Does it Make Sense to Pay Off Your Mortgage Early?

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Jun 10, 2021


By Lee Sherbakoff, CPA/PFS, CFP®, RICP®

The American dream of owning a home—complete with a white picket fence—dies hard; after all, it’s that iconic symbol of financial independence. And with record-low inventory, low interest rates, and high demand, (1) the housing market is currently booming now more than ever. Since most of us don’t have the luxury of purchasing a house in full, after the stress and drama of house hunting is over, we are saddled with a mortgage for the next 15-30 years. Incurring debt to one day own this major asset outright is unavoidable, so how do you handle it moving forward? 

The basics of debt are common sense: smart utilization of debt is a healthy financial goal (especially when it comes to avoiding high-interest debt such as credit cards or student loans), and it’s important to minimize consumer debt for many reasons. Do these principles also apply to mortgages? Is it better to put every extra dollar toward your mortgage or invest that money instead? As with most financial decisions, the answer depends on your unique situation. 

Let’s discuss some pros and cons of each strategy. 

The Best Use of Your Funds

If you are considering paying off, or paying extra on your mortgage, we can assume you have extra cash each month, or a lump sum you need to make a decision with. Of course, leaving additional funds sitting in a savings or checking account where you’re earning less than a percent of interest would never make good financial sense. You want your money to work for you, so the question to ask is, “What option will give me the biggest payoff?” Many clients choose the simple comparison between their mortgage rate and the rate of return on their investment or portfolio.

Like most financial decisions, there are plenty of factors that could affect the outcome, and the decision can’t be made in a vacuum. And as we all know, even the best estimates aren’t guaranteed. As I like to say, “Life happens.” It is important to run a thorough analysis and consider a variety of factors: the current interest-rate environment, potential taxes on new investments, the loss of mortgage interest deduction (if applicable), your risk tolerance and expected return of your investment portfolio, and private mortgage insurance, among other elements of your financial life. An experienced financial planner can provide the needed guidance and direction when it comes to such a decision. 

Weigh Your Options

There are some pros and cons to each choice that go beyond the raw math. Liquidity is a significant benefit of investing since, depending on which type of account you invest in, you may have greater access to the funds in case of an emergency or for your other financial goals. By placing the money toward your mortgage, thereby increasing the equity in your home, your options become more limited. The only way to access those funds would be to sell your house, do a cash-out refinance, or obtain a home equity loan or line of credit.

The advantages to paying down your mortgage are obvious. The additional cash flow created from the savings once the home is paid off can be redirected to your longer-term goals or strengthen your monthly budget once retired. The savings created could also potentially be used to offset your healthcare or long-term care costs once retired as well. However, paying extra toward your mortgage during your working years means less cash available to invest in securities with a higher expected return—which, if done wisely, could outperform the guaranteed return you get by paying down your mortgage.

Is Being Debt-Free Important to You?

While avoiding extra mortgage principal payments is oftentimes the right “financial answer,” there is more to the decision than just the numbers, as paying off your mortgage can have other non-financial benefits as well. Transitioning into retirement debt-free can provide homeowners with peace of mind at a time when they are feeling financially vulnerable. Living solely off one’s investments and/or Social Security can be intimidating and having one fewer monthly bill can help with that transition. So, while the numbers don’t lie, they often don’t tell the whole story. Do not underestimate the feeling and mindset of having your mortgage paid off as you enter retirement.

It’s Not Necessarily All or Nothing 

As with any major financial decision, to determine which option is best for you given your unique circumstances, it’s wise to consult with a trusted financial advisor. A combination of these two choices may make the most sense for some people. This could mean adding more money to each mortgage payment to bring down the principal while still putting the bulk of your extra money toward other investments. 

Before taking any action, it’s critical to consider several factors. We at The Nalls Sherbakoff Group would love to help you evaluate your options. We can provide personalized financial planning advice, and maybe even show you alternative investment strategies you hadn’t considered. Our ultimate goal is for you to enjoy your home without worry keeping you up at night.

We can partner with you as you navigate this financial decision—it’s just one among many along the road to your ideal financial future. Set up a complimentary appointment so we can see if our services are the right fit for you by calling us at (865) 691-0898 or contacting us online. We look forward to hearing from you soon!

About Lee

Lee Sherbakoff is principal and financial advisor with The Nalls Sherbakoff Group, LLC, an independent, fee-only financial planning and investment management firm. He specializes in serving pre-retirees and retirees, helping them create and execute financial plans and retirement income plans that lead to sustainable long-term, real-life returns that meet their deepest and most important financial goals and objectives. Lee has a Bachelor of Science in Finance from The University of Tennessee and a Master of Strategic Studies from the U.S. Army War College as well as the Certified Public Accountant (CPA), Personal Financial Specialist (PFS), Certified Financial Planner™ (CFP®), and Retirement Income Certified Professional (RICP®) credentials. Lee spent over 31 years in the U.S. Army Reserves, including serving at the Army’s highest levels on the Department of Army staff at the Pentagon and being deployed in support of Operation Desert Storm (1991) and Operation Iraqi Freedom (2008-2009). When he’s not loyally serving his clients, Lee enjoys giving back to the community and to his profession, acting as a council member of the Tennessee Society of CPAs and a member of the American Institute of CPAs. In addition, he is past President of the Knoxville Chapter of Tennessee Society of CPAs and past President of the East Tennessee chapter of the Financial Planning Association. To learn more about Lee, connect with him on LinkedIn.

DISCLOSURES: The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.

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(1) https://www.forbes.com/sites/forbesrealestatecouncil/2021/03/22/2021-housing-market-trends-what-buyers-need-to-know/?sh=1adaad8c40b3