Why Graham Stephan Says Paying Your Mortgage off Early Is a Bad Idea

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  • By paying your mortgage off early, you're missing out on deductible interest and the opportunity to invest more money each month.
  • The peace of mind that comes from paying a mortgage off early is enough for some to earn less through investing.

Whether you should pay your mortgage off early depends, in part, on how disciplined you would be about investing.

Real estate agent and YouTube entrepreneur Graham Stephan has some thoughts about paying off a mortgage early. According to the 32-year-old, paying a home off early is almost always a bad idea. Stephan offers the example of a home purchased for $400,000, with an interest rate of 4.2%.

Why paying a home off early is a bad idea

Stephan gave several reasons he believes paying a mortgage off early is not always the best idea. Let's take a look at what he said.

Deductible interest

If you purchase a home today, you can deduct the interest paid on a mortgage up to $750,000. Let's say you earn between $89,075 and $170,050. That would put you smack dab in the 24% tax bracket.

Using the scenario of a $400,000 mortgage at an interest rate of 4.2%, you would pay $16,640 in interest in the first year of homeownership. And because you owe less than $750,000 on the home, the full $16,640 can be deducted from your annual income. And because you're in the 24% tax bracket, that mortgage deduction would save you $3,994 in federal taxes. In essence, Stephan says that the "real" interest rate you're paying is reduced by 24% to under 3.2% due to the tax savings.

Holding onto your mortgage means lowering your federal tax obligation.


According to Stephan, inflation has historically averaged 2% a year. He points out that the money you're paying a little at a time on your mortgage will be worth far less as time passes. Stephan contends that you're paying less than 1.3% interest after inflation is factored in.

As inflation eats away at the value of a dollar, the value of the amount you’re paying in interest is also reduced.

Opportunity lost

Stephan also addressed the cost of directing money toward a mortgage with an effective interest rate of less than 1.3% when just about any investment has the potential to earn you more than 1.3%.

To illustrate his point, Stephan set up two scenarios. In one, you bump your monthly mortgage payment from $1,956 to $3,000 to pay it off early. After 15 years, your mortgage is paid off, and you begin to invest the entire $3,000 you've been paying monthly.

In the other, you keep your monthly payment at $1,956 and focus on investing the additional $1,044 monthly you would have directed toward paying the mortgage off early.

Stephan assumed an annual interest rate on investments of 7.5%. Here's how it turns out after 30 years:

Pay the mortgage off in 15 years, spend the next 15 years investing $3,000 per month Keep the mortgage as is, invest $1,044 per month for 30 years.
You have over $940,0000 in investments You have over $1,200,000 in investments
Source: Author's calculations

By paying a mortgage off early, you may miss out on years of investing.

Advantages of paying a mortgage off early

Stephan acknowledges that there are several reasons a person may want to pay their mortgage off early. Here's a look at what he says.

You have a high interest rate

If your mortgage interest rate is above 6%, Stephan says it may make more sense to pay your mortgage off early than to invest it and earn a little more interest than you're paying.

You probably won't invest the savings

Some people will pay a mortgage off early and immediately begin to invest the money that normally went toward their house payment. For others, it's a chance to pocket the money and have fun. Only you know whether you're likely to invest or spend the funds each month.

Peace of mind

For many, the thought of having a mortgage payment hangs over them like a cloud. If paying a mortgage off early offers you peace of mind and less stress, there's nothing wrong with knowing that the house is yours free and clear.

This debate is nothing new, but coming from a 32-year-old with plenty of time to pay a mortgage off in full and invest, Stephan offers an interesting perspective.

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