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You’ve been doing well with your finances. You don’t have any car loans or credit card debt. You’ve been socking away money in your 401(k), Roth IRA, and other investments. Now you’re looking for more avenues to help put yourself in a better position with your money.
Eventually, you start asking yourself that one question… the one that can really stir up some good debate…
Should I pay off my house early if I can?
On one hand, you have that huge feel-good aspect of getting rid of that giant burden that you’ve had for years. A mortgage payment is a real thorn in anyone’s side – no one likes paying that bill every month. I had a major debt problem coming out of college years ago that took years for me to dig myself out of and now I have this wonderful hatred of bad debt (as opposed to good debt). To be done with that mortgage ball and chain would be exhilarating… ah, the sweet smell of freedom!!
On the other hand, you have the math facet to look at. For one, you could take the extra money that you were going to put toward the mortgage and instead invest it elsewhere. Chances are you have a really low interest loan right now. If it’s even a 5% loan, you could probably make your money work better for yourself by putting it in a well-diversified stock portfolio that might earn you say 6 or 7% over the long run.
Getting rid of that mortgage payment also gives up your home mortgage interest deduction come tax day – that can be a big deal for many people who can itemize on their returns. And the higher the tax bracket you’re in, the more important this is for you.
And another important factor is that you’re putting yourself in a tough situation. If you invest the extra money in the stock market, for example, and run into some money problems, you can sell your stocks and get your money pretty quickly. But if you put it into your mortgage instead, you lose that liquidity. Selling your stocks is easier and quicker than having to sell your house.
So, basically the numbers will generally tell you that you should not pay off your mortgage early if you have a low-interest loan. But the emotional factor of losing that stress might still make you want to reconsider.
So should you pay off your mortgage early?
In my case, the answer is yes. When I did the numbers for my early retirement, I factored in that I would not have the monthly expense of a mortgage payment.
Right now, if I continue to make the payment amount I am at, Quicken says that my payoff date will be January of 2027. I currently make a little more than an extra payment each year.
My problem is that January 2027 is about a year and half after my retirement goal of July 2025… and that’s the latest I want to be done. So this is an issue. I’m going to need to tighten up and continue to get more of the principal paid down if I’m going to make this happen.
One of the nice things about recent versions of Quicken is that it gives you the ability to do “What if” scenarios without actually modifying your actual data. In other words, I can easily see what would happen if I paid an extra $100 a month on my loan for example. Or I can see how my loan would be affected if I made a one-time lump payment. Quicken will then do all the amortization fun and instantly let me know my new payoff date (as well as how much interest it would save me).
So in an instant, I can see that if I increase my mortgage payment by another $200 a month, I’ll hit my goal of paying off the house by July, 2025. Easy enough… wait – $200 a month??!!! Ouch… that’s a pretty big jump for my payment.
As an alternative, if I make a $20,000 lump-sum payment right now, I can also hit the July 2025 date. Hmm, that’s a pretty hefty sum of money as well. I can make that payment, but it would take a huge chunk out of my emergency savings. I’d be better off with the extra $200 a month. Now I’ll just have to figure out what I need to cut out to make that happen.
The good news is that Quicken says that the mortgage on my rental will be paid off in January 2024. Right now I’m paying $685 per month on that, so for that last year before retiring, that’s an extra $685 I can apply toward my primary residence loan. That’s $8,220 which is a good piece of the mortgage, but still not enough.
So the numbers say that I shouldn’t pay off my mortgage early, but I’m doing it anyway! I need to do it in order to make my retirement a success. What about you? Are you going to try to pay off your mortgage early or let it ride for as long as you can?
Thanks for reading!!