You Might Not Want to Pay Off Your Mortgage Early — Here’s Why
Paying off your loan early offers a guaranteed return — but you might be able to top that.Being debt-free is a good feeling, while living under a mountain of debt is not. It’s reasonable that many people aim to get out of debt as soon as they can, and it’s actually imperative that those with high-interest-rate debt, such as credit card debt, pay that off pronto. However, not all debt needs to be paid off as quickly as possible. For example, there’s a good case to be made for sticking with your regular mortgage payments and not aiming to retire that debt too soon.
Good debt vs. bad debtDon’t assume that all debt is bad. When managed well, debt can be quite useful, such as when it helps you buy a home, or a car, or go to college. If you’re saddled with debt because you borrowed a lot of money charging things you can’t afford on your credit card, or you took out a home equity loan you’ll have trouble repaying because you wanted to renovate your kitchen, that’s not so good. Interest rates have a lot to do with whether given debt is good or bad, too. We’ve been in a low-interest rate environment for many years now, and if you’ve taken out a mortgage that you can repay on schedule, you won’t be forking over as much in interest as you might have in a worse environment. Credit card debt, though, or any debt with steep interest rates, is a different beast. Many credit cards these days are charging rates in the high teens, and often well above 20%. (The overall average rate was recently around 17%.) If you owe, say, $20,000, and are paying 25% interest on it, that’s $5,000 in interest alone each year until you wipe out that debt.
Why you might not want to pay off your mortgage earlySo, why not just pay off all debt early, and be rid of it all? Well, because you might be able to achieve other things with your money. Go ahead and pay off any high-interest-rate debt pronto, but with low-interest-rate debt such as your mortgage, consider just sticking to the repayment schedule and putting any extra cash toward other financial goals rather than paying off your debt early. You might allocate that money to a college savings account, for example, or let it accumulate until you can buy a needed car with it. An especially fine idea is to invest that money for your retirement. Check out the long-term average growth rates for various investments below — they were calculated by Wharton Business School professor Jeremy Siegel, who used data from 1802 to 2012, a whopping 210 years!
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