Should you pay off your mortgage early? I am faced with this question, as I have extra money every month that I need to do something with. I could make extra mortgage payments to accelerate the payoff, but is it worth it?
Extra Money
I have an extra $1000 per month in my budget. I was just saving the money as cash, but all my mid-term expenses are funded, and my emergency fund has 6 months’ worth of expenses in it. So now I need to deploy this money elsewhere. I have some possibilities.
Cash
I could keep building cash or start a CD ladder. A year ago I wouldn’t have considered this, but interest rates are now high enough to justify a risk-free investment earning close to 5 percent.
I’ve always been a proponent of having cash. Cash is still king. Having liquid funds opens up a lot of opportunities for investments, it gives you security from having to go into debt should you have an emergency, and it provides a level of freedom.
Investments
Putting an extra $1000 per month into the markets seems scary at the moment, but in the long run, it will pay off in spades.
Even with this option, I would have to decide if I want to invest in a fund or buy individual stocks. I like dividend-yielding stocks for the cash flow, but many of them don’t provide a lot of growth.
At this stage, I may be better served investing in an ETF or something similar.
Real Estate
Owning a rental property has shown me the need for keeping cash. It has also made me want to purchase a second property. This will take a lot of capital, so saving up for the purpose of doing so is a must.
Buying a property totally with cash isn’t practical, but I would like to make a large down payment while having cash left over for renovations.
Mortgage Payoff
To answer the original question, should you pay off your mortgage early? The extra $1000 per month would represent close to a double payment per month. I haven’t done the math on what that would mean for a payoff, but it would accelerate it considerably.
There is a little over 15 years remaining on a 20-year note. I would have to study the amortization schedule to find out exactly when the payoff would happen, and then see if doing so would be worth it.
If you are a fan of Dave Ramsey you know what he would say about this. He would advise paying down the mortgage as quickly as possible to become 100 percent debt free. But should you? From a phycological standpoint, you should. From a mathematical perspective maybe not.
Being totally debt free gives you a lot of freedom when it comes to lifestyle and your career. Stress over money will also be nearly non-existent.
On the other hand, if your mortgage rate and payment are manageable, then keeping the note while investing any extra money could pay off later in life. Your portfolio might be many times larger than had you paid off the mortgage instead of putting money into the markets.
I am on the fence with things, as the interest rate on my loan is just under what current savings rates are. It would almost be a wash no matter what I chose. The only way I could beat the return would be to invest in stocks or real estate. And both of those investments have risks.
What do I do?
Should you pay off your mortgage early? There is no one-size-fits-all answer. You must determine your own situation. Look at your payoff term, the interest rate, how long you plan to live in your home, and any other financial factors in your life. Remember that you don’t have to do any option completely. You can split up your extra money. Put some towards your loan, some in the markets, and keep some as cash. This is probably the option that I will choose.
If you are in a similar situation, how did you approach it? Please share it below.
Read Also:
5 Mortgage Tips For First-Time Homebuyers
What Would You do With an Increase in Cash Flow?
Long-Term Mortgage Rates Hit a Seven-Year High
Based in the Pittsburgh, PA area, Brian holds full-time employment as a Warehouse Manager for an electronics firm. Brian enjoys wealth building, investing, gardening and the great outdoors. Brian holds a B.A. in Environmental Studies from the University of Pittsburgh and an MBA from Robert Morris University.
