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Why You Might Not Want to Pay Off Your Mortgage Early

Matthew Frankel, CFP, The Motley Fool

Many financial planners, myself included, often advise people against paying extra toward their mortgage -- especially if their mortgage has a historically low interest rate like many originated in recent years do.

There are some good reasons for this. For starters, most people have other debts that should be higher on their priority list. Furthermore, you can generally get better long-term value for your money by increasing your investment contributions as opposed to paying off your mortgage early. With that, here's a deeper dive into why it may not be a great idea to pay your mortgage early, as well as a few situations where accelerated repayment can make sense.

Miniature house with stacks of coins next to it.

Image source: Getty Images.

Prioritize higher-interest debt first

I often encourage consumers to prioritize debt repayment in terms of interest rates. Obviously, continue to make required payments on all debts, but when it comes to extra cash that you want to put toward debt repayment, be sure you're putting your money to work in the right order.

For example, if your mortgage has a 4.5% interest rate, it really doesn't make sense to pay any more money than required toward that loan if you have credit card debt at 18% interest. On a dollar-for-dollar basis, it's costing you a lot more to owe money to your credit card company, so it's the smarter financial move to pay that one first.

Of course, there are some exceptions to this rule. As one potential example, if you have a student loan at 6.8% interest and a mortgage at 4% but are expecting to have much of your student loan balance forgiven under the Public Service Loan Forgiveness (PSLF) program, it probably doesn't make sense to pay down your student loans any faster than you have to.

Consider your expected returns from investing

Even if you've eliminated all of your credit card and other undesirable debts, it can still be a smart idea not to pay your mortgage off early.

The reason is that it's important to consider what else you could potentially do with that money -- specifically, the returns you could get by investing it. Historically, the stock market has generated annualized total returns of about 10% over long periods of time, and a well-balanced stock-and-bond portfolio can be reasonably expected to produce long-term annualized returns in the 7% ballpark.

In other words, paying off your mortgage allows you to extinguish debt at whatever interest rate you're paying. On the other hand, investing that money allows you to potentially earn a better return for your money.

Why you might want to pay your mortgage early

To be fair, there are some situations where it does make sense to pay your mortgage early. If you have a mortgage that has a high interest rate, or a variable interest rate that could get much higher, it can be a good idea to pay down the loan faster (or to refinance).

Another common situation where early repayment is a smart idea is as part of a retirement plan. Let's say that you have 10 years left on your mortgage but want to retire in seven. By accelerating repayment to get rid of that debt by your target retirement date, you can dramatically reduce your expenses after retirement (and therefore your required retirement nest egg).

Finally, it's important to acknowledge that some people just don't like having debt, period. If having debt stresses you out and being 100% debt-free is a priority to you, the peace of mind that comes with getting rid of your mortgage can certainly be a valuable asset that's worth acquiring.

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