Should I Pay Off My Mortgage Early? What We’re Doing & Why

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Asking yourself “Should I pay off my mortgage early?” We did the same thing! Here’s what we’re doing and how we came to our decision.

When you own a home and have a mortgage to pay every month for years (or decades!), it’s natural to want to pay it off as soon as possible so you don’t have that debt looming over you. But, what is the best course of action when it comes to paying off your mortgage?

You have several potential options, and it’s important to weigh them out so you can make the most sound decision when it comes to paying off your mortgage early. If you should at all.

In this post, I’ll walk you through some of the things to consider and show you our own strategy.

Paying Off Your Mortgage Early: Factors To Consider

There’s no one-size-fits-all way to decide this issue since there are many different factors to consider. Before you focus on paying off your house you should have three things:

1. An emergency fund
2. Retirement accounts
3. No other debt

You need an emergency fund for obvious reasons so just because you have money sitting in your bank account that could cover your mortgage doesn’t mean that’s what you should do with it.

You also need to be investing for retirement. 15% to 30% of your income should be going into an IRA and/or 401(k). A paid off house isn’t going to provide for you in retirement.

Lastly, you need to have no other debt. Mortgage debt is the cheapest debt available so if you have any other debt, focusing on your mortgage is literally like throwing money away.

Only after you have all these things should you be asking if you should pay off your mortgage early. A few other factors that may impact your decision include:

Will Investing In Other Ways Be More Financially Sound?

You may find yourself (like we did) in the position of deciding between whether to pay off your mortgage fast or invest. If you are facing this consideration, do the math. Unfortunately, more often than not, the math shows that it makes more sense to invest your money elsewhere (stock market, etc) than putting it towards paying off the mortgage.

Mortgage rates are currently under 3% so paying off your debt will essentially net your money a 3% return. On the other hand, The S&P 500 has returned 8% since 1957.

So if you took the money you were going to use to pay extra toward your house and instead invested it in an S&P 500 index fund you’d be making around 5% more.

Will Your Mortgage Tie Up All Your Cash?

I’m a firm believer in having some sort of cash available as an emergency fund because, well, life. You just never know what’s around the corner. If you tie up all your liquid cash into your mortgage and have an emergency, you might not be able to pay for it unless you sell or take the equity out of your home.

As a homeowner, you should have at least three to six months of expenses saved in a high-yield savings account just for emergencies. This money should be easy to get to when you need it but not so easy that you spend it. The average length of unemployment is 21 weeks so I believe you should have closer to six months of expenses saved, just to be safe.

Consider Other Areas of Debt

If you have credit cards, student loans, medical bills, or other forms of debt that can have higher interest rates, work on paying those off before you work toward paying down your mortgage faster. The goal is to reduce the amount of money you spend on interest.

Also read: Which Should I do First, Pay Off Student Loans or Invest?

These factors will make a large impact on the decision for most people. I’m sharing our experience weighing out all the factors.

How to Pay Off a Mortgage Fast: Our Factors

Here’s a little bit of our story to give some context and real life examples.

In 2015 we read The Total Money Makeover by Dave Ramsey and started paying off our debt in alignment with The Baby Steps. If you aren’t familiar with his plan, it includes 7 steps to guide you through paying off all debt so you can start accumulating wealth and save for retirement.

The very simplified version of this plan is that it recommends paying off all debt (except your home) first and saving up a generous emergency fund before paying off your home.

In our case, we bought a house in 2017 while we were still paying off debt. We were clueless, unprepared, and got a pretty high interest rate and PMI (private mortgage insurance) because of it.

For us, it was a lesson learned: do your research ahead of time so you know what you’re getting into – and if you can find ways to save money!

Even though looking back, we made some mistakes, I don’t regret doing what we did. It was the right move for us and I love our house. Plus, it was a learning experience. One stroke of luck for us is that real estate in our area is skyrocketing so while we made dumb, uninformed mistakes, we also got lucky.

