Should You Pay Off Your Mortgage?

A simple truth is that the longer it takes you to pay off your mortgage, the more you’ll pay in interest. Yet, that doesn’t mean that paying off the mortgage is necessarily the best solution for your financial situation. Before taking action you need to consider your priorities, goals and what stage of life you are in.

For example, if you are younger or middle-aged and saving for retirement, your long-term stock portfolio or other long-term high interest-bearing investment likely averages an 8 to 9 percent return. If you pay 5 percent—or less—in interest on your mortgage, chances are leaving your money invested in the market instead of using it to pay off your mortgage puts you financially ahead.

On the flip side, if you are an older retiree and at risk of being financially strapped if the market drops for an extended period, liquidating investments to pay off the house may make more sense. Doing so could provide you with the added peace of mind that comes from less debt and eliminate concerns about whether you will see your investments rebound.

Of course, the historical performance of your investments is not indicative of future results. So, regardless of your age it’s important to take time to do the math or consult with a financial professional who can help you identify which option makes the most financial sense for your situation.

Also, if you participate in an employer-sponsored retirement plan that offers matching funds, you could lose money if you reduce your contributions to pay off your house. So, you need to tally the cost of walking away from that “free” money and its potential return if it’s invested over the longer term.

Yet, even if the numbers don’t favor paying off your mortgage, you may want to reduce your debt for personal reasons. In this case, consider accelerating your mortgage payments instead of paying off your mortgage in a lump sum.

Accelerating your mortgage payments involves paying more toward your principal each month—for example, $100 more—so that you pay less interest on your loan over time. It also provides you with the flexibility to increase or decrease the additional amount you pay to address changes in your financial situation.

For help determining how much you can reduce the amount of interest you pay by accelerating payments and how doing so may affect your overall investment strategy, consult your financial professional.