Should you pay off your mortgage?

Deciding whether to pay off your mortgage when you have the available funds is situation-dependent.

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

A mortgage is usually 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, student loans, or even a car loan, you should probably not pay off your mortgage. It is usually more sensible to pay off other debts first as they typically have higher interest rates than a 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 is the principal re-payment that represents your savings. If you were to pay off your mortgage and start to spend your prior mortgage payment each month instead of saving it, you’ll 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. One of the best way to use the freed up monthly cash flow from paying off the mortgage is to fully fund a 401K and/or IRA.

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.
 

|
For a free consultation Get in touch