3 Reasons Paying Off Your Mortgage Early Doesn't Pay

When you buy a home, you'll likely get a mortgage to do it. Some home buyers don't like having this mortgage because it makes them feel like the bank is the real owner of their house -- or because they just don't want to be in debt and have monthly payments to make. As a result, they may be interested in early mortgage payoff.

While repaying your mortgage loan ahead of schedule may seem like a good idea, the reality is that it's often not the best decision financially. In fact, there are three big reasons why early mortgage payoff just doesn't pay.

1. Your return on investment is probably pretty low

While mortgage rates are currently hovering around 7% to 8%, this is much higher than they have been in years. In fact, many people who borrowed to buy a home have rates in the 3% to 5% range.

When you pay off your mortgage early, your return on investment is the interest saved -- so, it's equal to whatever your interest rate is. If your return is around 3% to 5%, that's well below the return you could earn by investing in the stock market. In fact, the S&P 500 -- a pretty safe investment -- has produced average annual returns of 10% for decades.

Why earn 3%, 4%, 5% or even 8% by repaying your mortgage early when you could get a 10% ROI by just making your payments as scheduled and investing the difference?

2. You'll be tying up money in an illiquid asset

When you pay off your mortgage early, there's another big downside: You're tying up your money in your house. You can't easily access the extra funds you have paid toward your home. If you wanted to get that money back out -- say because you needed it to cover an emergency or a big expense -- you would have to go through the process of getting a home equity loan or you would have to sell the house. Neither of these are quick or cheap.

By contrast, if you don't pay your mortgage early and invest instead, you can sell your stocks whenever you want or need to so you keep your money accessible.

3. You can pay back your mortgage with money that's worth less due to inflation

If you have a fixed-rate mortgage, your interest rate is going to be the same for the life of your loan. But the value of your money decreases over time. This means all of your future mortgage payments are less expensive than the payments you're making today.

Since you'll have a mortgage for a long time, the payments you'll be making decades from now will be made with money that has much less buying power. Let's say your mortgage payment today, in 2023, is $1,500. In 2043, that $1,500 would only buy you the equivalent of $915 in today's dollars (assuming a 2.5% annual rate of inflation). So your mortgage payment will essentially cost you just $915 in the future instead of $1,500.

Since you effectively get a discount on your mortgage due to inflation, there's very little reason to squander that savings by paying your mortgage lender back early.

For all of these reasons, it simply doesn't make sense to pay off your mortgage ahead of schedule. Keep making your payments as planned and invest extra funds you have, and you'll end up a lot better off in the long run.