Should you pay off your mortgage?

If you have the savings available, should you pay off your mortgage? Probably, but the answer is situation-dependent.

Most simply, if your mortgage interest rate is greater than what you’re earning on your savings and you don’t anticipate needing this money in the near future, then yes, pay it off. However, like many personal finance decisions, it’s rarely that simple.

Because it’s a secured loan, a mortgage is often the least costly way to borrow money. If you anticipate needing to borrow in the future or you have other outstanding loans such as credit card balances or student loans, it is usually more sensible to pay off your other debts with higher interest rates than your home mortgage.

People often feel a well-deserved sense of psychic satisfaction knowing that the mortgage has been paid off. However, recognize that making a mortgage payment each month is a form of forced savings which is also valuable. Your payment is a combination of interest and principal and it’s the principal re-payment that represents your savings. If you were to pay off your mortgage and you started spending your prior mortgage payment each month instead of saving it, you’d be financially worse off than if you had just continued to make mortgage payments.

If you do pay off your mortgage, maintain the discipline to continue making those payments each month — but now, send them to your savings account instead of the mortgage company. For some suggestions on where best to save, click here.

So, yes, in many cases, it makes sense to pay off your mortgage balance if you can, but only if you commit to save those payments, rather than spend them.