Typically, when asked whether you should pay off your mortgage early, the usual advice is “no”. This advice can be quite nuanced, and there are situations where it might be beneficial to put a bit more towards your mortgage every month. A common argument against prepaying your mortgage, especially if you have a low Annual Percentage Rate (APR) like below 4%, is that the savings from paying off early—usually around 3.625% annually—are quite minimal when compared to potential investment gains, which usually outpace inflation.
Instead of putting extra money towards your mortgage, consider investing it in mutual funds, which can offer returns around 9%. It’s a much better deal. Debt, especially a mortgage, can feel burdensome, but when managed wisely, it can be a tool for building wealth. If you have a low APR on your mortgage (and you should consider refinancing if you don’t), letting it run its course might be the smarter choice. However, there are exceptions to consider.
When it comes to making extra monthly payments, it can be a good decision depending on your situation. Personally, owning my home has been far more pleasant than renting. The house my wife and I rented was smaller and cost $250 more per month than our current mortgage. We decided to put an additional $150 into our mortgage principal each month. Over our 28-year term, this should save us thousands of dollars. Although investing this extra money in a retirement fund or other investments could yield higher returns, there’s a special significance for me in this approach.
One big reason I pay extra is psychological satisfaction. I’ve always disliked having large debts, and reducing my mortgage debt gives me a clear and tangible goal to work towards. While I’m not as passionate about investing for retirement, my investments are healthy and growing steadily. This might not be the most mathematically logical approach, and perhaps my perspective will change one day, but right now, paying down my mortgage feels satisfying. Paying off debt also contributes to building equity, which helps in wealth creation.
It’s essential to recognize that while dealing with a mortgage in the U.S. is common, it’s not necessarily the best choice for everyone. If you decide to keep your mortgage, letting it follow its natural course can be beneficial, especially with low-interest rates. On the other hand, if the idea of your mortgage bothers you, don’t feel guilty about paying a bit extra each month. Just make sure to invest a significant portion of your money in options that offer higher returns.