extra money that you had to save it rather than pay your mortgage. That would increase savings. Paying your mortgage early would delay your savings for 15, 20 or more years. Then 30 can beat 15.
#5. Since the return on equity is always zero, you might do better from a net worth standpoint separating the equity in your ome.
Well, we get zero tax advantages for our mortgage, so that isn’t even part of the equation for us. But even if it were, I’d still pay off our mortgage early. For us the idea of freedom and flexibility is huge. (Although we are also investing.)
Love this topic. I think you pay off your mortgage by the time you retire. Before then, nah. Keep the liquidity and cash hoard.
@Financial Samurai
If I get rid of the mortgage sooner, I can retire sooner
To retire you need to have a nest egg that creates enough money on its own cover your expenses. If you get your expenses down really low, the next egg doesn’t have to be as big.
Hello!
This is a topic I am struggling with right now–we purchased our home last September. I have to say, after reading Rich Dad Poor Dad, I feel like I know the answer; it’s a bit of a compromise, as I still do not want to pay my house twice over on interest, but it leans more towards investing the extra money each month. I have a 30 year fixed rate at 5.5%, and so I will put a few hundred dollars extra per month to ensure it will be paid off in 15 years, and then the rest of our abundance we will invest.
Amanda, I think that’s a pretty good route to go. I kind of like getting rid of that mortgage early just to be totally done and completely debt-free, but I also know you shouldn’t put “all your eggs in one basket” either.
This is one of those money decisions I’m not looking forward to, but I’ll probably keep with the mortgage and put more money in to savings/investing.
Trent from The Simple Dollar had a recent post about a woman who’s savings was wiped out by her husband’s medical/insurance problem so a healthy emergency fund is better for peace of mind than paying off the mortgage early.
There are a few things here that most people don’t seem to understand.
First is that if you own your home “outright” you still are tied down and must pay taxes,water,electric etc, etc, etc,in other words you never ever own it outright
Second if you have an affordable rate and payment then you do have the ability to reduce your tax burden by taking the interest as a deduction.
Third perhaps the most important factor is that as the “buying power” of the dollar is reduced, you are most often paying years later with dollars that are worth less than when you paid off the mortgage.
It’s a personal and somewhat complex decision so take time to look at it from every angle and think long term.
Ray – that’s an interesting point about paying with dollars that are “worth less” than what they were before.
As far as ownership, just because you do pay water and taxes doesn’t reflect ownership. If you own your car, you still have to pay insurance, gas and maintenance.
There will always be that type of thing – that doesn’t reflect ownership though.
In terms of tax deductions, you can still get a good tax deduction by donating to charities etc. Why not take the interest you would’ve paid and give it to an organization that can help the poor?
Food for thought. Thanks for weighing in!
Screw the poor!
If you want to say give it to children with cancer or disabled war vets I’m with you but most of the “poor” are poor because they don’t want to work menial jobs, expect handouts and continually breed creating more poor moochers for the working class to be taxed more to “help”.
My personal opinion is to pay off your mortgage as quickly as you can, but then I love the feeling that I am debt free.
I also found a mortgage pay off calculator (http://www.payoff-calculator.info/) that can handle one-time lump sum, annually recurring extra payments as well as extra contributions to every single payment at the same time.
What do you know about lump sum investment? Lump Sum Investment is very nice choice to pay your debts