Don't Pay Off Your Mortgage Early Before You Do This

Your mortgage might easily represent the largest sum of money you'll ever borrow in your lifetime. And you're probably aware that the sooner you manage to pay off your mortgage, the less money you'll spend on interest.

Now, many people can barely afford to keep up with their actual mortgage payments. But what if you happen to be someone who bought an inexpensive home relative to your income? In that case, you might have extra money at your disposal regularly. Or, you might come into a large sum of money from a work-related bonus or inheritance.

Either way, you may be tempted to put your extra cash into your mortgage so you can pay it off ahead of schedule. But before you do that, consider whether that's really a sound financial choice.

Investing could be your better bet

These days, a lot of homeowners are sitting on record-low mortgage rates due to having signed their loans or refinanced them in 2020 or 2021. If you have a mortgage whose interest rate is somewhere in the vicinity of 3%, then you may want to think twice before putting extra cash into your mortgage.

Right now, you can earn 4% or more in a regular old savings account that's risk-free. So until that changes, it generally makes more sense to stick extra cash in the bank than pay off a 3% mortgage ahead of schedule.

However, at some point, savings account rates are bound to drop. Also, you may not have a 3% mortgage rate. If you signed your loan in 2022, you might be paying 5% on your home loan. Even so, investing your extra money could make a lot more sense than putting that money into your mortgage.

Over the past 50 years, the stock market has delivered an average annual 10% return, as measured by the S&P 500. It doesn't make sense to give up 10% to save interest on a mortgage with a 5% rate attached to it. 

In fact, let's say you signed a 30-year, $200,000 mortgage at 7% interest a couple of months ago, and now you've come into a $200,000 inheritance. If you were to pay off your home in one fell swoop, you might save yourself about $279,000 in interest.

But let's say you were to invest that $200,000 in stocks instead. At a 10% average yearly return in your portfolio, in 30 years, you'd be looking at a balance of almost $3.5 million. So in this situation, even with a higher mortgage rate, it actually pays to stick to your regular payment schedule and put your money to work in the stock market. 

A lingering mortgage balance isn't always a bad thing

You'll often hear that it's not a great thing to carry debt, and that it's best to do what you can to eliminate it as soon as you can. But mortgage debt tends to fall into a different category. 

There are tax benefits to carrying a mortgage, and the debt you incur when buying a home might allow you to build equity in an asset that gains value over time. While it's easy to see why you'd be inclined to try to pay off your mortgage early, when you run the numbers, you might realize that investing your extra cash makes a lot more financial sense.

Of course, if you're sitting on a credit card balance with a 20% interest rate that has the potential to climb, then by all means -- use your extra money to whittle it down. But when it comes to a mortgage, paying off debt early isn't always the savviest choice.