Paying Off a Mortgage Early

The narrative on whether or not to carry debt changes depending on which financial guru you are taking advice from. Some financial experts recommend putting your money where it is likely to gain the greatest returns. Others are more risk averse and encourage followers to eliminate debt as soon as possible. This leaves many people unsure of where to put their money. Should they aggressively pay off debt? Should they invest as much as possible to benefit from compound interest? Here are some things to consider when thinking about whether or not to pay off your mortgage early: 

Benefits of Paying Off a Mortgage Early

  • The mortgage payment is gone and the homeowner is only responsible for taxes and insurance. 
  • There is no longer interest paid on the loan. Although interest rates are currently very low, one may still pay hundreds of dollars each month toward interest until the loan is paid off. 
  • Frees up monthly cash flow to be used in other places.

Drawbacks to Paying Off a Mortgage Early

  • You lose the mortgage interest tax write off. 
  • If money for payoff is withdrawn from a high yield investment account, that money isn’t earning a higher interest rate. 
  • Reduces available liquid assets to cover life’s emergencies.

Those are the general pros and cons, but in order to really determine whether or not to pay off your mortgage, you need to do the math. In the tables below, our example assumes the amount to pay off a mortgage is $100,000. There are 10 years or 120 payments remaining at 5% interest (fixed rate). The $100,000 is currently in an investment account that is earning approximately 5% per year.  

Mortgage 
Balance
Interest 
Rate
Payments RemainingInterest paid over 10 years on mortgage balance
$100,0005%120$27,278.62

Remember, depending on the tax situation, that $27,278.62 may be deductible (check with your accountant). Now let’s see how much that $100,000 could continue to earn in the investment account:

Balance in 
Investment Account
Average Interest 
Rate per Year
Gains over 
10 years
$100,0005%$64,701

In this case, the math is in favor of keeping the money in the investment account. But another approach is to balance paying off the mortgage while still maintaining the balance in an investment account. It doesn’t need to be a big chunk – even paying one or two more principal payments per year can accelerate the payoff. Alternatively, chunks of cash can be used to buy an additional real estate investment which may yield even more than the investment account (talk to me for more info!). 

These charts, of course, do not reflect the unique situations you may find yourself in over the course of 10 years. There is no one-size-fits-all answer for everyone. Speak with a trusted financial advisor or your accountant to see what the best decision for your personal financial goals.