Experts weigh in on whether to pay off your mortgage early
Paying off a mortgage is a huge accomplishment, and it’s a cornerstone of financial independence. Homeowners who don’t want the shadow of a mortgage payment hanging over them for decades are eager to map out a strategy for tackling their mortgage debt for good. But other homeowners might be better served putting their cash to use elsewhere, such as higherreturn investments or retirement savings.
Three financial experts weigh in on the ever-evolving debate on whether you should pay off your mortgage early — or put your money to work in other places. Let’s dive in.
Everyone agrees: Tackle mortgage debt last. Before you even think about paying off your mortgage early, financial advisers say you should get rid of high-interest debt, student loans and other sizable debt. Two other key areas that many people shortchange or neglect are their retirement and emergency savings.
A recent Bankrate study shows that nearly half of working adults (48%) are saving something, but no more than 10% of their annual incomes. Only 1 in 6 employees (16%) say they’re saving more than 15% of their yearly earnings.
Evaluating how best to put your money to work: Pouring money into a house that you don’t plan on living in for more than five or 10 years ties up a good chunk of your liquidity for the foreseeable future. That probably won’t be in your best interest, especially if your mortgage carries a low interest rate, says Helen Ngo, CFP, founder and CEO of Capital Benchmark Partners in Atlanta.
“Look at where else you can put your money so that it works for you,” Ngo says. “Your interest rate plays a factor in the decision, and you have to weigh the spread in rates.”
For example, a 30-year mortgage with a 4.5% rate is still super cheap compared with the 8% to 9% that people paid in the 1990s, Ngo says.
Douglas Boneparth, president of Bona Fide Wealth Management in New York City, points out that if you have a mortgage rate near 4%, but you can get a 6% to 7% return on a diversified investment portfolio, paying off your mortgage early won’t make sense on paper.
“The spread between your mortgage interest rate and what you can conservatively assume by investing your money might influence how you allocate your savings across any large debt,” Boneparth says.
How emotional baggage of debt factors in: Debt is a heavy topic. People feel defined by it, and that comes with considerable emotional baggage. Their feelings about debt — even carrying a mortgage long term — can override any financial considerations of putting their money to work elsewhere.
“It’s easier to think, ‘Hey, I’m debt-free’ instead of how to diversify an investment strategy,” Boneparth says. “But you have a choice to make. People are shooting from the hip instead of crunching the numbers.”
Your age and appetite for risk matter too.
The younger you are and the more money you earn, the more you can afford to be aggressive with investment risk. But that appetite for risk dwindles as you get closer to retirement age, says Richard Barenblatt, a mortgage specialist with GuardHill Financial Corporation in New York City.
“There are situations where not having mortgage is good,” Barenblatt says. He adds that knocking out your mortgage ahead of schedule makes sense if you’re retired or you don’t need the tax benefits, which are less robust under the new tax law.
“Being debt-free is the holy grail of financial security, and that’s ultimately what a retiree is working toward,” Barenblatt says, adding that as people age, they’re more afraid of running into financial trouble that could take the roof from over their heads. “It’s a common perception as people get older, and that overrides any other lucrative (money-making) opportunities that come their way.”