If My Rate Is So Low, Should I Pay Off My Mortgage Early?

If My Rate Is So Low, Should I Pay Off My Mortgage Early?

With rising interest rates, that refi you did a couple years ago is looking pretty good now so does it make sense to pay down or pay off your mortgage early? We typically recommend our clients pay off their mortgage before retiring. This way, they have a smaller amount of living expenses during a time when there’s no employment income. Reducing debt is also a way to get closer to financial independence.

However, sometimes additional principal payments might not make sense. Before paying off your mortgage early, there are a few things to think about:

Is your emergency fund fully funded?

The point of an emergency fund is to have cash available immediately for something unexpected. If your emergency fund isn’t enough to cover a crisis, pause additional principal payments and keep a larger cash cushion.

Is there something better you could do with the funds??

If there are other outstanding debts with a higher interest rate than your mortgage rate, eliminate those first to save on the total amount of interest paid. Secondly, you could put funds toward your retirement or invest in the market if you think you could earn more with the funds invested than the mortgage interest rate you pay, which may be a much easier hurdle to beat. Keep in mind, getting that higher return by investing is not a sure thing, and with this volatile market, think of is as investing for the long-term.

Do you need the extra liquidity?

While you may be able to get equity out of your home if you needed it through a HELOC or reverse mortgage, you would pay today’s higher rate and lose the liquidity debt gives you by paying off a mortgage early. The added leverage of debt allows you to do other things with your cash on hand such as (finally) going on a trip or paying for living expenses.

Is paying off your mortgage early a goal?

Some people hate the idea of having any kind of debt and think with today’s standard deduction there’s no advantage to claiming the mortgage interest whereas some don’t mind having a mortgage because it is ‘good debt.’ If it isn’t your top goal to pay off the mortgage early, focus on the goal that is your priority and hang onto that low mortgage rate. If you are determined to get rid of the mortgage and you’ve considered all the other points above, keep making the additional principal payments. It’s just one more step towards your financial independence!

Cynthia Flannigan
Cynthia Flannigan

Cynthia made the shift to financial planning to guide clients through making good financial decisions through both grim and exciting changes in life. More than anything, she thrives on helping people. She obtained her CFP designation in 2008 and completed a masters in financial planning and taxation at Golden Gate University.

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