Analysis

64% of Americans Say It’s Best to Pay Off a Mortgage ASAP. Here’s Why They’re Wrong

The idea of being in debt doesn’t sit well with a lot of people. If you’re one of them, you may be inclined to try to pay off your mortgage as quickly as possible.

The upside of paying off your mortgage ahead of schedule is pretty obvious. The sooner you shed that debt, the less interest you pay.

Also, there’s something to be said for not having another monthly debt payment to make. So the peace of mind alone may be a factor that motivates you to put extra money into your mortgage.

In a recent Quicken survey, 64% of Americans said that it’s best to pay off a mortgage as quickly as possible to get out of debt. But that line of thinking may not apply to as many borrowers today.

When you have a really low mortgage rate

The average mortgage rate as of this writing is 6.82%, according to Freddie Mac. But if you signed your mortgage in 2020 or 2021, the interest rate on your home loan may be less than half of that. And if so, then paying off your mortgage ASAP is something you may not actually want to do.

For one thing, many savings accounts these days are paying upward of 4.00% interest. Savings account rates are variable, so that could change over time. But right now, why would you put extra money into a 3% mortgage if you can earn 4% on your cash by keeping it in the bank?

More: Check out our picks for the best mortgage lenders

Also, when you put extra money into your home, you tie that cash up in an asset that’s not very liquid. And then it might cost you a lot of money to get that cash out.

Let’s say you put an extra $5,000 into your mortgage this year in an attempt to pay it off sooner. What if, a few months later, you need $5,000 for an emergency repair? If you’re forced to sign a home equity loan at 8%, you’re paying a higher rate of interest on that money than on your 3% mortgage.

You can get more mileage out of your money by investing it

It’s natural to want to minimize the amount of interest you’re forced to pay on a home loan. But even if you’re sitting on a higher mortgage rate (say, because you signed your loan more recently), paying it off early may still not make financial sense.

Let’s say you borrowed $200,000 for a home at 6.82%. That means you’re paying a total of $270,156 in interest over the life of your loan. If you get a $50,000 inheritance, you may be inclined to put it into your mortgage and pay off that loan early.

But over the past 50 years, the stock market has averaged an annual 10% return. If you put your $50,000 into stocks and generate that same return, in 20 years, it’ll be worth about $336,000. So even if you’re able to shed a chunk of that $270,156 in interest by putting a lump sum toward your mortgage in the middle of your payoff window, putting spare cash into stocks could still make more sense — even if your loan’s interest rate isn’t so low.

All told, it’s easy to see why you may be inclined to try to pay off your mortgage as soon as possible. But carrying that mortgage instead could actually end up being a savvier financial decision.

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