For the past few years, we continued paying off our debt and following The Baby Steps plan. Now our debt is paid off and we have fully funded our emergency fund, so it was time to decide: do we work on the mortgage or something else? Or both?

Should You Pay Your Mortgage Off Early?

Let’s compare the options so you can see how the different factors came into play as we made our decision. I hope walking through our decision-making process regarding paying off the mortgage early will help you walk through this process yourself when the time is right.

Choice 1: Paying Off The Mortgage in 30 Years

The standard home mortgage is usually 30 years. However, you can get mortgages that have shorter terms, say 20 years or even 15 years. The difference is that you will probably have a slightly lower interest rate with a shorter-term mortgage but your monthly payments will be higher since you’re paying off in a shorter time frame.

For us, paying off our mortgage early (in 10 years rather than 30) would’ve meant putting over $2,000 per month toward it.

At that time, we were in the longest bull market in history. That means that the stock market was producing great returns and the economy was sound. We couldn’t take that for granted, and after the events of 2020, I imagine you can understand why.

However, we didn’t make enough income to take full advantage of the stock market and pay off a mortgage fast. So, instead, we focused on maxing out our tax-advantaged retirement accounts, 2 Roth IRA’s, and one 401(k), and making our regular payment on the mortgage.

While that meant we weren’t paying our mortgage off early, we were investing our money in the best way possible.

Also read: 11 Steps to Avoid Burnout When Paying off Debt

Choice 2: Paying Off Mortgage in 15 Years

That strategy was working well for us…until 2020 came along.

Due to everything that was going on both globally and domestically, 2020 brought the end of the bull market. Because we were no longer assured good returns from the stock market, we needed to change our strategy slightly.

The stock market was very volatile and we (like much of the rest of the country) didn’t know what it was going to do. With that in mind, we decided to shift our focus toward investing more evenly between investing in the market and paying off our home.

The drop in the market and the sudden recession that followed caused the government to lower interest rates. We took advantage of those lower rates and refinanced our mortgage, shifting from a 30-year mortgage to a 15-year mortgage.

Refinancing increased our monthly payment by $200 per month and we decreased Travis’ 401k contribution by an equal amount. This simple move to shave those years off our mortgage will guarantee us a savings of $30,000 in interest!

Should I Pay Off My Mortgage Early: Our Current Plan

While the stock market did bounce back pretty quickly we are by no means back to a bull market. The economy is still shaky, so what we’re seeing now could be artificial inflation of the market.

In considering all of these factors, we don’t want to stop investing altogether; however, we also don’t want to invest as aggressively as we did in prior years.

Our current plan is to pay off our mortgage in 15 years and keep it as a rental property if we ever move so we can keep diversifying our income and investments.

Pros and Cons of Paying Off Your Mortgage Early

Now that you know some of the factors to consider and our story, here’s a quick breakdown of the pros and cons of paying off your mortgage fast.

Pros

• Saves interest over time – often to the tune of thousands of dollars
• Eliminates your monthly mortgage payment, which frees up cash that can be used to invest elsewhere or build retirement savings.
• Can create peace of mind because you own your home outright

Cons

• Could prevent you from being able to get better returns from other investments
• Might tie up too much of your available cash so you can’t access it if you need to quickly for emergencies
• Can create stress if you need money quickly but aren’t able to access it

Should I Pay off My Mortgage Early or Invest?

In our case, it made sense to change investment strategies from focusing mostly on investing in the stock market to investing with a more even split between the stock market and paying off our mortgage fast.

However, in your case, if you had the good fortune of locking in a really low mortgage rate when you purchased your home, it might make more sense to invest it elsewhere instead of putting it towards paying off your mortgage.

Note: just as our example showed, it’s important to keep an open mind around your investment strategy and be willing to change your strategy as economic and life circumstances change.

As you consider whether to pay off your mortgage early, it’s important to consider the best options for your financial circumstances and what strategy will help you reach your short- and long-term financial goals in the shortest amount of time.

What do you guys think about paying your mortgage off early?