Growing up, most of us were told that you need to pay down your mortgage debt as quickly as you can.
At first glance, this makes complete sense. Why wouldn’t you want to pay down the largest debt of your life?
However, with interest rates so low there might just be a better place to put those funds. Not to mention, paying off your mortgage quicker might not exactly help you when you really need it to.
This is going to mean different things to different people. I am in no way suggesting you do not pay down your mortgage debt, but I simply want to lay out some different scenarios.
There isn’t necessarily a right or wrong answer here, it’s all about perspective.
With interest rates being as low as they are right now, there is an argument to be made that paying down 2% debt for instance doesn’t make financial sense. Although to the average homeowner, it still might but I wanted to show you my thoughts.
Consider the following question: are your savings better off being invested somewhere with a 6% ROI (return on investment)?
For example, if you invested $10,000 at 6% a year, that would equate to $600 that you’ve earned in gross profit.
Conversely, if you put that same $10,000 against your mortgage using your lump sum privilege, we would see a much lower rate of return. To be specific, if your mortgage rate is 2% then you would have saved approximately $200 a year of interest.
By investing the money instead, you would have earned $400 more than you would have if you had chosen to pay off that mortgage faster.
Of course, a couple of things need to happen for this to make sense. You must be financially responsible, you need to find a secure investment for your money, and you must be diligent in managing the moving parts.
The idea of being mortgage-free quicker might still sound better in the long run.
Although, as soon as you put those funds towards your mortgage, you lose the ability to leverage them in investments. This might not seem like it matters when you look years ahead into a future where you are then mortgage-free but consider this.
Say something comes up within that time frame that forces you to backtrack (job loss, medical emergency, etc.). The money you put towards your mortgage is landlocked unless you have a Home Equity Line of Credit (HELOC) secured against your property.
Those additional payments you made are not helping because access to funds has become your top priority.
Instead, you could put those funds towards a leveraged investment in real estate, if the market you are in gives you a steady appreciation on real estate. At the very least, you could find a secure investment that would earn you more than double what your current mortgage interest is.
Admittedly, paying down your mortgage does come with a huge psychological benefit. The idea of being mortgage-free or on a path that leads you there sooner gives people a very warm and fuzzy feeling. There is a certain sense of relief that comes with that. It’s also certainly true that most people don’t regret paying out their debts in general.
Looking at it simply, it does make a lot of sense on the surface level. Paying off your mortgage as quickly as possible gives you peace of mind and a guaranteed return on your money.
However, paying out your mortgage faster also has some downsides. Rather than putting more money towards your mortgage, you could generate more money from other investments, and avoid creating dead equity that may not help you when you need it the most.
There is no wrong answer here. I just wanted to layout a different perspective.
Any questions, don’t hesitate to get in touch!