Pay off your mortgage early

Let’s try to make the math easy:

  • You borrow $200,000 on a 30-year loan.
  • Your fixed interest rate is 3%.
  • Your mortgage loan payment is $843 per month.

Now, let’s up that mortgage loan payment by an additional $1,000 per month. Using our mortgage payoff calculator, you'll see that can pay off your mortgage in 10 years and seven months, which would save you $69,952 in interest — that’s a big number.

Pros

We’ll get deeper into the dollars and cents, but first, what about the other benefits of paying off your mortgage?

Some can’t be measured financially — for some homeowners, paying off their mortgage is about peace of mind. One less bill might make you sleep easier at night.

Paying off your mortgage, or paying a lump sum to lower your monthly payments, will also free you up to tackle other debts. You can shift that money toward credit card balances, student loans or any other bills you want to prioritize.

But the biggest benefit is cutting down your interest expenses. This is especially true if your loan had a high interest rate when you took out your mortgage.

Also, paying down your mortgage isn’t the same as wiping out other annoying monthly bills. You’re building equity in your home with each payment — equity that could be tapped in the future if you find yourself short on cash.

Even if you already have a decent emergency fund, you never know what life will throw at you. Like a coronavirus.

Cons

Having equity is important, but be careful not to pay down so much mortgage that you’re left with little real cash. Did you lose your job at any point during the pandemic? It’s not easy to tap into your home equity without a steady income.

There’s value in keeping enough cash (for example, in a high-yield savings account to protect you from the unexpected.

And while paying off your mortgage early can save you a bundle on interest, is that really the best way to save money? There are alternatives that could net you higher savings in the long-run, especially since you could refinance your mortgage and take advantage of refi rates that are still historically low.

With your money going toward your mortgage, will you miss out on higher returns from other investments?

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Invest in the stock market

Let’s compare how much you can earn by investing, versus the money you'd save by paying off your mortgage early.

  • Instead of adding $1,000 every month to your mortgage repayments, you invest that money for 10 years and seven months.
  • We'll assume an average annual return for the S&P 500 of 8%, which is very conservative. (In 2021, the benchmark soared nearly 27%.)
  • In total, you’d earn $182,946.04, according to a compound interest calculator.

Pros

So, according to those calculations, you’d earn $182,946.02 by investing, while saving only $69,952 in interest by paying off your mortgage early.

It’s a clear win financially, and that’s before taking into account the tax implications. If you invest all that money in a 401(k) or IRA, you can save thousands more in tax breaks.

Cons

If this was such an obvious choice, it wouldn’t be much of a debate, would it?

What it really comes down to is your tolerance for risk. Investing returns aren't guaranteed; you could end up losing money on stocks or bonds.

When you have a fixed-rate mortgage, you know exactly how much you’ll save in interest by paying it off early.

Another option: Use some home equity to invest

Home equity is simply the portion of your home that you’ve paid off. As your home’s value increases and you pay down your mortgage, your equity grows.

Using that equity as collateral, you can ask a lender to let you borrow a large sum of money — using what’s called a home equity loan.

You can take out a home equity loan to cover major or unexpected expenses — but what about to invest?

Pros

If you look at interest rates versus rates of return, using your equity to invest in the stock market might make perfect sense.

Given recent rates on home equity loans, you’d pay far less in interest compared to the money you’d earn by investing in the S&P 500 at our conservative 8% annual return.

Cons

But again, the stock market is far from guaranteed. Are you willing to take the risk that your investment might not perform as well as expected?

That could lead to some serious problems. Because the home equity loan is secured by your house, you could wind up losing your home to foreclosure if you can’t pay it back. Or, what if you decide to move? If you haven’t finished paying back your loan, your lender will expect you to pay it back in full, immediately.

And finally, there are some extra costs you might not consider. As when you took out your first mortgage, your home equity loan will come with closing costs — typically 2% to 5% of the total loan amount.

If you’re not feeling too confident about these decisions, speak to a professional. A certified financial planner will help you customize a plan — to invest in your retirement.

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About the Author

Ethan Rotberg

Ethan Rotberg

Former Reporter

Ethan Rotberg was formerly a staff reporter at MoneyWise. His background includes nearly 15 years as a writer, editor, designer and communications professional. He loves storytelling, from feature writing to narrative podcasts. His work has appeared in the Toronto Star, CPA Canada and Metro, among others.

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