Paying Off Mortgage Early: The Good, The Bad and The Ugly

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Paying off mortgage early? STOP and read this article first to make sure you're making the right decision. This may be the biggest financial call of your life.

In this article

Key Takeaways

  • Ultimately, deciding whether it makes sense to pay off your mortgage early depends on your financial needs and your current lifestyle.
  • First, consider your mortgage rate. The lower the interest rate, the less need to pay off your mortgage early.
  • The downside to paying off your mortgage early is that you forgo extra cash to invest for retirement – and this can be a high opportunity cost.

Introducing: Paying Off Your Mortgage Early


So you’ve bought your own house. You’re a homeowner – congratulations!

Now you are stuck with an ugly mortgage. 

Although this kind of debt is considered “good debt,” it’s still a negative number that’s looming above your head.

I don’t like that feeling – and I’m sure many other folks out there don’t like the feeling of being in debt, either.

So now the question begs: Should you pay off your mortgage early?

This is where maintaining a budget will really help you decide if you can afford to pay off your mortgage early. As you may know, two budgeting apps that I’ve recommended in the past are Digit and Personal Capital

Once you have that budget set, it’s time to consider 3 strategies.

Paying off your mortgage early [3 strategies]:

the millennial money woman blog post "paying off your mortgage early three strategies"

Should you Pay Off Your Mortgage Early?


If you want my honest, candid answer: 
No.

Reasons Why I Will Not Pay off My Mortgage Early:

  • I can get a better return on my investment in the stock market (using apps like Acorns or Personal Capital) versus paying off my mortgage (currently at 3%).
  • I am maxing out my retirement account contributions first.
  • I don’t have extra cash to pay down my mortgage principal faster (nor do I want to pay it down faster)
  • My current home will not be my forever home.
  • I’m a big believer in liquidity – having readily accessible cash – and putting everything into my house would tie-up my cash.
  • I’m OK taking the investment risk over being safe and paying everything toward my house.
the millennial money woman blog post "reasons why i will not pay off my mortgage early"

If you had the opportunity to purchase a home (or refinance your home using Shop Rate Market Place or Supermoney Mortgage for instance) in 2020 or early 2021, then chances are that your mortgage interest rates are pretty low.

If they are low – so we’re talking around the 4% to sub-3% marker, then it might make sense to forgo paying down your mortgage faster, and instead use that excess cash to invest in the stock market.

“The younger you are, the more you should invest in the stock market because time and compounding interest will help become wealthy down the road.”

And as I mentioned above, I’m OK taking the investment risk over playing it safe, and paying down my mortgage at an accelerated pace. 

Owning my house out-right, free and clear just isn’t my cup of tea (not yet, at least).

Let’s check out some other questions you need to answer for yourself to figure out if paying off your mortgage early is the correct – and best – step for your financial situation.

the millennial money woman blog post "five questions to ask yourself before paying off your mortgage early"

Paying Off Mortgage Early: 5 Questions You Need to Answer First


As you may have realized by now, paying off your mortgage early is not a decision you should take lightly. 

There are many pros and cons to paying off your mortgage early (see the section below). 

Before you financially (and emotionally) commit to paying off your mortgage early, you should ask yourself these 5 questions below first. 

the millennial money woman blog post "first question to ask yourself before paying off your mortgage early"

1. How does the rest of my financial situation look like?


Typically speaking, if you do not have a well-rounded financial picture before you start paying off your mortgage early, you won’t be ready to handle any of the emotional and financial hurdles that could be thrown your way… because, life.

Before you start paying off your mortgage early, you want to make sure you’re doing the following:

  • You have 3 to 6 months’ worth of living expenses saved in your emergency savings fund (I’d suggest using banks like CIT for your emergency account)
  • You have paid off any high interest debt 
  • You are maxing out your current retirement plans for your retirement

Let’s say you are doing all of these things.

However, if you start paying off your mortgage early, what if you no longer max out your retirement plan contributions?

For me, that’s a red flag.

And remember, if you are still looking for potential emergency savings funds, I would suggest considering the CIT Bank offer.

It’s a great place to store some of your cash and earn more than the average 0.01% that you’d earn at any other savings or checking account.

Hey, even if it’s just a few bucks, it’s at least something for you to keep your emergency savings fund earning some interest.

2. Will I be asset rich and cash poor?

the millennial money woman blog post "second question to ask yourself before paying off your mortgage early"

One of the worst things you can do is be asset rich but cash poor.

It’s not worth the risk.

In other words, you have 90% or more of your net worth tied up in illiquid assets.

