We tend to think debt is bad and want to pay it off as quickly as possible. This can be a great mindset for higher interest debt like credit cards and some student loans. But when it comes to your mortgage, you probably want to think twice about paying it off early.

Mortgages Typically Come With Low Rates

Mortgages are some of the lowest interest rate debt you can find. 

When you pay down your mortgage early, you are avoiding paying interest on a portion of the balance. So the rate of return you are “earning” on these additional payments is the interest rate on your mortgage.

A Better Way To Put Your Money To Work

Paying your mortgage early may seem like a good way to earn a guaranteed rate of return. But when you have multiple decades until retirement, you have a much better chance to earn a greater return by saving and investing the money.

When you consider the compounding power of investing, it becomes clear how much of a difference this can make. For a 35 year old, $100 invested today and earning 10% over the next 30 years would turn into $2,000 at age 65.

Investing in the market comes with risk, but if you do it intelligently, keeping your time horizon in mind, you should come out ahead.

Houses Increase In Value

Houses generally increase in value. And this is especially true over long periods of time. 

So if you’re paying down your mortgage because you’re worried the housing market may crash and you’ll owe more than your house is worth, do some thinking about how long you plan to be in the house. If you’ll be there for the foreseeable future, you’re minimizing this risk already and can focus your money in other areas.

Focus On Flexibility

Building flexibility into your financial picture should be a key part of your financial plan. You never know exactly what the future holds, or how laws will change, or even how your own goals will evolve.

Prepaying a mortgage reduces your financial flexibility. Homes are very illiquid assets – just think about the process you have to go through (and the cost!) to sell a home versus the couple of clicks you need to make to swap out an investment held in your 401(k) or in a brokerage account.

So before making extra payments on your mortgage, think about the assets you own today and how much flexibility you have if your future plans change.

Final Thoughts

When does it make sense to pay off your mortgage early? It’s ok to pay a little extra if you are already saving enough to reach your other long term goals. And if you’re in or nearing retirement, it can be a huge relief to be debt free. 

But when you’re young, make sure you fully understand the tradeoff you are making if you decide to pay down your mortgage early.

Joe Calvetti is a CPA and the founder of Still River Financial Planning, a comprehensive, fee-only financial planning firm that specializes in working with young families and professionals. Click here to learn more about how we work with clients.

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Disclaimer: The information provided above is for educational purposes only and should not be considered financial, legal, or tax advice. You should consult with a professional for advice specific to your situation.