Summary
Why paying your Mortgage early might not be worth it:
- It may not be the best investment for your money
- Mortgage interests now are very different from what your parents/grandparents experienced, be careful taking that advice!
- It may sacrifice your emergency fund
- Doesn’t contribute to tax-sheltered accounts
- There are a lot of other options to use that cash! You just need the right advice.
Ever wondered why people who earn millions and can afford to pay cash for their home would still have a mortgage? The short of it is because they will be millions of dollars richer after 30 years (keep reading to learn why).
After conducting hundreds of homeowner interviews House Numbers, here are the common mistakes we’ve heard from folks who pay off their mortgage early:
1. They believe saving mortgage interest is the best investment for their extra money.
The real question should be, “Is my mortgage interest rate higher than the rate of return I could get from any other investment, over the long term?” The answer is almost certainly: no. In any month or year, anything can happen in the markets. But, a home is a long-term investment, and the average long-term return of the stock market is 10.5% per year. Your interest rate is much lower than that. So, by pre-paying your mortgage, you’re betting against the odds and taking a lower return. The best, most consistent investors know that time, not timing, matters. Put your extra cash into a low-cost, diversified investment portfolio (I use Wealthfront) and you’ll likely have a much higher net worth.
2. They got outdated / bad advice from someone who bought their home a long time ago, like a parent or grandparent.
From the mid-1970s through most of the 1990s, interest rates on a 30-year mortgage were generally above 8%. During that time, it did make more sense to pay off your mortgage early. Most folks I talk to now have interest rates between 2.5-4.5%, which makes this advice outdated and in most cases worth ignoring.
3. They don’t have enough savings to cover upcoming home maintenance expenses.
These are inevitable and, if you don’t have money set aside to cover them, you’ll probably end up with credit card debt. The average credit card interest rates are ~20% — much, much higher than your mortgage interest rate. So, don’t prepay your mortgage now to save a small amount, only to add even more interest costs later via expensive debt.
4. They don’t contribute to a 401k, IRA or other tax-sheltered account.
Retirement accounts like 401k or IRA have special benefits that make their after-tax, money-making power even stronger. When combined with the principles under #1 above, it makes sense to prioritize these contributions overpaying extra on your mortgage.
5. They’re not sure what’s the best thing to do with their extra cash.
I’ll be honest — this described me for a long time. Life is busy. These decisions are complicated. I didn’t have anyone who could help me. I did the best I could. But, once I started to uncover the right advice, I realized I could better manage my home wealth.
House Numbers can help!
If any of these describe you, it may be time to reevaluate your strategy. You may not stop making extra payments altogether. But, you might diversify what you do with your extra cash to increase your overall wealth.
At House Numbers, these are the questions our product helps answer based on your unique goals and financial situation. We believe most homeowners need a better home wealth management solution.
