The typical response to the question of whether one should pay off their mortgage ahead of time is usually “no”. The explanation is rather nuanced, yielding some cases where it might be beneficial to contribute a bit more towards your mortgage every month. There’s a common argument against mortgage prepayment, particularly for homeowners who secured relatively low Annual Percentage Rate (APR) in recent years, mine is below 4%, as likely yours is too. Paying off early results in annual savings of 3.625%. However, compared to potential investment gains, this is rather minimal, barely outpacing inflation.
Now picture using this extra money to invest in mutual funds instead, offering potential returns around the 9% mark, a significantly better deal. We all struggle with the burden of debt, in this case, a mortgage, but it’s important to remember that wisely managed debt can be a tool for generating wealth. If you’re benefiting from low APR on your mortgage (refinance if not), it might be smarter to let it run its course. That being said, there are a few exceptions to heed.
Deciding to Pay Extra Each Month. My home-owning experience is a pleasant one, far removed from my days of renting. The house my wife and I used to rent was smaller yet cost $250 more per month than our current mortgage. Consequently, I’ve opted to invest an additional $150 into my mortgage principal every month. Over the remaining 28 years of our term, we can save thousands of dollars. Despite that, an even better return could be had by investing this amount into a retirement fund or other investments. However, this approach holds a special significance for me…
Psychological Satisfaction. I have always had a deep-seated aversion to carrying hefty debts. This need to eliminate my mortgage debt gives me a particular motivation—an enemy I can actually see and work hard against to vanquish. I confess that I lack the same fervor when it comes to investing for retirement, although my investments are healthy and growing slowly but surely. I admit this is not the most mathematically logical approach, and perhaps one day my perspective will shift, but for now, I’m committed to tackling my mortgage head-on. I find it rather satisfying! Truthfully speaking, paying off debt is never a bad thing. Plus, every dollar spent on mortgage contributes towards building equity, which aids in wealth creation.
American Equity Purchases Mortgages, but it’s definitely not a route for everyone. If you decided to hold on to your mortgage, it’s wise to let it run its natural course, this is where the low interest rates come in handy. However, if cannot stand the sight of your mortgage, don’t be guilty about paying a bit extra every month. But ensure to earmark a larger portion of your revenue towards investments that yield a higher return.