If you have a serious emergency and need money but your net worth is tied up in your home… chances are, you’ll have some difficulty accessing cash without drawing a loan of a high-interest rate (such as a Home Equity Line of Credit) or falling into credit card debt.

3. If I don’t pay off my mortgage early, what will I do with the “extra” money?

third question to ask yourself before paying off your mortgage early

Let’s say you decided against paying off your mortgage early.

How would you best utilize your “extra” cash that won’t be going toward your mortgage at this point?

If you would do the following with that extra cash:

  • Spend on stuff you don’t need
  • Spend on extra vacations
  • Spend on luxury items

…Then I would recommend a) against doing those things, and b) that you to use that “extra” cash and pay that toward your mortgage.

Why?

Because it sounds like you don’t have the discipline (and I’m not trying to be offensive here, I’m trying to be honest and help you with your finances) to save and invest that extra cash.

Paying off your mortgage – assuming this is your situation – is technically a “forced savings plan,” if you will.

It’s unconventional – and probably thinking a bit outside of the box – but using that cash to pay off your mortgage as opposed to spending it on vacations or other things that could cause you to go into heavy debt down the road is probably the best course of action, here.

4. What return would I get if I invested my extra cash?

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Chances are, if you invested your extra cash, you’d see a much higher return on your investment than if you were simply to use your cash toward paying off your mortgage.

Two investing platforms I have used in the past are Acorns and Personal Capital. They are effective and you literally have access to your investments at your fingertips (through your smartphone). 

Keep this in mind: As you invest in higher-risk assets (such as stocks), your returns will also increase.

The downside (ie, the risk), however, is naturally worse than if you were to invest in conservative assets (such as real estate).

5. Should I pay off my mortgage or invest?

the millennial money woman blog post "fifth question to ask yourself before paying off your mortgage early"

This is the point where you want to start thinking about how much more [if at all] you could earn if you were to invest your cash in a different investment.

You’d also need to consider the following:

  • Are you a conservative investor? 
  • Do you hate the ups and downs of the stock market?
  • Do you enjoy taking risk and seeing a high return?
  • Are you able to sleep at night if your investment portfolio dropped by 30% or more?

If you believe you are able to stomach the ups and downs that the stock market throws at you – then once again, you should strongly consider investing your “extra” cash in the stock market as opposed to the conservative housing market.

Paying Off Mortgage Early: Pros & Cons


So let’s say you just went through the exercise above and asked yourself “Should I pay off my mortgage early?”

But really, have you ever thought of the pros and cons that come with paying off your mortgage early?

Let’s take a closer look, below to see what you could expect, depending on which way you decide to go. 

the millennial money woman blog post "paying off your mortgage early pros"

Pros – Paying Off Your Mortgage Early

  1. Increased Cash Flow
  2. Interest Savings
  3. Predictable Return on Investment
  4. Less Stress – Peace of Mind
  5. Available Home Equity for future

Let’s go into further depth, below.

1. Increased Cash Flow


After your mortgage is paid off entirely, you won’t have to make another payment for rent. Ever!

That means you’ll be able to save hundreds – if not thousands – of dollars each month that would have originally been used to pay your mortgage.

If have a lot of money leftover, before you stick it into a simple checking account, consider opening up a high yield savings account with CIT Bank.  

The next step is to look at your budget and see how you can allocate your newly increased cash flow (and guys – this is a high class problem!). 

If you haven’t tried budgeting yet, I would suggest taking a look at Digit to help you on your budgeting quest.

Remember this: You won’t see an increased cash flow for a while – or at least until that mortgage payment is paid off entirely. So it could take some time. 

2. Interest Savings


If you pay your mortgage ahead of its actual due date – chances are, you’ll be saving quite a bit of money in interest savings.

“The higher your interest rate, the more money you’ll save in paying off your mortgage early.”

However, if your mortgage rate is as low as mine – which is at 3% – you probably won’t be saving as much money if you pay off your mortgage early versus if your interest rate hovered around the 5% or 6% marker. 

Big Difference. 

To see how much in time and interest you could save by paying off your mortgage early, check out this mortgage payoff calculator.

As you know, mortgage interest rates have dropped quite drastically since 2019 and 2020.

If you are thinking of refinancing or possibly locking in a new mortgage rate, I highly recommend you to check out the following 2 websites:

Both websites compare mortgage rates in the market place – all while taking into consideration your personal situation.

This includes:

  • Credit Score
  • Your home’s location
  • Outstanding mortgage balance

Even if you don’t sign up for a mortgage now – I highly suggest you at least check out your options – for free – using these websites. 

