If you have been an experience homeowner for many years and have reached a point that your monthly mortgage is paying off principle in large chunks, building equity to the point that reaching the end of the mortgage is a goal within your horizon, and you have disposable means to pay off your mortgage early, you may be tempted by the prospect to pay off your mortgage early.
It is a temptation much like eating a chocolate chip cookie. You prepared the ingredients carefully, laid down spoonfuls of dough on the cookie sheet and popped them into the oven. Twelve minutes later, you pulled perfect cookies from the oven, filling the air with their sweet aroma and you began to eat, bite by bite, savoring chocolate in one of its best preparations. Each bite is a monthly mortgage payment, but a bigger bite than the obliged mortgage payment will ultimately pay off your mortgage early.
You may want to savor the cookie for as long as it lasts, but the flavor is so pleasing, the urge to hold on longer is overwhelmed by enjoying the flavor in your mouth, just like the pleasure that comes from deciding to pay off your mortgage early. What to do?
If the end of your mortgage is on the horizon, do you finish the cookie now, pay off your mortgage early, or maintain the urge and continue your monthly payment schedule? Ultimately, no one else can answer the question for you; it is a decision you must struggle to make. However, others who have had the struggle and professionals with foresight to understand the pros and cons have advice to offer. The right answer depends on your personal financial situation; you don’t eat the chocolate chip cookie like everyone else and neither do they.
First of all, here is the advertised, typical track of home ownership: you work, buy a home, pay the mortgage according to schedule until you have completed the obligation and retire, mortgage-free. Your retirement income is typically less than your working career, but your mortgage payment is no longer an obligation. Paying off the mortgage with simultaneous retirement may be an advantage.
Or, you may be in a tax situation with other sufficient deductions to enable losing the mortgage deduction without penalty in higher taxes. In that situation, to pay off your mortgage early, even before retirement, is advantageous to your tax situation by making tax-deferred investments with greater return with the money originally devoted to the mortgage.
Maybe your home has increasing in value – and over the long haul, that is the trend of real estate – and the increase is more than the expense of your annual mortgage interest, it could be advantageous to pay off your mortgage early to increase the value of the investment in your home to you since you would then own the entire home and not just a piece of it because of the mortgage obligation. And you have the added benefit of devoting what was once mortgage payment to other investments.
On the other hand, if your home value has reached a plateau – and they do happen occasionally over the long haul – and it is no longer making money, or if other investment possibilities offer greater return than the growth of home value, it is best to eliminate the monthly expense of interest payments, pay off your mortgage early and put that money into an investment that is growing and will continue to grow value.
Meanwhile, the plateau may begin to climb again, but since you have no further mortgage obligation, that growth in home value is all to your benefit because you made the decision to pay off your mortgage early.
The decision may be as easy as calculating the cost of your mortgage interest rate, the growth rate of your home’s value and the availability of an alternative investment paying a higher rate of return than your home value less your mortgage interest rate.
In the end, it is all about the money; in other words, the chocolate chip cookie. If the satisfaction is in eating the cookie, so be it. If the satisfaction is in investing the cookie to be able to make more cookies, enjoy eating a cookie, pay off your mortgage early and invest the rest. As long as you are making money you can continue making and eating cookies to your dreams’ content.