Does it Make Sense to Pay Off Your Mortgage Early?

By Jeremy Wallace and Andrew Hart

Owning a home is part of the proverbial “American dream” for a reason. (And with record-low inventory, low interest rates, and high demand, (1) the housing market is currently booming now more than ever.) But this iconic symbol of financial independence doesn’t come without strings attached—strings in the form of a mortgage for the next 15-30 years (for those of us unable to purchase a home in full). In order to one day own this major asset outright, it’s impossible to avoid incurring this debt. So the question is, how do you manage it moving forward? 

We’re no strangers to debt basics: smart utilization of debt is a healthy financial goal—especially when it comes to avoiding high-interest debt such as credit cards or student loans—and it’s important to minimize consumer debt for many reasons. But do the same principles apply to mortgages? Is it better to put every extra dollar toward your mortgage or invest that money instead? Like most financial decisions, the answer will depend on your unique situation. 

To gain more clarity, let’s go over some pros and cons of each strategy. 

The Best Use of Your Funds

If you are considering paying off, or paying extra on your mortgage, we can assume you have extra cash each month, or a lump sum you need to make a decision with. Of course, leaving additional funds sitting in a savings or checking account where you’re earning less than a percent of interest would never make good financial sense. You want your money to work for you, so the question to ask is, “What option will give me the biggest payoff?” Many clients choose the simple comparison between their mortgage rate and the rate of return on their investment or portfolio.

Like most financial decisions, there are plenty of factors that could affect the outcome, and the decision can’t be made in a vacuum. And as we all know, even the best estimates aren’t guaranteed. As I like to say, “Life happens.” It is important to run a thorough analysis and consider a variety of factors: the current interest-rate environment, potential taxes on new investments, the loss of mortgage interest deduction (if applicable), your risk tolerance and expected return of your investment portfolio, and private mortgage insurance, among other elements of your financial life. An experienced financial planner can provide the needed guidance and direction when it comes to such a decision. 

Weigh Your Options

There are some pros and cons to each choice that go beyond the raw math. Liquidity is a significant benefit of investing since, depending on which type of account you invest in, you may have greater access to the funds in case of an emergency or for your other financial goals. By placing the money toward your mortgage, thereby increasing the equity in your home, your options become more limited. The only way to access those funds would be to sell your house, do a cash-out refinance, or obtain a home equity loan or line of credit.

The advantages to paying down your mortgage are obvious. The additional cash flow created from the savings once the home is paid off can be redirected to your longer-term goals or strengthen your monthly budget once retired. The savings created could also potentially be used to offset your healthcare or long-term care costs once retired as well. However, paying extra toward your mortgage during your working years means less cash available to invest in securities with a higher expected return—which, if done wisely, could outperform the guaranteed return you get by paying down your mortgage.

Is Being Debt-Free Important to You?

While avoiding extra mortgage principal payments is oftentimes the right “financial answer,” there is more to the decision than just the numbers, as paying off your mortgage can have other non-financial benefits as well. Transitioning into retirement debt-free can provide homeowners with peace of mind at a time when they are feeling financially vulnerable. Living solely off one’s investments and/or Social Security can be intimidating and having one fewer monthly bill can help with that transition. So, while the numbers don’t lie, they often don’t tell the whole story. Do not underestimate the feeling and mindset of having your mortgage paid off as you enter retirement.

It’s Not Necessarily All or Nothing 

With a decision as big as this one, it’s critical to consider several factors before taking any action. And obtaining an objective third party’s counsel is always a wise idea! A trusted financial advisor can help determine which option is best for you given your unique circumstances. Perhaps a combination of these two strategies makes the most sense; this could be adding more money to each mortgage payment to bring the principal down while still putting the majority of your extra funds toward other investments. 

Consider partnering with Wallace Hart Capital Management as you navigate this financial decision; after all, it’s just one among many along the road to your ideal financial future. We can evaluate your options, provide personalized financial planning advice, and maybe even show you alternative investment strategies you hadn’t considered. Our ultimate goal is to help you to enjoy your home without worry keeping you up at night. To get started, contact us at 859.300.3030 or request an appointment online today!

About Jeremy

Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and  he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.

About Andrew

Andrew Hart is co-founder and chief planning strategist at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Andrew has 15 years of experience in the financial industry and strives to provide new and better strategies and processes to improve his clients’ lives. Andrew graduated from Wittenberg University with a bachelor’s degree in business management and holds a certificate in financial planning from Georgetown University and the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation. When he’s not working, you can find him enjoying the city of Lexington, Kentucky, teaching at the University of Kentucky’s Financial Planning program, and spending time with his wife, Susan, twin sons, George and Ted, and daughters, Merritt and Philippa. To learn more about Andrew, connect with him on LinkedIn.