There is constant debate over whether it is more advantageous to pay a mortgage off early or instead use that money to invest in other areas.  The point of this post is not to convince you of one or another but instead, present advantages of both that will allow you to decide for yourself.

Before you begin to consider whether to make extra mortgage payments or invest the money, it is important that you first address the following:

• Pay Down High Interest Debt:  Unpaid, high interest debt (such as credit card debt) will multiply significantly faster than extra payments will reduce a mortgage/extra payments will increase investment accounts.  This is due to the fact that amount of interest paid on your mortgage/investment accounts is likely to be less, if not significantly less, than the interest on consumer debt.  Thus, it is important to place priority on reducing this debt.
• Establish an Emergency Fund: In the event of job loss, injury, or unpaid maternity leave etc., it is essential to have capital available to cover at least 3-6 months worth of living expenses.  Having this money available gives you financial security in a time of limited or possibly no cash flow.
• Invest in a Retirement Account:  Whether it is offered through an employer or not, it is essential to contribute to a retirement account.  The key to retirement savings is time.  The earlier you begin, the more time your money has to grow while taking advantage of compound interest.  With a company match, your savings can drastically increase with no additional contributions on your end.

After you have achieved the above steps, it is now time to decide where your additional income should go.

Reasons to Pay Off Your Mortgage Early

• Desire to Be Debt Free: Having no debt gives you a sense of freedom that is indescribable.  You owe nothing, to no one and what you have is yours.  Many people prioritize this freedom over almost anything. 
• 100% Ownership:  By owning 100% of your home, you can add a large sum to the asset column of your net worth.  In times of financial need, having full ownership can give you significantly more capital to work with, possibly through a line of credit or even a sale. 
• More Savings and Increased Cash Flow: The sooner a loan is paid off, the less you will have paid in interest over the life of the loan.  The savings from your loan mean more money ultimately retained in your pocket and greater monthly available income.  Between the principal, private mortgage insurance, and interest, your mortgage payment was likely a huge monthly expense.  Thus, eliminating it will easily free up significant capital.
• No Guarantees on Investments: Many may claim that your investment returns may outpace your mortgage interest, thus making investing the obvious choice.  However, it is important to remember that your investment returns are NOT guaranteed.  Not only is it possible to have minimal returns, but also, you are susceptible to losing your principal. On the contrary, extra mortgage contributions are always going to help lower the ultimate cost of the loan.

Reasons to Invest

• Tax Breaks:  Carrying a mortgage offers specific tax benefits that aren’t offered to those without them.  If the benefit is significant enough, it may be worth keeping around to reduce your taxable income, which ultimately could put more back in your pocket.
• Increases Your Portfolio Diversity:  Part of being financially sound is having a well-balanced portfolio that exposes you to many different types of investments.  If you funnel all additional cash into your mortgage, you are possibly missing out on opportunities to invest in different capacities. Thus, using that additional cash for other ventures can possibly lower your risk in the event of failure of one facet in your portfolio.
• Your Mortgage Interest is Less Than Your Expected Return: In a time of ultra low interest rates, it is likely that many investments can create returns above the rates you are paying for your mortgage.  Thus, the money spent in investments generates more wealth that the equivalent contribution does at reducing the debt.
• Inflation: Your monthly mortgage payment will remain the same whether you are in month 1 of your mortgage or month 90 (assuming no extra payments have been made).  However, due to inflation, month 1 will actually “cost” you more than month 90.  With inflation and gradual income increases, your mortgage payment will be easier to make over time.

It is critical to understand that everyone has a different debt and risk tolerance when it comes to their own finances.  Some prioritize having no debt greater than opportunity cost. While others leverage low interest rates, such as those on a mortgage, to instead use the money for other investments.  There are many supporters for each camp of thought but you ultimately need to decide which is better for your current situation and financial philosophy.

“Achieving Freedom Through Financial Fitness.”

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