Paying off my mortgage early: Seriously stupid or really responsible?
September 3, 2021
Most people think they know the answer to the question: should I pay off my mortgage?
Their answer is intuitive, shaped by their financial values and preferences. Either “Yes, of course, it’s a debt and my home is the safest place I can put money,” or, “No, of course not, why tie up cash I could put to work more productively elsewhere?”
And they’re both right. So what should you do?
Remember, any decision you make about your mortgage should be guided by your current and future liquidity needs balanced against what other investment opportunities you have available to you. Money you put into your home is much harder to get out of your home. Extra cash you use to pay down the mortgage will no longer be available in the event of an emergency or if a higher returning investment opportunity comes along.
Before you pay off your mortgage, be thorough in considering all the ways in which your money could be working for you – and maybe think twice about whether your home is actually the “safest” place to keep money. You are always only as good as your last mortgage payment. Should you lose your job and become unable to make your payments, you can’t extract any extra money you used to pay down the mortgage. In addition, all you have really gained by putting that money into your home is not paying future interest.
Peace of mind isn't overrated
However, there is a valid emotional component to all of this. If you are someone who literally loses sleep over having a mortgage, then maybe you shouldn’t have one. Sometimes it is okay to make sub-optimal financial decisions if it improves your peace of mind. At Fortunately, our goal is not to force you to become risk loving if you are fundamentally risk averse. We just want you to have a full understanding of the actual risk you are taking and the tradeoffs between different options.
If you decide to put money into your house, consider getting a Home Equity Line of Credit (HELOC). They are often very inexpensive or even free to get and you can use them or not, but they’re nice to have in your back pocket as a credit line in case something goes wrong. Having a HELOC can potentially help you avoid, or at least postpone, a worst- case scenario - where you aren’t able to make your mortgage payments and you are either forced to fire sale your home or the bank forecloses.
For a deeper dive into mortgages, visit the Fortunately Mortgage Guide.
September 3, 2021