When you purchase a home, taking out a 30-year mortgage and paying on it for the next 30 years is easy. But, surprising, so is taking out a 30-year mortgage and paying it off in fewer years. There are a number of tricks you can use to help you pay off your mortgage early if that’s what you’d like to do. But first, you must decide whether paying of your mortgage early makes sense for you.
I don’t think that paying off your home mortgage will ever cease to be debated. Some will look at the interest rate being paid after tax deductions are considered and point out that you can make a better return on your money elsewhere. Someone else will chime in and say that you should aim to become completely debt-free. This will always be debated, because both sides are correct.
Absolutely, there are investments available in which you can obtain a higher rate of return. Assuming that the stock market performs as it has in the past over the long run, you can look forward to an approximate 10% return on your money. The interest saved by paying down your mortgage will always be less than you could earn in the sock market over the long run. At the same time, I don’t think that anybody could make a sound argument that being debt free is a bad thing. Imagine not having to make that monthly mortgage payment. It’s hard to fathom having that much extra income available for saving, giving, and spending.
So, if you can earn more money in the stock market, why would anybody want to pay down their home mortgage? Well, it comes down to risk. Sure, the stock market on average has returned more than you would save by paying down your mortgage. However, it’s also much riskier. As we’ve seen recently, the stock market is quite volatile. While it may return approximately 10% over the long run, this year it could return 30%, and next year 20%. Nobody knows how it will do. By paying off your mortgage, however, you’re receiving a guaranteed return. This seems like a much better alternative to buying U.S. government treasury bills or any other low-risk investment. Not only would you receive a better return, but you’re decreasing your leverage, which decreases your personal risk. Until you own your home, there’s always some risk that you could lose it.
To determine whether prepaying on your mortgage makes sense, it’s important to look at the numbers, but also consider the emotional impacts. Personal finance is just as much about emotions as it is about the math. Paying down your mortgage will likely bring comfort and peace-of-mind to your life. Ultimately, you must make this decision for yourself. This isn’t one of those financial decisions you ca just look up the “right answer” to in a personal finance book. Depending on your personal circumstances such as your age, income, house payment, total debt outstanding, future aspirations and tolerance for risk, your choice of whether to pay down your mortgage early may differ from mine.