Should I Pay Off My Home Mortgage Early?

This is a very common question, and in an area where our gut feeling is often wrong! People seem to have a deep need to feel as if they are more secure if they pay off their home debt, but the numbers often say otherwise. Here is the basic rule – if your mortgage interest rate is low enough that it is reasonable you can make more money on your investments than you pay on home debt, you should probably not pay off the mortgage. With interest rates having been so low for so long, this is probably the case for many of you. This is before any tax considerations and the impact of the 2018 Tax Reform, which makes a mortgage interest deduction less desirable for many people, so forget the tax angle for now, and consider any tax savings gravy. Here’s another way to look at it. Say, for instance, you have a 4% mortgage and believe you can invest for a 6% return. Gosh, with interest rates going up it may not be long before you can do better than 4% on even savings rates. So say you owe $400,000 at 4% and pay $16,000 in interest, but are getting 6% or $24,000 on the $400K you kept instead of paying the house off with. In this case, you are $8,000 ahead for that year, not bad. Plus you can always pay the mortgage off in the future with the investment account, so you always have the option.

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