This video discusses why, for many people, paying off their mortgage early does not make sense in today’s economic environment.
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Why You Should NOT Pay Off Your Mortgage Early
For many homeowners, the idea of paying off their mortgage early seems like a dream come true. Being debt-free sounds like a financial goal worth pursuing, and the freedom that comes with it is certainly appealing. However, there are several reasons why paying off your mortgage early might not be the best financial decision. Let’s explore these reasons in more detail.
1. Opportunity Cost
One significant drawback of paying off your mortgage early is the opportunity cost. By using your extra funds to pay off your mortgage faster, you are essentially tying up your money in an illiquid asset – your home. This means that you will have less money to invest in other potentially more profitable ventures, such as stocks, mutual funds, or real estate properties. Over time, the returns on these investments could potentially outpace the interest saved by paying off your mortgage early.
2. Mortgage Interest Tax Deductions
Another reason to think twice before paying off your mortgage early is the benefit of mortgage interest tax deductions. In many countries, homeowners are eligible to deduct the interest paid on their mortgage loans from their taxable income. By paying off your mortgage early, you will be reducing your ability to take advantage of these tax deductions. Instead, you could be using that money strategically to reduce your tax liability and increase your disposable income.
3. Emergency Fund and Liquidity
Having an emergency fund is crucial for unexpected expenses or financial hardships. Paying off your mortgage early could deplete your savings and limit your liquidity. It’s always wise to have readily accessible funds for emergencies, medical bills, or sudden job loss. If you use all your available resources to pay off your mortgage, you might find yourself in a difficult situation if unexpected expenses arise and you don’t have savings to fall back on.
4. Low Mortgage Interest Rates
Interest rates on mortgages are historically low, making borrowing money relatively cheap. If you have a low-interest mortgage, it might be more beneficial to invest your extra funds elsewhere. For instance, the stock market often offers higher returns over the long term. By investing your money and earning a higher return than your mortgage interest rate, you could come out financially ahead.
5. Future Financial Goals
Lastly, paying off your mortgage early may hinder your ability to achieve other important financial goals. If you have other debts, such as student loans or credit card debt, it might be more prudent to prioritize paying those off first, as they tend to carry higher interest rates. Additionally, if you’re planning on major life events such as starting a business, higher education, or saving for your children’s education, using your funds towards those goals may be more advantageous than paying off your mortgage early.
In conclusion, while the idea of being mortgage-free is enticing, paying off your mortgage early might not always be the best financial decision. Weigh the opportunity cost, the benefits of tax deductions, and the impact on your emergency fund and liquidity before committing to this strategy. Consider consulting with a financial advisor who can help you analyze your specific situation and make an informed decision.
I borrowed 135k. My mortgage would have been 25 years and i would have paid more than 100k in interest. My flat will never be worth 220k. But not paying 100k in interest it helps me to sleep at night thanks.
The mere existence of the ‘prepayment penalty’ means that the banks do NOT want you to pay off your mortgage early. This video is so much cap.
You can't guarantee me that the stock market will earn me more in returns in 5 yrs, but I can guarantee you paying off my mortgage in the same time wil make me debt free.
I have no debt aside from my house. I want to be debt free in 5 years. Owing nothing is worth it to me.
In 18 months from now I could be mortgage free
It depends on what stage of life you are in. I started paying extra on the mortgage when I was about 50. Still doing it. I want no debt in retirement. I never paid extra before that because I wanted to invest, and honestly I didn’t have much extra.
Since the mortgage is "amortized" (interest is front-loaded and the bank will get their interest anyway), paying off early does not help with saving interest but only helps to speed up "debt-free". Do you agree?
Yes my interest rate is fixed. Up until next month's mortgage payment -May 2023 that is. I will have been paying 350.00 less a month. My mortgage is fixed in so much as the escrow remained fixed. However, since I live in Florida in a state that has a Republican majority State House and Senate for over 2 decades now and who has never met an insurance company lobbyist that they didn't love more than their constituents, I am now in a much tougher position. Homeowners insurance has never been higher in Florida and the political remedies decided upon by our state pols is no remedy at all. Many in Florida are now deciding if they can even stay in Florida in their home. If I had paid off my home by now I wouldn't be looking at a mortgage payment that basically erased the refinance deal I got a year and a half ago. I so wish I had put more emphasis into paying down or off my mortgage because I am close to retirement now and looking at an uncertain future in my home.
I'm from the Ric Edelmen school on this topic. Any money in your home is trapped in the walls. Cash is king. If you are 80 years old and have low income and want to take out a mortgage on your home what will the bank say? Also, the government is practically paying you to have a mortgage.
Schmidt, what about when homeowners insurance is super high? I’m paying almost the same for insurance as what I pay for my mortgage. If I didn’t have a mortgage, I wouldn’t need homeowners insurance, and I could instead use my $ in short term investments to have as the home emergency repair fund (new roof etc). The insurance hardly ever pays claims. Having the cash would be much more flexible
This speaker is stupid just don't sell other assets to pay off one's mortgage early just just get the money from else where
I like how you say they’re are different situations for everyone. Risk tolerance varies!! Dave Ramsey never address this. Big fault
I locked in at 2.87% in 2021. With the added interest tax write off, it's less. With the true inflation rate at 10-12%, I'm getting paid to have a loan.
Until Bidenflation, interest rates were next to nothing. I was WAY ahead using cash to pay off the mortgage, even with a rate under 3%. Now, without a monthly mortgage I have much more cash flow. Seriously disagree with this premise being pushed.
Makes a lot of sense not to pay off principal on an old 3% mortgage when rates are now much higher
Most people are better off just getting debt off their backs
0:02 Hi, thanks for your video. I retired four years ago at age 66. I took the ex spouse social security benefit. I turn 70 this year and have applied for my own social security benefit. I expect the increase to be 3x what I was getting before. I have a car note which be paid off in august. I also have a state pension.
I have a mortgage that’s 3% and is due to be paid off in five years. Here’s my question: should I use the extra money from social security to pay off my mortgage early or invest it somewhere else? Thanks.
How do you feel about silver and gold? Just curious. Thank you I really enjoy your videos.
Not paying off the home loan was the route I took. I refinanced every time There was 1% reduction in the fixed rate. The mortgage rate is 3.37%. This allowed maximizing saving and investment during my working years. Inflation will eat away at the value of this debt, while equities continue to perform, on average, above inflation. Additionally, mortgage interest remains tax deductible.
Mr Schmidt, have the cash to build, should I still get a construction loan and put down almost the purchase price just to reduce the interest and have some oversight on the builder?
1:08 yeah and cancer is weight gain in reverse.