Owning a home is a big responsibility that traditionally comes with a mortgage payment every month. As a homeowner, you probably have questioned making payments ahead of schedule to try and pay off your mortgage a bit earlier than scheduled. This is a common thought amongst home owners. Many people who owe a monthly mortgage debate on paying it off early. The dispute whether or not to has been around in the financial world for a significantly long time and certainly is not going to just disappear.
Let’s Do the Math
When looking at the long term numbers, many experts believe that it is actually more beneficial to continue on the payment plans for the allotted time you have already signed up for, especially if you have a low interest rate. They believe that investing your money will, in the long run, be a better choice. A stock portfolio that contains a decent assortment of invested stocks typically gains at least a 7% growth if they are left alone and let grow for at least a decade. Investing your hard earned money, rather than paying off your mortgage early, can lead to a higher overall income.
When completing your yearly federal taxes, there is also a write off for your mortgage interest rate. A home mortgage interest deduction could possibly help you lower your taxes. Prepaying for your mortgage prevents you from taking advantage of this perk. Looking at just the hard numbers, it would be more worth your while to not pay your mortgage off early. Putting extra money into a mortgage that only has 3% or 4% interest on it and losing out on tax benefits is not worth it. Taking the money and investing it instead is the better option.
There’s More than Just the Math Though
Though the numbers may say to invest and not pay off the mortgage early, many people still put more money than needed into their payments and get their mortgage handled before schedule. The tax benefits are nice, but do not appeal to everyone and investing the money is not important to others as well. Having the glorious feeling of financial freedom is what some people want. Though the math may say otherwise, coming home to a house that is yours and only yours gives you real personal satisfaction. Being completely debt free on your home is riveting and calls for celebration. Many people don’t like being in debt and paying off their home as quickly as possible is a priority, and there is nothing wrong with that.
The Pros and Cons in Depth
A deeper analysis of the pros and cons could help you, personally, decide whether to pay off early or to continue with your current payments.
Figuring out your exact home mortgage deduction can be done by looking at your effective tax rate. On average, the deduction will be $22 off your taxes for every $100 you owe in interest on your mortgage. Though this may seem like a really nice benefit, it only applies on the amount you deduct that is over the standard deduction available to those who don’t itemize their returns. In 2014, the average standard deduction for a married person who filed jointly was $12,400. So, essentially, your home mortgage interest deduction is not worth anything unless you itemize your taxes. Even then, it is only worth what you must pay over the standard deduction that is available for everyone. This small piece of the puzzle can radically downgrade the value of your deduction; possible to the point where it is so minuscule you don’t even need to consider it.
When you ask someone if they’d rather invest their money in the stock market or pay off their mortgage early, you will find a decently sized amount of people who are very skeptical about placing their hard earned money into stocks. Many of these people feel like carrying a long-term amount of debt is not a good idea as well. They would rather have complete ownership of their home rather than make extra money by investing. There are many ways to look at this situation.
Historically, the stock market has done well and allows the math to lean heavily towards investing instead of paying. Low-interest mortgages typically leave extra funds that can put into stocks, allowed to grow, and earning extra money in the end. The stock market, however, is not guaranteed in any way. The savings you receive on interest by paying off your mortgage early, however, are a for sure thing. The savings on interest may be less than what they would make by putting money in stocks, but people who chose to do so typically don’t care and would rather live debt free.
Keeping a Balanced Approach
Looking at the situation from both sides can help keep a balanced approach. It is completely possibly to prepare on a mortgage while still investing money as well. Paying just a few extra dollars on the monthly payments will lead to a mortgage getting paid off early, but still leaves funding to put towards other investments like stocks or even retirement funds. You can choose to qualify the argument and participate with both sides. Finding a compromise that works for your family and its income is completely okay. Choosing a side and sticking with it is also okay. Life is all about finding balance; finding it in this situation, whether it be one side or another or the middle, is another part of life.
The Choice is Yours
When deciding to prepay your mortgage or not, the choice is completely up to you. If you hate the fact that you are in debt, you should probably put more money into your mortgage and pay it off quicker. If you are fine with a low-interest rate mortgage and knowing that you owe money monthly, you should probably choose to invest instead. Though the math may show that investing is more beneficial in the long run, the emotional stability that being debt free gives you is comforting. Doing what is best for your specific family and situation is what is most important. Weigh your options then make an informed decision one which choice you would like to make.