Many people suggest that paying a mortgage as quickly as possible is a great financial move. They point to the obvious benefit of avoiding the interest payments that pile up over the 30 years of a typical US mortgage. And it’s true that those savings are immense. Usually, the cumulative interest payments on a 30-year mortgage are more than the balance of the original mortgage itself, sometimes twice or three times the amount. That’s an incredible amount of money.
Paying a mortgage early also instills important spending discipline on a homeowner. Without that discipline, people might spend carelessly or frivolously, or they might rack up consumer debt that must be paid at very high interest rates. So, paying a mortgage early is part of the valuable lesson of “living within your means.”
Moreover, if a mortgage is paid by the time a person has retired, then those mortgage payments will not be a burden during retirement, when one’s income is reduced. In fact, having full ownership of a property will leave the owner with equity against which he or she can borrow for additional expenses in retirement, as needed. Owning that house is like building a second bank account (an immense bank account).
All of those reasons are excellent arguments for paying a mortgage early. However, the story doesn’t end at that point. There are strong reasons against paying a mortgage early, and for many people these outweigh the benefits. Begin with the interest rates that most people are paying today, which are at historical lows. Few of us think of ourselves as big borrowers who can leverage interest rates to our benefit, but that’s what we are. At a time when we’ve been able to borrow hundreds of thousands of dollars for a mortgage at ultra-low interest rates, the smart thing to do is to keep those rates as long as possible and try to find investments that will pay more than the interest rates cost. In other words, a long-term investor can legitimately wonder if the better financial outcome is to spend as little as possible on a mortgage and then invest the rest in the stock market.
The second, and related issue, is that many people are actually paying lower interest than even today’s low rates imply. The reason for this is that mortgage interest is deductible from income taxes. Thus, there’s a benefit to paying interest each year. Why give up that benefit?
Another reason for stretching mortgage payments for their full term is that a person who is straining to make that mortgage payment might be vulnerable to paying much higher levels of interest on other accounts. It makes no sense to aggressively pay a 5% mortgage while incurring an 18% credit card interest rate (the latter of which is not tax-deductible).
Finally, there’s a lifestyle argument to be made. It’s great to be careful with your money, but the purpose of money is to support a lifestyle. Focusing only on paying a mortgage as quickly as possible might lead a person to make short-term decisions that diminish a lifestyle, such as eschewing health care, vacations, or even home repairs. Money is “fungible,” that is, it can be shifted around for various uses. Think carefully about how you want to use your money before blindly devoting it to eliminating a mortgage as quickly as possible.