3. Predictable Return on Investment


If you’re someone who loves predictability and hates variation (like me), perhaps paying off your mortgage early might be a benefit for you, because you know exactly what your return on investment will be: Your mortgage interest rate.

Sure, you may lose some of the tax advantages of your mortgage interest rate – but in all reality, with the higher standard deduction in 2020, it’s very rare that the average American will need to itemize their tax deductions (which could then allow that person to take advantage of the mortgage interest tax deduction). 

4. Less Stress – Peace of Mind


Who here likes living with debt?

I doubt many hands went up… and I certainly hate living with debt as well.

So, if you are looking to pay off your mortgage in an effort to increase your peace of mind and actually be able to sleep at night – this might be a compelling reason to start paying down that debt.

Trust me, I’ve met older couples who told me they stayed up at night because they couldn’t handle having a $100,000+ mortgage looming over them. 

They hated debt. 

Debt impacted their wellbeing. 

That’s when we knew it was time to start paying down that mortgage at an accelerated rate.

Remember this: It all comes down to your personal situation on whether paying off a mortgage is the right next step for you.  

5. Available Home Equity for Future Use


Lastly, one of the cool aspects of paying off your mortgage early is that you’ll build up a large chunk of home equity for yourself.

That home equity is always useful, especially in the case you need to tap into your home equity at a future point. 

One tool I have recommended in the past is utilizing Shop Rate Market Place to withdraw some of the equity in your home. 

They literally ask you a 60-second quiz to asses your current personal financial situation and then, assuming you qualify to tap into your home’s equity, you’ll be able to cash-out a portion of that equity!

Of course, if you want to stay out of debt and are paying off your mortgage for that very reason in the first place, it probably will not make sense to obtain a HELOC – which is just another form of debt.

Now that we have checked out the pros, let’s consider the cons of paying off your mortgage early.

the millennial money woman blog post "paying off your mortgage early cons"

Cons – Paying off Your Mortgage Early

  • Decreased Cash Flow
  • Lower Retirement Savings Contributions
  • Asset Rich & Cash Poor
  • Less Asset Diversification
  • Losing out on Higher Investment Returns
  • Real Estate Market Determines Value of Home

Let’s go into further depth, below.

1. Decreased Cash Flow


Because you’ll be using a larger chunk of your income to pay toward your mortgage, it’s only normal to see your cash flow available to you in the 
present decrease quite drastically. 

In fact, you’ll likely have much less cash to do the following:

  • Invest for your retirement
  • Build an emergency savings fund
  • Pay off debt 
  • Spend money on discretionary expenses

So, it’s important to make sure you are emotionally and financially ready (ie – no debt, and still continuing retirement contributions) to make that commitment and pay off your mortgage early.

My ultimate tip here is if you do commit to paying extra toward your mortgage: Budget.

Like I said earlier, if you haven’t budgeted yet, try using Digit. They will do the trick to help you set your sights on your financial goals.

2. Lower Retirement Savings Contributions


This point ties in with the previous one – ‘decreased cash flow.’

If you are considering paying down your mortgage at an accelerated rate – I would caution you first to see how that pay down would potentially impact your retirement savings rates.

For example, if you are maxing out your 401(k) currently (which is $19,500 for 2020, under age 50) and you are maxing out your IRA contribution (which is $6,000 for 2020, under age 50) – how would your accelerated mortgage pay-down plan impact your retirement contributions?

Remember this: When you’re young – you have time on your side. 

If I were you – I would not want to waste my time paying down my mortgage (only to get a 3% return, in my case) where I could be investing that money in the stock market and receiving a 7% annually compounded return – for the next 45+ years of my investing career.

“I will always have time to pay down my mortgage later. Now I want to focus on investing.”

3. Asset Rich & Cash Poor


The first time I heard this phrase was when I was dissecting a client’s multi-million-dollar portfolio.

These clients were probably worth $5 million dollars. 

And surprisingly, they only had $100,000 combined in their savings, investment and retirement accounts… which equates to about 2% of their overall net worth was liquid or somewhat liquid.

The rest of their net worth?

Tied up in real estate.

the millennial money woman blog post "asset rich and cash poor example pie chart"

And you know what scared this couple the most?

Knowing that if they had a major emergency, they would have to take on debt. And a lot of it. 

4. Less Asset Diversification


Similar to the point above, asset diversification is a pretty important concept.

“The more concentrated your net worth is in 1 asset or 1 asset category, the more you expose yourself to risk.”

