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Great question. It really depends on where you’re at financially and in your life.
Having a home, starting a family, fulfilling career and personal goals and building financial security are common goals. Most people need a mortgage to help them reach those goals. Mortgages make homeownership possible while turning rent payments into equity you build over time and into a home for you and your loved ones.
Mortgages are also most people’s largest debt. There is a psychological benefit to paying it off early – peace of mind. When your mortgage is paid off, except for property taxes, your mortgage payment is gone, freeing up monthly cash flow for you to use on other goals. For many people, this is particularly important near or at retirement when income may be lower and more fixed.
Paying a mortgage off early can be very compelling, but it’s not always the best choice. If you have other debt – credit cards, student loans or car loans – mortgage rates are usually lower, so you can save more money paying other debt off before using that money as “extra” on your mortgage.
Sometimes, people think a downside to paying it off early is losing tax benefits associated with paying interest on their mortgage, but that benefit may not be as significant as it used to be. Previously, the standard deductions were relatively low, so you could maximize the mortgage interest deduction. In 2018, standard deductions and what can be itemized changed. More people may find that their payment must be quite large for it to make sense to itemize.*
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And, you may have heard that investing the money rather than paying extra toward your mortgage is a better option. Following is an example of that theory in action. It assumes a 3% mortgage and a 6% return on investment. It’s important to note that in most cases, investment returns are not guaranteed, so there is risk.
• A $200,000 loan amount on a 30-year fixed rate at 3% would have a monthly payment of principal and interest of $843.21. • If these regular payments are made each month, at the end of 10 years, you would owe $152,039.31 on the mortgage.
• If you have an extra $250 per month and choose to pay it toward the principal balance of the mortgage, the balance at the end of 10 years would be $117,104.07.
• If instead, you decided to invest that $250 per month and were able to earn 6% on your investment, you would have $40,970 in investments.
• At the end of the 10 years, you could chooseto pay that toward the principal balance of the mortgage and reduce it down from $152,039.31 to just $111,069.31.
• This method would save you $6,034 ($117,104 - $111,069) if the investment, not guaranteed, did provide 6%.
One advantage to investing the money rather than adding it to your mortgage payment is that investments are often accessible in the event you need the money for something. Once a payment is made on a mortgage, you would need to refinance or take out another loan to access the money. The choices you make really do depend on your goals and where you are in life.
The best advice I can give is to talk to a mortgage loan officer at Summit Credit Union about your own situation, whether your current mortgage is with Summit or not. We are a cooperative financial institution, owned by those who do business with us. We are here to have conversations that help you get to decisions that make sense for you.
*Check with your tax advisor regarding deductibility.
