Should I pay off my mortgage?
Written by Mac Pierce, Edited by Brie Pio
It has been quite some time since I last posted a blog. Not to worry! I have one from my wonderful intern Mac Pierce.
Please check out his post below! Enjoy…
You may be wondering if it’s the right time to pay off your mortgage. First, let’s look at the factors we need to consider:
Available cash. Do you have enough liquid assets to pay your debt in full? If so, do you have enough in an emergency fund as well? Do you have any needs coming up you would need cash for, like buying a new car?
Current Interest rate. Did you secure a rate before the 2022-2024 interest rate increases? Is it a fixed rate or variable rate? Think hard before paying off a loan in the 2-3% range.
Are there any prepayment penalties?
Is there any reason you need to maintain a high credit score? Paying off debt could potentially lower your credit score.
Remember, you will still be responsible for paying your property taxes and home insurance premiums.
Pros to fully paying off your mortgage early:
Reducing your regular expenses. If your monthly mortgage payment consists of a substantial chunk of your expenses, you'll be able to live on a lot less once that payment goes away. This can be very helpful if you have limited income or are trying to retire.
Saving on interest payments. Depending on your loan size, interest rate, and length, the interest can be very expensive over the long haul. Paying off your mortgage early frees up that future money for other uses.
Rate of risk-free returns. If your mortgage rate is higher than the rate of risk-free returns, paying off your debt can provide a risk-free return equivalent to that rate. Compare your mortgage rate to the after-tax return on a low-risk investment, like a money market fund. If your mortgage rate exceeds that return, it may be wiser to pay down the mortgage rather than invest.
Peace of Mind. This is probably most important reason, especially when entering retirement. Many people just feel more secure knowing their home is paid for.
Cons to fully paying off your mortgage early:
You need to catch up on retirement savings. If you discover that you aren’t contributing enough money to your retirement accounts, you should consider starting there first.
Your cash reserves are low. Keeping a cash reserve of three to six months’ worth of living expenses is crucial in case of emergency. You may want to build up your cash reserves before paying off the rest of your mortgage.
You carry higher-interest debt. Before you pay off your mortgage, consider paying off any higher-interest loans such as like credit cards, personal loans, and auto loans. Create a habit of paying off debt every month rather than allowing the balance to build.
You could miss out on potential investment returns. This is called opportunity cost. If your mortgage rate is lower than the expected returns of a portfolio invested for the long term, consider keeping the mortgage and investing any extra funds instead. This is particularly relevant if you locked in a low rate before recent interest rate increases. However, with riskier investments, their returns can fluctuate and are not guaranteed.
Possible tax implications. Under our current tax environment, many people find themselves taking the standard deduction on their tax return. However, if you are currently itemizing and deducting mortgage interest, you will want to factor in any potential tax increases.
Other Options:
Rather than fully paying off your mortgage, consider other options to pay down your balance faster.
Option 1: Make Extra Payments
One of the most effective ways to reduce your mortgage balance is by making extra payments. This can be as simple as:
Saving a little extra each month. Even an additional $50 can significantly decrease your principal over time.
Making Biweekly Payments. Instead of monthly payments, consider making half of your monthly payment every two weeks. This adds up to one extra payment per year.
Option 2: Refinance to a Shorter Term
If you currently have a 30-year mortgage, refinancing to a 15- or 20-year mortgage can save you thousands in interest. While your monthly payments could be little higher, you’ll pay off the mortgage sooner and save a ton in interest.
Option 3: Allocate Windfalls Wisely
Use any unexpected financial windfalls—like tax refunds, bonuses, or inheritances—to make a lump-sum payment toward your mortgage. This can significantly reduce your principal.
I hope you have found this information useful! Please talk to your financial advisor if you are considering any of the options above. Or, Book a Call to find out more about Birch Point Wealth Management’s services!
Mac is not an Investment Advisor Representative. This blog is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Please note the publish date of this blog. Financial information, market conditions, and other data mentioned in this post may no longer be accurate or relevant.