So let’s say that your personal finance life is going pretty well. You’ve managed to pay off all of your debts except your mortgage. Is it time to start paying more on that mortgage so you can pay your mortgage early?
Why would you want to pay your mortgage early?
When you got your mortgage from the bank, you agreed on an interest rate (well, your bargaining power was low, but you agreed to pay their interest rate). Assuming you have a fixed rate mortgage, you agreed to pay a certain percent in interest on the outstanding balance of your mortgage. The faster you pay off that mortgage, the less interest you will pay. And who doesn’t want to keep more of their money?
Okay, then why wouldn’t you want to pay your mortgage early?
So if paying your mortgage early means that you pay less interest, why wouldn’t you want to pay off your mortgage early?
Well, the big question is what else your money could be doing for you?
Many people just don’t have the cash flow to be paying extra on their mortgage. They’re paying off other debts, building up savings, paying regular expenses and doing fun things like taking reasonably priced vacations. But if you’re doing all of that and still have money leftover in your budget, why not pay your mortgage early?
Take a look at the interest rate on your mortgage. Let’s say you’re paying 4%. Could you make a higher return by investing your money? Sure, investments come with risk, but a 4% return is pretty low, and if you’re looking long term, you should certainly be able to earn a higher rate of return.
Additionally, some people will argue that you should look at inflation. Let’s say your mortgage payment is $1000. $1000 buys much more now than it will in 20 years. Looking at one inflation calculator, $1000 in 1998 has the same buying power as $1528 today. So theoretically, though that payment won’t actually change, it will feel like less. (Of course, this assumes that your income is moving with inflation.)
Finally, a lot of people like to have some liquidity in their finances. If you pay extra funds into your mortgage, if something happens and you need that money, you’re going to have some difficulties. But if you invest the money, you can pull it out of the stock market by paying off your investments.
Okay, but should I pay my mortgage early?
It’s really a personal decision. It’s what works best for you. Some people really want to get the most for their money, so for them, I would recommend investing the extra they would pay. Other people struggle with the emotional impact of debts, and for them, I would recommend paying extra towards the mortgage, if only for the peace of mind. There isn’t a wrong answer here. It’s what works best for you.
Megan is a 40-something government employee in the Washington, DC area. She got interested in Personal Finance when she got out of college and realized that her paycheck wasn’t going to go as far as she had hoped. Since starting this blog, she has managed to buy a house and make a solid start on her retirement goals, and hopes to help others do the same. Here is her story:
In 2007, I was a gainfully employed 20-something with no debt but not a lot of knowledge about personal finance. It was a co-worker’s comment about Roth IRAs that sent me to the internet, searching for information. It was then that I realized that I really didn’t know a whole lot about personal finance and that my current financial situation was due a lot to inherent frugal tendencies, generous family members, a fear of debt, and good luck. While that was working for me, clearly I needed a better plan.
While I had no debt, I was also pretty much living paycheck to paycheck and not worrying about going over budget (I say this as if I had a real budget) because I had an emergency fund set aside to cover any overages.
Except that’s not what an emergency fund is for.
So I did a lot of research, read a lot of blogs, and decided that I needed a plan. I needed to budget. I needed to know what I was spending my money on. I needed to prepare for the future.
I decided to create a blog not only to make myself accountable to others but also to share the knowledge that I gained along the way. I’ve learned so much from my fellow bloggers, and I hope that my readers can find something useful in what I have to share as well.