The 2 Big Reasons We've Stopped Making Extra Mortgage Payments
by Christy Bieber | Updated July 19, 2021 - First published on April 16, 2021
Paying extra on our home loan doesn't really pay off.
For a long time, we made extra payments on our mortgage.
We did so even though it generally doesn't make financial sense to pay off a home loan early -- you can get a better return on investment elsewhere. Still, we wanted to be debt free sooner rather than later. We were already investing quite a bit, so we devoted some extra cash to our monthly home loan.
Last year, we stopped making extra payments -- likely for good. And there are two big reasons we made that choice.
1. We refinanced to a lower-interest loan
When you pay off a debt early, your return on investment is the interest you save.
Since mortgage interest rates are generally well below what you earn by investing in the stock market, you're usually better off investing instead of paying off home loan debt ahead of schedule.
Despite this basic mathematical reality, we still made extra mortgage payments when our rate was around 4%, because we liked the idea of not having this loan any more. But we refinanced our home loan when rates hit record lows, and we now pay just under 3% interest on our home mortgage.
With such a low rate, I really can't justify devoting extra money to the mortgage any more, even if the idea of being debt free feels good.
2. We don't want to lose our tax deduction
My husband and I itemize on our taxes, so we can deduct mortgage interest. If we pay off our loan early, we lose this deduction.
We decided not to do that, since it means the government is in a sense subsidizing our mortgage costs. We also think our taxes could go up in coming years, which would make the value of the mortgage interest deduction even greater.
You could argue that it doesn't make sense to pay interest when your tax deduction doesn't fully cover what you pay. But, looked at another way, the deduction makes our already-low interest costs even lower, since we pay the interest with untaxed dollars. That ends up making the difference between mortgage payoff and potential investment returns yet greater.
Should you make extra mortgage payments?
Becoming mortgage free is an ambitious goal, one I really wanted to reach ahead of schedule for a long time. But it's essential to look at the math.
If you obtained a mortgage or refinanced recently when rates hit record lows (or you plan to soon), then paying down mortgage debt early makes less sense than it did before these lows. That's especially true if you're claiming a deduction for your interest costs.
Instead, invest your money, and be sure to take advantage of tax breaks and favorable tax rules that can help you grow your wealth.
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