Every homeowner wants to pay off their mortgage, but some people want to pay it off ahead of schedule. Doing so frees you from one of the biggest financial obligations people will ever face, but there is an opportunity cost that comes with paying your mortgage early.
The personal finance Reddit community debated when it makes sense to get rid of your mortgage and when it’s better to only make the monthly payments that your lender requires. These were some of the key insights.
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Assess Your Risk Aversion
It’s no secret that you might get better returns in the stock market than what you’re saving in interest. However, not everyone feels comfortable with putting their money in the stock market and may prefer the safety of having a debt-free home.
That was the big takeaway from the top commenter, who suggested that each person consider their risk tolerance.
“If you have it in a lump sum, you could, in theory, put the money somewhere where you get a low-risk return higher than your mortgage rate and net the difference, but these decisions come down to your own preference,” the commenter said. “If the peace of mind of not having a house payment is big to you, paying it off is fine. This is a good problem to have to solve.”
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Consider Future Debt
Paying off your mortgage early gets you out of a big debt, but it may also require that you take out loans to cover other expenses in the future. Those expenses vary for each person, but one Redditor brought up college tuition as something to prepare for.
“What about other goals? Kids’ college, etc., where debt to do that will be much higher than your mortgage rate,” the commenter said.
Keeping money on the sidelines instead of paying off the mortgage can help you avoid taking out loans with higher APRs than your mortgage. While you’ll still pay interest on your mortgage, you can end up owing less money to the bank if your extra cash keeps you out of additional debt.
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The Interest Rate Plays A Role
The interest rate is a key component in deciding if it makes sense to pay off your house now or wait a bit. A record-low interest rate, such as one that is between 2.5% and 4% APR, is hard to get again if you need to refinance. Preserving this low rate and keeping your money may be the better choice, especially if you are comfortable with putting it in the stock market.
However, it is more difficult to justify a mortgage with an 8% APR. Homeowners with that rate may want to pay down the principal more aggressively instead of stopping with the monthly payment.
“Once you get into the 4.5%+, just the cumulative interest is so high it’s hard for me to imagine not trying to get it knocked out,” one commenter said.
“I’m at 3.125%, I believe, so I’m not paying mine down,” another commenter said. “I’m pumping that money into my 401(k), high-yield savings account, and my company stock purchase, which has gone from $40 per share four years ago to over $300 now.”
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