To get it out of the way at the start, if this were simply a math problem, there would be no debate. It will almost always (like 99.99% of the time) make more Mathematical sense to invest the money than to pay off your mortgage early. When you pay off your mortgage it is an awful lot like making an investment with a guaranteed rate of return equal to your interest rate. At the cost of borrowed capital since the financial crisis, that’s not a very attractive rate of return, especially considering the performance of the market over that same period of time.
Don’t forget that this is not a zero-sum game. Just because you’re making some extra payments on your mortgage doesn’t mean you’re staying out of the market. It’s a perfectly fine approach (and the one my wife and I have chosen) to make some extra principal payments toward your mortgage balance while still investing a large portion of our money into a diversified portfolio of mainly equities.
By paying off your mortgage early, you are investing in security and peace of mind, not doing a math problem. Personal finance is not a math problem. Personal finance is about putting yourself at peace with your finances. If you feel like you want to travel the country doing odd-jobs in an RV for the rest of your life you’re going to have a different set of financial priorities than a 66 year old widow who simply wants to have her bills paid and have enough left over to spoil her grandkids.
Whether or not you need to pay off your mortgage early comes down to your individual tolerance for risk, and your goals. It is impossible to make a blanket statement that would apply broadly to huge swaths of people but generally, those who are more risk averse would do well to pay off their mortgage early. Those who are comfortable with leverage can be a little more relaxed about pursuing an early pay-off.
It’s also important to consider that simply because your mortgage is paid off does not mean that your housing costs go away. You still must maintain your home. That means HVAC, new roof, general maintenance. None of those costs go away just because you have your deed free and clear. You’ll still be responsible for your home insurance costs, and you still will be responsible for your property taxes. Since those items will no longer be held in escrow tied into your mortgage, as most people arrange, it’s best to budget those things out in 1/12 installments to run all year into a separate savings account. For many people with small mortgage balances, you may find that the above factors actually make up the vast majority of your housing costs.
Still unclear about whether you’re a risk averse person or someone who’s comfortable with leverage? Still on the fence about whether you should start making extra payments? I find it a helpful exercise to consider the following hypothetical scenario. If you own a home, regardless of whether you have a large balance against it, or it’s completely paid off, imagine for a moment that you own it free and clear. Now imagine that I were to offer you 5 times your home’s appraised value (regardless of what the value is for this exercise) at today’s current 15 year mortgage interest rate (roughly 3.5%). You could take that money and invest it in the market. Would you take the deal?
If you said yes to that proposal, it’s safe to say you’re an investor who is very comfortable with leverage who may have more of a risk of missing out on returns than someone who would value the security of living in a paid off home. If you recoil at the thought of that kind of leveraging up on your personal home, you may just be one of the many people who value the security and sound foundation of a home you own outright more than you fear missing out on some returns staying out of the market.
Neither approach is right or wrong, but simply a matter of what is right for You and Your family. Take stock of all the factors in your life before you dismiss the idea of paying down your mortgage early out of hand as “un-wise” simply because the math doesn’t necessarily add up. In this case 1+1 does not Always equal 2.