The real reason behind asset diversification is to lower your risk of exposure to a single asset class. 

Asset diversification also helps you maximize your potential investment returns because you invest in multiple different sectors that would respond differently to the same occurrence (such as the 2008 Great Recession). 

As a quick, surface-level example:

  • Stocks (especially small caps) underperformed massively in 2008 (by around -34% return)
  • Real Estate underperformed massively in 2008
  • REITs – also known as Real Estate Investment Trusts – thrive
  • Global bonds outperformed in 2008 (returning around 12%)

5. Losing out on Higher Investment Returns


As you may have heard me reference earlier, by investing in real estate, chances are, you’ll likely miss out on higher returns that could be generated by the stock market.

“Adjusted for inflation, the average annual return for the S&P 500 lies around 7%.”

Compare this statistic with the average return on a rental real estate asset between anywhere from 0% to 3%.

And keep this mind: Investing in your home (or deciding to rent out your home, down the road) is not a hands-off situation – as it is with stocks. 

If you decide to invest your cash in your home, you’ll have the following costs:

  • Insurance
  • Property taxes
  • Repair costs
  • Maintenance costs

If you feel like you’re missing out on home owner’s insurance – which is a 100% must – then I highly suggest for you to check out Kin Insurance.

Kin Insurance is a great company for the regular homeowner. If you are a millennial and are buying – or have already bought – your starter home, this is literally the insurance company for you. It’s easy, affordable and fast to sign-up. 

Kin insurance is available in the following states:

  • Alabama
  • Florida
  • Georgia
  • Texas
  • California (will be very soon, waiting on regulatory approval)

If you decide to invest in rental real estate – which is a route that a lot of my mentees want to pursue – there are many [costly] factors that play into your ultimate rate of return as well.

You’ll have to:

  • Take care of the renters 
  • Handle disputes with the renters
  • Hire a property management company that typically charges north of 10% of your monthly rental income 
  • Take care of any repairs
  • If your renters leave, you’ll have to take care of the vacancy bills and deal with the stress of filing that vacancy

It’s not an easy task to rent out a home (if this is the route you decide to go).

If you are considering renting out your home, one thing you’ll likely want to do is to hire a rental management company for help with:

  • Legal purposes
  • Contractual purposes
  • Dealing with renters and collecting rent

All Property Management is my go-to property management company.

Not only do they help you with renting out your property All Property Management is a marketing channel for you to advertise your rental properties in a fairly hands-off way.

Check out All Property Management here.

 

6. Real Estate Market Determines the Value of a Home

One of the major reasons why you don’t want to have so much of your net worth tied up in your home is because you want to avoid an occurrence similar to that of 2008 – where home prices fell drastically and many were left with a negative home value. 

“Imagine if you had poured your cash into your home – only to see the home value plummet – something that’s completely out of your control.”

Ouch.

And that’s exactly what happened to so many families that lost their homes in 2008.

They had no control over the home value price fluctuations and literally saw their home prices tank…

How to Pay off Your Mortgage Faster [3 Strategies]

  • Refinance
  • Increase monthly payment
  • Utilize bonus / extra money
the millennial money woman blog post "how to pay off your mortgage faster"

There are, of course, several strategies to pay off your mortgage faster, should you decide that this is the right option for you.

Let me illustrate some basic concepts behind these 3 strategies.

1. Refinance


You could always refinance your current mortgage to a mortgage with a shorter term.

I’ve used these 2 websites in the past to see my available loan interest rate options. If you are serious about refinancing, I would suggest by starting here:

 

Let’s use the following data as an example on how I would shop for a new mortgage:

Current Scenario
Home Value
$200,000
Down Payment
$40,000 (equal to 20%)
Living in Home for:
2 years
Original Mortgage Term:
30 years
Years Left on Mortgage:
28 years
Original Mortgage Interest Rate:
4.5%
Monthly Payment (Principal & Interest):
$1,278

Now, let’s say you received a major raise and have made the decision to pay off your mortgage faster. 

This is what you do: You can refinance your mortgage to a much shorter term. 

Typically, mortgage terms include:

  • 30 years
  • 20 years
  • 15 years
  • 10 years

Let’s say you are looking to reduce your mortgage from a 30-year term (with 28 years remaining, per the current scenario) to a 15-year term.

