Pay off mortgage early or invest?

October 7th, 2011 Jayne Sandler
mature couple and financial planner RS

As you begin to count down the years (or months) to retirement, you may be one of the many people who wonder if you should just knock off the remainder of your mortgage balance so you can live debt free.

This is a question many empty nesters struggle with: Should you pay off your mortgage early? Or should you use those extra funds and invest them instead?

Let’s begin by looking at the advantages of paying off your mortgage early.

The case FOR paying off your mortgage early

The first and most obvious reason for paying off your mortgage early is that it will save you money. For every dollar you pay early, you’re “earning” the interest you would have otherwise paid over the balance of the loan period. This means that you’ll end up saving a good amount of money on interest payments. In addition, the money saved is risk-free and guaranteed, as opposed to other investment tools.

Another big advantage of paying off your mortgage early is the peace of mind you will have in knowing you are mortgage free and your home is entirely yours.

With the lower cost of living, the prospect of unemployment or underemployment is no longer so daunting. You can now imagine retiring or taking a job that pays a whole lot less than your previous position without any concerns about losing your home.

To see how long it might take you to pay off your mortgage, check out MidWestOne’s mortgage calculator.

The case AGAINST paying off your mortgage early

On the other hand, by paying off your mortgage early you may be giving up on investment returns that might outweigh your mortgage interest rate. For example, why pay off a 5% mortgage early when you could be earning 8-10% (or more) on that money? (Keep in mind that these types of returns are never guaranteed, while mortgage savings are.)

Also, for many people, their home is a significant portion of their assets. By prepaying, you are adding more stock into property, which could result in too much investment in real estate. By instead investing your money into other financial tools, you are reducing your overall financial risk through diversification.

Another important thing to consider when making this decision is tax deductions. Your tax savings decline the further you get into the loan, as more money is applied toward principal.

Nonetheless, if you pre-pay, you are also reducing the amount of money you could use for tax deductions. Meet with your CPA to ensure you understand the tax ramifications of paying off the mortgage in advance.

There are both advantages and disadvantages to paying off your mortgage early. Make sure you meet with a financial planner before you decide to prepay your mortgage so you can determine if it is indeed the best approach for you.

Jayne Sandler

About the author

Jayne Sandler, Vice President, Mortgage Sales Manager at MidWestOne Bank. She works with MidWestOne Mortgage Lenders to help customers’ homeownership dreams come true.

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