Before we get started, let me be clear: I can't tell you what to do. The "should I pay off my mortgage as quickly as I can?" question is one that comes up often on personal finance forums and blogs, and even though I generally know how the comments will play out, like watching a Law & Order: SVU episode I’ve already seen many times (oh, this is the one when John Stamos impregnates a ton of women to spread his seed then later is stabbed by an exploding knife!), I still get sucked in.
What I can do is outline why some people choose to do it, and others don't. The “do” and “don't” camps are pretty evenly divided, and neither seem particularly interested in flipping the other side.
Why People Pay Off Their Mortgage Faster
- The peace of mind is priceless. If they lose a job, they don’t worry about losing the roof over their head, as long as they can swing the property taxes, insurance, and maintenance.
- The sense of accomplishment and freedom. (Also not too shabby.)
- They can redirect that now-gone monthly mortgage payment elsewhere (eg. to boost savings).
- They weren’t benefiting from the tax deduction anyway. (By the way: the tax deduction is not a good reason to keep a mortgage, especially with the 2017 Tax Cuts and Jobs Act.)
- They just hate debt.
Why People Don't Race to Pay Off Their Mortgages
- Depending on the interest rate, they think they can make more on other investments eg. real estate. (Note: This is me. I am in no hurry to pay off my mortgage as my rate is a smidge above 3 percent, and I’m taking the chance that my money will earn more deployed in the stock market.)
- A large portion of their net worth would be tied up in the residence, making funds harder to access if needed. Maybe you've heard the term "house-rich, cash-poor"? Their net worth will be less liquid, though they could apply for a HELOC.
- Because of inflation, as time goes on, they’re paying the monthly with cheaper dollars.
- Their lender charges a pre-payment penalty.
- They’re underwater.
Still can't decide? Here are some more alternatives.
Make an extra payment a year or pay biweekly. Instead of making 12 payments a year, make a payment of half the amount due every two weeks so you end up making 13 payments a year. Both options reduce the interest you pay over the lifetime of the loan.
Recast. Instead of refinancing, you give your bank a bunch of money toward the principal, and for a fee, it will re-amortize your loan with the current balance, current interest rate, and current term; the result is a lower monthly payment. When I considered doing this, my bank required I pay a minimum lump sum of $5,000 toward the principal and a $250 fee to recast. The bigger the lump sum you throw at the balance, the lower your monthly would be. You don’t pay off the mortgage faster, but you free up your monthly cash flow.
Basically: Ask yourself why you’re thinking of paying your mortgage quicker, consider which reasons mentioned above resonate with you, then do what lets you sleep at night.
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