What’s old is new. That’s what I thought as I browsed mortgage interest rates this week. Our first mortgage was 7.75% back in the early 1990s, not much different from rates these days. Over the years, one of the most common questions I’ve received from clients has been, “Should we pay off our mortgage or invest?” Over time, my perspective on that question has changed.
When viewed purely from an analytical perspective, this can be seen as primarily a math problem designed to answer the question, “How can we make our money work the hardest?”
With a 2.75% mortgage like we have today, I’d look at the effective cost of the loan, factoring in any tax benefits, and compare that to what type of investment return I could expect if I chose to save or invest the available funds instead of using them to pay down the mortgage. Through that lens, in this environment, it would be hard to make a case to direct extra money toward paying off our sub-3% mortgage. However, I’m just not sure I like that conclusion, and I’m sure I’m not alone.
On the whole, the mortgage math is important, but it’s not the only factor that matters. Let’s take a look at five reasons why you might buck the math and focus your efforts on paying down or paying off your mortgage.
1. Peace of Mind
This resonates with my wife and me. For most families, a mortgage represents their biggest liability. Eliminating that significant obligation can provide a lot of financial flexibility and a definite sense of security. If you are looking at reimagining work or even retirement, a budget that does not include a mortgage payment may allow you to live your dream.
2. Getting Rid of Mortgage Insurance
To me, the word insurance connotes protection and peace of mind. However, with mortgage insurance, it’s actually just an extra expense with no benefit (other than allowing you to get the loan in the first place!). The rules have changed over the years and vary by loan type, so you will have to check with your mortgage servicer for the rules in effect with your specific loan, but making additional payments to the principal could put you in a position to eliminate this fruitless expense.
3. Your Mortgage Stands Between You and a Clean Slate
This point doesn’t truly “buck the math,” but if your mortgage represents your only liability, then deploying your available cash flow or cash to knock it down could make sense. I think high-interest, credit-card debt or even-higher-interest installment loans could be a better target, but if your mortgage is all that is standing between you and being debt free, I can see how that would be compelling.
4. The Budget Benefits Are Substantial
As I noted earlier, your mortgage is likely your biggest monthly outlay. No mortgage would mean freeing up a lot of money, on a month-to-month basis, to use elsewhere. That “elsewhere” could go in a lot of different directions -- travel, transportation, family or just insulation as you create your own vision of financial security.
5. You’ve Got a Good Stash of Cash
I’ve always been a fan of maintaining a robust cash reserve or emergency fund. If you don’t have one, that might be a better place for your available resources than prepaying your mortgage. The good news is, in today’s interest-rate environment, you will be handsomely rewarded, and setting the cash aside would allow you to make your home payment or meet other obligations if, for example, you lost your job. If you have the “cash stash” box checked, then moving forward with a plan to pay down your mortgage could be appealing.
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