The benefits and drawbacks of early mortgage repayment vary depending on the borrower’s financial situation, the interest rate on the loan, and their age at retirement. Another consideration is whether to invest that money instead. Compare the potential interest savings from paying off a mortgage ten years early to the different investment returns from putting the money in the market.
This is a question that many homeowners wrestle with, and there’s no one-size-fits-all answer. The best decision for you will depend on your individual financial situation, goals, and risk tolerance.
Should You Pay Off Your Mortgage Early?
There are several advantages to paying off your mortgage early:
- Save money on interest: This is the most obvious benefit. The sooner you pay off your mortgage, the less interest you’ll pay over the life of the loan.
- Build equity faster: As you pay down your mortgage, you build equity in your home. This can be a valuable asset, especially if you plan to sell your home in the future.
- Reduce your monthly expenses: Once your mortgage is paid off, you’ll have more money available each month to spend on other things, such as retirement savings, vacations, or home improvements.
- Peace of mind: Knowing that you’re debt-free can give you a sense of security and peace of mind.
However, there are also some potential drawbacks to paying off your mortgage early:
- You may miss out on investment opportunities: If you use your extra money to pay off your mortgage, you won’t be able to invest it in other assets that could potentially earn a higher return.
- You may lose out on tax deductions: You can deduct the interest you pay on your mortgage from your taxes. If you pay off your mortgage early, you’ll lose out on this tax deduction.
- You may tie up your money: Your home equity is a valuable asset, but it’s also illiquid. This means that you can’t easily access your money if you need it for an emergency.
Should You Invest?
Investing your extra money can be a great way to grow your wealth over time. However, it’s important to remember that investing comes with risk. The value of your investments can go up or down, and you could lose money.
Here are some things to consider before you invest:
- Your risk tolerance: How much risk are you comfortable with? If you’re not comfortable with the possibility of losing money, you may want to invest in more conservative assets, such as bonds or CDs.
- Your time horizon: How long do you plan to invest your money? If you have a long time horizon, you can afford to take on more risk.
- Your financial goals: What are you hoping to achieve with your investments? Are you saving for retirement, a down payment on a house, or something else?
The Best of Both Worlds: Refinance and Invest
If you’re still on the fence about which option is best, you may not need to choose between paying your mortgage early and investing. Rather, you can take a two-pronged approach to reducing your debt and growing your wealth.
Mortgage rates are at historic lows, which means it’s a great time to refinance. If you took out your mortgage or last refinanced years ago, it’s likely that you can save quite a bit of money by refinancing to a lower interest rate and/or reducing your mortgage term length. That’s true whether or not you also choose to pay down the loan more aggressively. Just be sure to factor in closing costs when running the numbers.
With your newfound mortgage savings in place, you can go ahead and invest, too. This allows you to spend less on your mortgage overall while still taking advantage of the higher returns of the stock market
Bottom Line
The decision of whether to pay off your mortgage early or invest is a personal one. There is no right or wrong answer and the best choice for you will depend on your individual circumstances.
If you’re not sure which option is right for you, it’s a good idea to talk to a financial advisor. They can help you assess your financial situation and goals and develop a plan that’s right for you.
Frequently Asked Questions (FAQs)
At what age should you pay off your mortgage?
There’s no need to pay off your mortgage by a certain age, although one common rule of thumb says you should pay off your mortgage before you retire. The idea is that getting rid of one of your biggest monthly expenses means you need less income to cover your living expenses.
However, if paying off your mortgage means you can’t save as much and have a smaller nest egg to draw retirement income from, then you may be better off taking longer to repay your mortgage so you have more cash each month to save and invest.
Does paying off your mortgage early hurt your credit score?
Paying off your mortgage early would reduce how much debt you have, and lowering your debt can lead to an increase in your credit score.
However, the impact of this decision on your credit score shouldn’t be a key consideration. It’s far more important to think about how paying off a mortgage early will affect your savings, investments, cash flow, liquidity, and ability to use your time and money how you want.
What are the best ways to invest extra cash?
If you won’t need your money for many years, putting your extra cash in exchange-traded funds or mutual funds that invest in the S&P 500 and have near-zero expense ratios has historically offered strong returns and may continue to do so in the future.
If you’ll need your money sooner, a less volatile option such as a high-interest money market fund, online savings account, or certificate of deposit can be a good choice.
Before making any significant investment decisions, consider speaking with a financial advisor to discuss the best moves for your portfolio and financial goals.
Additional Resources
- Forbes Advisor: Best Mortgage Lenders
- Investopedia: Should I Invest or Pay Off My Mortgage?
- NerdWallet: Mortgage Calculator
- Bankrate: Mortgage Rates
The decision of whether to pay off your mortgage early or invest is a complex one. There are many factors to consider, and the best choice for you will depend on your individual circumstances. If you’re not sure which option is right for you, it’s a good idea to talk to a financial advisor. They can help you assess your financial situation and goals and develop a plan that’s right for you.
Save interest by paying off the loan
The total interest cost for the 30-year loan would be $123,312 at the 3. 5% interest rate. The borrower would save $20,270 by paying it off ten years early.
Saving more than $20,000 in interest is noteworthy, but the interest amount saved only accounts for 2017% of the total interest cost for a 2030-year loan: $103.042% of interest has already been paid for the first 20 years of the loan ($123,312%20-$20,270), which accounts for 20%83 percent of the total interest over the loan’s life.
Investment Gains vs. Loan Interest Saved
If a homeowner invested $100,000 instead of using the funds to pay off their mortgage in ten years, they would receive $22,019% based on an average rate of return of 2%. There would be no material difference between investing the money versus paying off the 3. 5% mortgage based on the $20,270 saved in interest from the earlier loan table.
But the homeowner would earn $62,889 if the average rate of return was 5% for the ten years. Regardless of whether the loan rate was three or not, this is more money than the interest avoided in the three previous loan scenarios. 5% ($20,270), 4. 5% ($28,411), or 5. 5% ($37,618).
Even if the borrower used the five years to pay off the loan early, they would still receive more than twice as much interest. 5% loan rate, with a ten-year rate of return of 7% or 10%.
The borrower not only avoids paying interest on the loan by repaying their mortgage rather than investing the money, but they also free up funds that would have been used for monthly repayments. This money could also be invested with the same rate of return.