Why Paying Off Your Mortgage Early Might Not Be a Wise Financial Move

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Trinity Owen’s Case Study: Paying Off Mortgage vs. Investing

Trinity Owen and her spouse became proud homeowners of a four-bedroom house in East Concord, New York, in 2019. Passionate about becoming debt-free, they started making extra payments on their mortgage. However, they decided to calculate the potential long-term financial outcome of paying off their mortgage early versus investing that money in the stock market.

To their surprise, the potential growth of their investment in the stock market over 25 years at an average annual return rate far outweighed the interest savings from their extra mortgage payments. As a result, the Owens stopped making extra payments. As Owen, a digital marketer, puts it, “We no longer pay a dime more on our mortgage, even though we could pay it off from our investments more than twice over.”

Like many financial planners, the Owens understood that sometimes it’s not financially viable to pay off a mortgage early.

The Unexpected Advice: Maintain Your Mortgage

Despite the common goal of becoming debt-free, sometimes it’s more financially savvy to keep a low-interest home loan than to be aggressive in paying it off. Paying off such a loan early can sometimes hinder your long-term wealth-building strategy, which might involve taking care of higher-interest debts, saving for retirement, or investing in the stock market.

The Benefits of Retaining Your Mortgage

Retaining your mortgage provides several advantages. One such benefit is the flexibility provided by keeping your cash readily available. As highlighted by Melissa Caro, a New York-based Certified Financial Planner (CFP) and founder of digital platform My Retirement Network, paying off your mortgage ties up your money in the house, which you can’t get back when needed. Plus, your mortgage interest may be tax-deductible if you itemize on your taxes.

Keeping Your Mortgage: An Emotion-Driven Decision

While retaining your mortgage might be a mathematically sound decision, it’s essential to understand that monetary decisions aren’t always based on pure logic. Emotions run high when it comes to dealing with debt, and some people find the idea of being debt-free empowering. As Josh Brooks, a CFP with Exponential Advisors in Weatherford, Texas, puts it, “It’s about financial freedom and peace of mind, more than the numbers alone.”

However, letting emotions dictate your financial strategy might lead to lower long-term earnings, a decrease in liquid cash, and slower progress towards other financial goals.

Reframing their approach to mortgage payments has greatly changed Owen and her husband’s perspective on paying interest for necessary purchases. This strategic thinking has allowed them to invest in their online jewelry business and in stocks and local real estate, contributing to their long-term wealth.