Mo Money's Building Wealth Blog

Ok, so you have a mortgage on your primary residence.  That puts you in the majority as around 60% of homeowners in the US carry a mortgage.  The question that always arises is, if at all possible, should you pay it off early or should you ride it out?  Like everything in life, it all depends.

Recently I posted about different categories of debt.  That might be a good read before reading further in this post.

If you are someone who is emotionally burdened by having any sort of debt, then by all means you should consider paying it off.  You’ll know it is behind you and you’ll never have to worry about not being able to afford home payments in your later years.

If you’re not in the emotional camp, then you have choices to make.  Here are a few examples to help illustrate that:

Case #1:  Nicole’s interest rate is in the 3% range.  She is relatively young and has a variety of investments averaging a 10% return per year.   She values flexibility and might want to invest her money in real estate or a business someday.  Taxes and risk aside, she is earning 7% more on her money by keeping it invested and not pulling the money out to pay off the mortgage.  She is earning money on the “spread”.

Case #2:  Richard has a mortgage with a 6.5% interest rate.  Richard is nearing retirement and has conservative investments that target 5% per year.  He values financial security and is risk averse.  Taxes aside, Richard might want to consider paying his mortgage off as early as possible as doing so would essentially be giving him a guaranteed 6.5% return on his money instead of a 5% return.  This is assuming of course that Richard would still have plenty of money remaining for retirement.

Case #3:  Wendy has a mortgage.  Wendy is a spender and pretty much lives paycheck to paycheck with very little savings and some credit card debt.  I would highly recommend that Wendy get a financial coach or advisor as soon as possible to fully analyze her income and expenses to build a plan to get her on track to start managing her financial future.

The main takeaway that these cases are trying to illustrate is that the decision to pay off your mortgage is never a one size fits all matter.  The decision depends on factors such as the interest rate, your age, current and future earnings, spending habits, amount of savings, investment goals, risk tolerance, etc.  The best advice is to take all of this into consideration and make the choice that works best for you. 

Tip:  Making additional mortgage payments each year can significantly reduce the remaining years left to pay off your mortgage.  Here’s a free nifty mortgage payoff calculator to help you determine how you much could save.