Owing money feels terrible and dirty. Generally speaking, always pay off higher interest rate debt first. Posted February 21, 2020 by Ben Carlson. Should You Pay Off Your Mortgage? Even paying a few hundred dollars extra each month on the principal will make a notable difference. But most people don’t live in the spreadsheet. Like a major international corporation or small business, families seek to invest their cash in assets that will yield the highest risk-adjusted return. Families that have teenagers headed for college should plan ahead, as a university education gets more expensive each year. Now here’s what I’ve been reading lately: 1I’m ignoring the fact that home prices have risen as well. Fifteen years is more reasonable. If everyone simply invested the money they saved by not buying lunch or lattes or nice cars or Netflix they could turn those savings into something real assuming they allowed it to compound over 30-40 years in the stock market. The cost savings of refinancing when you go from 8% to 6% to 3.5% can be a huge boost to your monthly budget. Eliminating this payment can greatly reduce the amount of cash you need to meet monthly expenses. You may begin allocating extra funds toward the mortgage balance so that the debt is paid off sooner than the loan period, or you may even refinance from a 30 to 15 or 10 year loan period, thus lowering your interest rate as well. Let me start by saying this: I hate debt. I manage portfolios for institutions and individuals at Ritholtz Wealth Management LLC. Change your loan period to 15-years, and you pay less than half the interest, about $127,000. The problem with this opportunity cost analysis, other than the fact that 6% annual returns year-in and year-out aren’t realistic, is the element of forced savings involved. Should you pay off your mortgage early or invest the money instead? I prefer the Loan Amortization template on Excel. If you're near retirement, paying off your mortgage early could be a sensible … When a decent retirement fund has been set up and most outstanding debts have been paid off over the years, families can concentrate on the mortgage so that they are completely debt-free when retirement begins. Michael is right — 30 years is an almost unfathomable amount of time for most people. One of the best ways to attain financial independence is to pay off your debt as quickly as possible. After all, there were children to put through college and trips to take during the retirement years. Most mortgages don’t have a prepayment penalty, so you can also make additional payments towards the principal balance. April 25, 2020 at 12:00 p.m. UTC. If you are risk-adverse and financially conservative, it may make more sense for you to invest in your home and pay it off to ensure you will always have a place to live. Let’s say you have a $200,000 mortgage at 5% interest. Here’s the tale of the tape2: Monthly payments jump by $920 but you end up saving more than $290,000 in interest expense over the life of the loan. However, as careers grow and your income increases, funds that could be used to pay off a mortgage should instead be allocated to future education. Input your search keywords and press Enter. Pay off your mortgage as soon as you can, and definitely pay it off before you retire. So the question is: “Should I pay off my mortgage early or not?”. Would you pay off your mortgage payment to save yourself 5-6%, or would you rather continue paying the 6%, invest your cash savings and get a return of 10%, and pocket the difference? In fact, the opposite may happen. What does that mean? I know in 15 years my daughter will be in college and her twin brother and sister will be turning 18 and getting ready to make that leap as well. All of this means that if you're planning to pay off your mortgage -- or other debt -- you can't necessarily count on improving your credit. This will eliminate the need to make mortgage payments out of pension or retirement funds, and Social Security’s monthly allotment. When you consider the tax breaks on interest expense (not as great as they once were but still), on a real basis, you’re more or less borrowing for free with rates hovering around 3%. Limited income: Your monthly mortgage payment may represent a significant chunk of your income. If you could invest your excess cash or savings and get a rate of return higher than your mortgage costs, you would be better off making that investment and pocketing the difference. Continue reading to learn more about additional circumstances and reasons you should or should not pay off your mortgage early. In a similar manner, life insurance should be funded in case the unthinkable happens. 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