Guest post by Skye McLean, Mortgage Connection
Growing up, most of us were told that you need to pay down your mortgage debt as quickly as you can. At first glance, this makes complete sense. Why wouldn’t you want to pay down the largest debt of your life?
However, with interest rates so low there might just be a better place to put those funds. Not to mention, paying off your mortgage quicker might not exactly help you when you really need it to.
This is going to mean different things to different people. I’m not suggesting you don’t pay down your mortgage debt, I just want to lay out some different scenarios.
There isn’t necessarily a right or wrong answer here, it’s all about perspective.
With interest rates being as low as they are right now, there is an argument to be made that paying down 2% debt for instance doesn’t make financial sense. Although to the average homeowner, it still might but I wanted to show you my thoughts.
Consider the following question. Are your savings better off being invested somewhere with a 6% ROI (return on investment)?
For example, if you invested 10k @ 6%/yr that would equate to $600 of profits that you’ve now earned.
Conversely, if you put that same 10k against your mortgage using your lump sum privilege we would see a much lower return. To be specific, if your mortgage rate is 2% then you would have saved approx. $200/yr of interest.
By investing the money instead, you would have earned $400 more than you would have if you had chosen to pay off that mortgage faster.
Of course, a couple of things need to happen for this to make sense. You must be financially responsible, you need to find a secure investment for your money, and you must be diligent in managing the moving parts.
The idea of being mortgage-free quicker might still sound better in the long run.
Although, as soon as you put those funds towards your mortgage, you lose the ability to leverage them in investments. This might not seem like it matters when you look years ahead into a future where you are then mortgage-free but consider this.
Say, something comes up within that time frame that forces you to backtrack (Job loss, medical emergency, etc.). The money you put towards your mortgage is landlocked unless you have a Home Equity Line of Credit.
Those additional payments you made aren’t helping because access to funds has become your top priority.
Instead, you could put those funds towards a leveraged investment in real estate…if the market you’re in gives you a steady appreciation on real estate. Or at the very least, you could find a secure investment that would earn you more than double what your current mortgage interest is.
Admittedly, paying down your mortgage does come with a huge psychological benefit. The idea of being mortgage-free or on a path that leads you there sooner gives people a very warm and fuzzy feeling. There is a certain sense of relief that comes with that. It’s also certainly true that most people don’t regret paying out their debts in general.
Looking at it simply, it makes a lot of sense…paying off your mortgage as quickly as possible gives you peace of mind and a guaranteed return on your money.
However, paying out your mortgage faster also has some downsides. Rather than putting more money towards your mortgage you could generate even more money from other investments, and avoid creating dead equity that may not help you when you need it the most.
There is no wrong answer here. I just wanted to layout a different perspective.
For more information or to answer your mortgage questions, email Skye McLean at Mortgage Connection.