Should We Pay Off the House Early?
/Is paying off your mortgage early the smart thing to do? It sounds great having that extra cash flow in your pocket each month by not having that monthly mortgage payment. That being said it is not quite that simple, lets see if paying off the house early makes sense for you.
Consider these factors:
Once your mortgage is gone you will be missing out on your mortgage interest tax deduction.
Dependent on your interest rate you may be earning more on investments rather than paying off the bill.
Lets look at an example, say your mortgage is $400,000 and you are in year 5 of your 30 year loan with a 3.5% interest rate. In this example that makes your monthly payment roughly $1,800. If you decided to pay $3,600 a month instead of your $1,800 you would shorten the loan term all while spending less money on the house. This sounds greatly appealing I understand. My goal here is to simply bring math and facts to the table.
As you can see with the increase payment schedule your mortgage will cost you 532k rather than 646k. At the same time you saved more than 100k on interest. The downside to this is the fact that all of this interest can be deducted and create tax savings in the tens of thousands of dollars.
The largest point I would like to address here is the fact that I believe there is a better use for that additional $1800 a month.
Rather than cut down the mortgage what if we took that extra cash and invested it into an index fund? If we took the $1,800 a month and did just that, given a 10% rate of return you would accumulate $368,720.96 in just a 10 year span. Now what if we did it for the remainder of the loan? Investing that extra $1,800 a month for the 25 remaining years on the loan will accumulate a value of $2,388,300.13! That’s one expensive house…
Now this math has changed somewhat in the current marketplace we reside in. With mortgage rates anywhere from 5 to 7 percent the math becomes less appealing and there is definitely a stronger argument to pay down that mortgage. The rule of thumb should be, can I use this money to out earn the 6% I am paying the bank to borrow for my home? If not then consider paying down that mortgage.
One final thought, I am fully aware that owning a home is an emotional decision and not just one to be solved by math. There is something to be said about you owning your home and the dirt under it, not the bank. With that in mind I am not directly telling you to keep the mortgage payment we often find a healthy balance of investing and early payment being the most logical answer for our clients. As I said before, I wanted to present to you the math and logic around the process.
I would love to help you analyze your own situation. Please reach out!