Why you (probably) shouldn’t pay off your mortgage early

Obligatory disclaimer: I’m not a CFP, fiduciary, CPA, or lawyer. I cannot be held liable for any investment or financial management decisions you make based on my blog rambling.

For me, a mortgage comes with a heavy emotional weight. When I was young, my family went through bankruptcy and we were afraid that we’d lose our house. I remember my mom talking about it a lot, and I was pretty scared of what bankruptcy was going to lead to for us. We were going to be living in our car? But no, my mom was worried we’d lose the car too. What then?!

That’s neither here nor there. Suffice it to say, when we bought our first house, I wanted to pay it off ASAP. The best we could do then was an extra $100/month, which on a 30-year mortgage typically reduces your payoff schedule by 11 years! So we’d pay it off in 19 years instead of 30.

When we sold that house 6 years later and bought our new one, I was… what, 29? Almost 30. And I was looking at our 30-year mortgage and thinking we could pay it off by the time I was 40. Score!

But I was also starting to learn more about personal finance around that time. And over the next 2-3 years, I would start budgeting better and investing more to build our retirement savings. It became increasingly clear to me that paying off our 3.875% mortgage didn’t make much sense when I could put that same money into the stock market for an inflation-adjusted return of 7% compounded over the next 20 years. (And if we just look at the last few years, I’ve been getting more like 15% per annum.)

Then coronavirus came and interest rates fell through the floor. In 2020, we refinanced our house and took cash out of our equity for home improvement projects. We switched from a 30-year mortgage to a 15-year, our monthly payment went up by ~$400, our interest rate dropped to 2.875%, and our total savings on interest will be over $25,000 compared to the 30-year, even with the increased debt from the cash-out refi. We’ll also pay off our mortgage several years sooner than we’d originally anticipated.

I just checked and we could throw everything “extra” at the mortgage and pay it off in 4.5 years. By extra, I mean reducing retirement investments and not going on vacation ever and maintaining a gazelle-like focus on paying off the mortgage. For the sake of clarity, our mortgage balance is currently $142,998.96.

Given the short time-frame, you should use 10% in a compound interest calculator to compare against investing in indexes. 4-5 years is a bit short for averaging index returns, but this is all hypothetical, so let’s not worry about it. Investing everything that we might throw at the mortgage in 5 years only returns $139,196. That’s $3,802 less than paying off the mortgage. So it makes more sense to pay off the mortgage, right? Nope.

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