Is It a Good Idea to Pay Off Your Mortgage?

Like most personal finance decisions, it depends.

I’m a financial advisor, and one of the most common conflicts of interest for advisors arises around this idea of paying down your mortgage early.  One prominent financial advisor has said for years that you should get the biggest and longest (fixed rate) mortgage you can get on a house that you can afford (I’m paraphrasing).  The idea is that you borrow the money presumably at a lower interest rate than the rate of return you are likely to earn on a diversified investment portfolio over the term of the loan, generally 30 years.

The conflict I mentioned earlier comes into play as advisors, most of whom are compensated to some degree on the amount of assets they manage for you, might seem to have an incentive to discourage pulling assets from your portfolio to pay off the mortgage.  By pulling a chunk of your money out of the portfolio being managed, the advisor is likely to take a pay cut.  Most of the advisors I know manage this conflict in a fiduciary manner in the best interest of the client; nonetheless, the potential conflict exists.

Some advisors have chosen to eliminate this particular conflict of interest by operating under an “advice only” flat fee model or by simply not charging for asset management if they do provide that service (full disclosure, I operate my practice under a flat-fee advice only model and do not charge for or even offer asset management.  I simply provide investment advice on your existing investment accounts).

There is a peace of mind that comes from being completely debt-free, including the mortgage, that is hard to put a price on.  Owning your home outright is a good feeling for sure.  However, there is flexibility that comes along with maintaining an affordable mortgage.

So, what’s the right way to go?  Well, it depends.

Here are some of the arguments in favor of paying off the mortgage early:

• • • You will save money. By paying off the mortgage early, you could save tens of thousands of dollars in interest payments.
    • Frees up cash-flow. Eliminating that monthly mortgage payment frees up significant cash to do other things (or maybe even to take a less stressful job that pays a little less).
    • Peace of mind. Your emergency fund will go a lot further without the burden of a monthly mortgage payment if you lose your job.  And you don’t have to worry about losing your home.

Some of the arguments against an early mortgage payoff are:

• • • You can’t eat your house. The money used to pay off the mortgage is now tied up in the house.  If you need that money, you will likely have to sell the house.  Getting another mortgage may be difficult at this stage if you’re in a situation where you NEED the money.  Banks are much more willing to lend to those who don’t really need it.
    • You may want to do other things with your money that you can’t do once the money is tied up in the house.
    • The mortgage gets “cheaper” over time. As the cost of most other goods and services (and hopefully your salary) rises with inflation, your mortgage payment will stay the same (assuming you have a fixed rate loan).
    • Mortgage interest is deductible (if you itemize). This deduction is harder to come by with the higher standard deduction, but if your itemized deductions exceed the standard deduction, you could reduce your taxes a bit by deducting the interest.

None of these arguments are compelling enough on their own to make an emphatic case either way.  The decision to pay down the mortgage early or carry it out to the full term really comes down to personal choice.  Does your mortgage cause you to lose sleep at night?  If so, maybe you should work on paying it off early to give you peace of mind around knowing you are totally debt free.

But whether you pay off your mortgage early or just make the required monthly payments, make sure your emergency fund is sufficient to cover your non-discretionary living expenses (which includes housing) for a reasonable number of months based on your circumstances.

Yeah, unfortunately, it still depends!

If you’d like to discuss this or other personal finance topics, please reach out and schedule a free consultation.