Buying and owning a home is one of the most rewarding experiences as an adult. This life feat can be amplified once an individual has reached a financial staple to pay off the entire mortgage. For some, this may take years, and for others, it may happen a bit sooner.
Given the historically low-interest rates, many financial advisors would advise against paying off an existing mortgage due to the better economic opportunities through investing your money. To better understand what direction you should take with your mortgage, it’s important to break it all down and understand the underlying risks and benefits before making such a decision.
The Risk of Not Paying Off the Mortgage
The housing market has gone through a period of volatility. While interest rates may be at a historically low percentage today, that may not be true for next month or next year. By not paying off an existing mortgage and seeking an alternative investment option with your money, you are placing trust into an economy that hasn’t seen a recession in almost nine years ago. Because of this, conservative financial advisors will tell you to pay off the mortgage rather than invest in the market.
The Benefits of Paying off an Existing Mortgage
There are dozens of benefits for taking the steps towards eliminating a mortgage debt from your name.
1. Saving Money
Paying off an existing mortgage helps save money in the long run, saving thousands of dollars in interest payments. With the largest monthly expense gone, you can accelerate wealth building.
What is better than the freedom from debt? Once you pay off an existing mortgage, there will be a peace of mind knowing you own the entire is your home.
How do I pay off my mortgage?
When it comes to paying off an existing mortgage, there are a couple of options that must be taken into consideration. If your interest on the mortgage is lower than market rates, then investing your capital in the market instead of making additional payments on the mortgage is a better decision. If you do pursue this route, make sure you consider taxes. Interest payments on mortgages are mostly tax-deductible while money invested in the markets can be taxable. As a result, your tax rate will play an important role in the equation:
Mortgage Rate * (1 – Marginal Tax Rate) < Market Rate of Investment * (1 – Marginal Tax Rate)
Another option is to pay off outstanding debt at higher-interest rates. A common source of this could be credit cards, student loans, or maybe past lines of credit. If you have built up a large sum of debt, consider paying the highest interest rate loan first.
Risks of Investing in Markets
Paying off your mortgage reduces overall risk. Markets rate of returns have always been volatile, and many of the available options tend to place faith and trust in other markets and interest rates. Paying off a mortgage should always come first if your income is very volatile and subject to the changing economic tides. If suddenly you aren’t able to cover their monthly bills, then paying off the mortgage after you have a significant cash reserve might be a good option
Why You Should Seek Alternative Options
While not paying off an existing mortgage can be quite risky, the benefits of investing that money or utilizing any of the other options presented above are immense. In fact, thousands of people around the world have provided first-hand research demonstrating turning $15,000-$150,000 into double its initial value. As Financial Mentor states, “Think twice before paying off your mortgage.” When it comes to investing rather paying off an existing mortgage, here are a couple of reasons why an individual should seek alternative options.
1) Interest Rates
The interest rates are greater on a savings account than the mortgage. If an individual can make greater gains from an interest rate in a savings account or a certificate of deposit in comparison to the mortgage loan interest rate, they could make more money. To put this into perspective, Kristin Wong, on Life Hacker, says that, “If your mortgage interest is 4%, but you think you can get 8% putting your money elsewhere, then, financially speaking, the smarter move is to invest your money instead. Why wouldn’t you take double the return?“ Logically speaking, it then does make sense to invest rather than pay off an existing mortgage.
2) Tax Purposes
This may not come across as a surprise; however, taxes are another major reason why financial advisors suggest not to pay off an existing mortgage. Since mortgage payments are tax deductible, keeping them on the books can provide a significant tax deduction. The only good way of comparing two alternative investments is to include the right tax treatment of those investments and compare them on a net basis.
3) Get Rid of Other Debt
Evidently, if you are carrying other forms of debt, aside from a mortgage, it’s imperative to look at the different interest rates. While the interest rate on a mortgage loan may be low, an interest rate on a store credit will not be as generous. With that being said, instead of spending the extra money to pay off a mortgage, use that money to pay off that debt first. As a rule of thumb, always try to pay off the highest-interest-rate debt first.
The Final Answer Is:
After much considering the different fields of the though, it brings us back to the question: is it smart to pay off an existing mortgage? The truth is, the answer is quite dependent on your situation. While this might not be the right answer you were looking for, take a minute to allow it to settle. Every single mortgage loan is quite different and the rates vary around the country and the world. It’s important to take into consideration what the current interest rates are at and where they are expected to go. There is a much greater risk in not paying off an existing mortgage, you are gambling with an unstable market. With that being said, it does not hurt to take the time to consult with your local CPA or financial advisor. They will be able to provide first-hand and local knowledge to better guide you in the right direction.