The Pros and Cons of Each Decision
One of the most common questions our clients ask is, “Does it make more sense to pay off my mortgage or increase the amount I invest?” The answer varies based on a variety of factors, such as your financial situation, your goals and the market environment, to name just a few. To make the most informed decision, we encourage all our clients to consider the benefits and drawbacks of each decision.
Benefits of paying off your mortgage first
- Interest savings – You have the potential to save thousands to tens of thousands of dollars in interest payments over the original life of the loan.
- Increased home equity – As you work to pay down your mortgage, you build home equity that adds to your overall net worth. This equity can help you qualify for refinancing and/or home equity loans, should the need arise.
- Potential for greater monthly liquidity – Once you pay off your mortgage, the funds that would have gone toward your monthly payments are available to spend or invest as you’d like.
- Increased financial security – One of the main reasons individuals choose to pay off their mortgage early is for peace of mind. Should an unexpected financial emergency occur, you don’t need to worry about losing your home if you own it outright. As long as you carry a mortgage balance, your home may be subject to foreclosure should you become unable to make the minimum payments.
Drawbacks of paying off your mortgage first
- Reduced cash liquidity – Your home is an illiquid asset that cannot be converted to cash quickly should an emergency occur. If you choose to pay off your mortgage early, be sure to maintain enough cash in an emergency account to cover any unexpected expenses.
- Fewer opportunities to invest – Any extra money you choose to put toward paying down your mortgage is money you’re not able to put toward other investments. It’s typically unwise to pay down your mortgage at the expense of your emergency fund, your retirement savings or other long-term investment opportunities.
- A lost tax deduction – If you itemize your taxes and choose to pay off your mortgage early, you will no longer benefit from the tax deduction for mortgage interest.
Benefits of investing more
- Potential for higher returns – Although investing carries more risk than paying off debt, it also provides an opportunity for higher returns. The return potential of your investments could result in greater savings over time than the interest savings of paying off your mortgage early.
- More easily accessible liquidity – Should you face an unexpected need for cash, it’s much easier to liquidate an investment in stocks, bonds or mutual funds than it is to sell your home, take a home equity loan or refinance.
- Access to an employer match – Paying off your mortgage early should never come at the expense of contributing to your employer-sponsored retirement plan. If your employer offers a company match and you’re not contributing to the plan, you’re missing out on “free” money provided by your employer. Not only do pre-tax contributions to an employer-sponsored retirement plan reduce your taxable income in the year they’re made but they also grow tax deferred within the account. You don’t want to miss out on the long-term benefit of compounding earnings.
Drawbacks of investing more
- Investment risk – While investing offers the potential for greater returns, it also presents more risk than paying down debt. There’s no guarantee you will make money investing, but there is a guarantee that you will save on interest payments by paying off your mortgage early.
- Not owning your home – As long as you’re making mortgage payments, the bank owns your house. If you don’t make mortgage payments, you risk losing your home to foreclosure.
The decision to pay off your mortgage early depends on a variety of factors, all of which can be explored in conversation with your wealth manager. Together, you and your wealth manager can weigh your options and determine the strategy that makes sense for you.
For more information about the pros and cons of paying off your mortgage early, or for any other financial guidance, schedule a call with a member of our team.
