Should You Pay Off Your Mortgage Early?

Dec 14

Yesterday, I got a call from a client facing a common (yet complex) financial dilemma: whether to pay off his $210,000 mortgage, which carries a 6.5% interest rate.

This question isn't just about crunching numbers; it’s also about the personal aspects of financial decision-making.

Consider the Financial Implications of Paying Off a Mortgage Early

First, my client considered liquidating his IRA and investment accounts to pay off the mortgage.

Let’s compare the average rate of return of his investment accounts to his mortgage interest rate. Is the cost of liquidating these assets worth the benefits of paying off the mortgage early?

His mutual fund has averaged returns of just under 11% per year over the last decade. Paying off a mortgage that costs 6.5% in interest would mean sacrificing the higher returns from these investments. If the benefits of these higher returns outweigh the potential savings in mortgage interest, he’s going to want to keep that money in his investment accounts.

Another big factor to consider is the potential tax benefits of mortgage interest deductions. If this deduction significantly reduces his tax liability, paying off the mortgage early might not be the best move financially.

Honor Your Personal Preferences and Lifestyle

Feelings About Debt

I told my client that financial decisions aren't just about the numbers.

Personal feelings and attitudes towards debt play a crucial role. This client has never carried any debt in his life, so the mere presence of a mortgage loan is a source of discomfort for him. This emotional aspect can't be ignored in financial planning.

Lifestyle Considerations

Think about lifestyle habits and financial behaviors.

In this case, my client earns a healthy income, but he’s also an aggressive saver and frugal spender. If he decided to pay off the mortgage, he could replenish his investment funds relatively quickly.

The Psychological Aspect

There's a significant psychological benefit to being debt-free: peace of mind.

When you own your home outright, you have this sense of security in knowing that if you lost your job today, you wouldn’t lose your home. This is a massive tangible benefit that can often outweigh financial considerations.

Employ a Holistic View

Given the higher return on investments compared to the cost of the loan, you’re probably thinking, “He should keep the mortgage, right?”

The thing is, real-life scenarios are rarely this straightforward.

Personal finance involves more than just maximizing financial efficiency; it involves considering the nuances of an individual's life, their risk tolerance, job security, saving habits, and personal feelings towards debt.

When faced with the decision to pay off a mortgage early, you need to look beyond the numbers. Choose a comprehensive approach that considers financial implications, tax benefits, personal preferences, lifestyle, and psychological well-being.

Each situation is unique, and what works for a financial institution when it comes to maximizing returns may not align with an individual's personal and emotional needs.

The beauty of personal finance lies in its humanness – and it's this aspect that should guide our decisions.

That’s it for me today, guys. See you in my next post!

Brent Edwards (aka Brent the Broker) is a residential real estate agent and Realtor in San Diego, CA who helps clients buy and sell homes in San Diego, California and all surrounding areas. Brent is a highly-recommended Realtor in San Diego by family, friends and past clients. Call Brent today at 619-550-8070 if you have any questions about real estate in San Diego or you'd like to buy or sell a home.