Current Scenario
Home Value
$200,000
Down Payment
$40,000 (equal to 20%)
Living in Home for:
2 years
Updated Mortgage Term:
15 years
Years Left on Mortgage:
15 years
Updated Mortgage Interest Rate:
2.8%
Monthly Payment (Principal & Interest):
$1,557

Notice how 2 things were influenced quite heavily with this refinance to a shorter-term:

  • Your interest rate dropped because you’re shortening the term
  • Your monthly payment increased 

I typically only recommend pursuing this strategy if your cash flow is able to supplement the following, first:

  • Your current lifestyle
  • Maxing out your retirement plans
  • Continuing your current savings strategy to your investment and savings plans
the millennial money woman blog post "pros and cons to refinancing to a shorter term mortgage"

If you are still able to stick to your current financial plan, then refinancing to a shorter-term so that you can pay off your mortgage early could be the way to go.

2. Increase Monthly Payment


This is the strategy for you if you want to hedge (limiting the upside and the downside).

Here’s what I mean:

  • You continue paying your monthly mortgage bills.
  • You don’t refinance to a shorter-term, because then your required minimum monthly payments increase.
  • If you have a bad month and are not able to make the higher, minimum required monthly payment (for a refinance to a shorter-term), then this will go against you.
  • However, if you maintain your current mortgage term and simply increase your monthly payment, this will count for you.
  • If you have a bad month, then you simply resort back to your minimum required monthly payment (which is lower than what your minimum required monthly payment would be if you had refinanced to a shorter-term).

There have been instances where mortgage companies actually fine you for paying more than what was required of you to pay.

Pretty crazy, huh?

3. Utilize your Bonus / Extra Money 


What I mean by this point is pretty simple:
 As you come into extra money throughout your career, instead of spending that money on vacations or cars, for example, consider using that “extra” cash toward paying down your debt in large lump sums.

This extra money could come in the form of:

  • Bonus or holiday money
  • Inheritance money
  • Signing bonuses
  • Business pay-outs

The point is this: You want to make sure you develop a solid plan to pay off your mortgage early before committing to it.

Should You Pay Off Your Mortgage Before You Retire?


Although I won’t get into too much detail in this post, I do want to address this question, that I’ve heard many times.

Now, I know you are likely of the millennial audience, but retirement will come faster than you know.

Trust me, the years will fly by and you’ll be left wondering whatever happened to that time?

So, it’s better to prepare now and answer the question: “Should I pay off my mortgage before I retire?”

Here are my points to consider if you are asking this question for yourself:

  • Paying off your mortgage before retirement will help reduce stress and is a major achievement
  • You do not need to pay off your mortgage before retirement
  • If your mortgage interest rate is low, consider continuing with your minimum monthly mortgage payments
the millennial money woman blog post "should you pay off your mortgage before you retire"

However, I do want to throw out this caveat: I have discussed this question with many couples, who were just on the brink of retirement. 

Although they didn’t have to pay off their mortgage – they insisted.

Why?

Because having debt looming over their heads while not earning money caused them to lose their peace of mind. 

And honestly, I probably wouldn’t be able to sleep, either if I had a mortgage and was about to retire tomorrow. 

It wouldn’t go over well with my husband, either.

What Happens When You Pay Off Your Mortgage?


When you pay off your mortgage, first of all – Congratulations!

It’s not every day where you are able to say you live in your own place – actually your own place, and not the bank’s place.

You’ll receive a few things when you pay that final mortgage payment:

  • Official statement illustrating you have satisfied all loan payments
  • A canceled promissory note (which is a document you signed when you took on the mortgage, in the beginning)
  • Typically, a certificate of satisfaction
  • Your home’s deed, which means you are officially the sole owner of the house

Closing Thoughts


I know that many people do not like debt.

Many ask themselves, “should I pay off my mortgage early?” to which I would personally suggest considering all of your options.

Why would you want to lock up your cash in an illiquid asset, gaining only a 3% return (or the equivalent to your mortgage interest)?

Instead, you could be investing that “extra” cash either through your retirement accounts or by investing that cash through some easy-access applications such as Acorns or Personal Capital.

“Remember, if you invest in funds such as the S&P 500 Index Fund, you could see an average 7% return.”

So, if you’re asking me: I would continue paying the minimum required mortgage payment toward my home and invest everything that I can afford toward my investment assets and retirement assets.

Of course, it’s a personal decision and I can only provide you with the facts.

All I can say is that if you consistently invest in the stock market now – the younger you are – the more your bank accounts will thank me later!

How do you feel about paying off your mortgage early?

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Fiona Smith
Fiona Smith
The Millennial Money Woman was founded by Fiona Smith. She holds her Master of Science Degree in Personal Financial Planning and has co-founded a local non-profit community teaching financial literacy to young professionals.

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