Should You Pay Off Your Low Interest Mortgage Early?
Written By: Ryan Rink, CFP®, EA, ChFC®, CLTC®
When it comes to managing a home mortgage, conventional wisdom typically suggests paying it off as quickly as possible to reduce interest payments and monthly recurring expenses. However, in the case of a mortgage with a low interest rate, there are several benefits to opting for a slower repayment schedule. This approach can enhance financial flexibility and potentially lead to greater overall financial growth.
Investment Benefits
If you either purchased a home prior to 2022 or elected to refinance in 2019-2021, it’s likely the interest rate on your mortgage is somewhere in the 2.5-4.0% range. If your rate is within this range, the money you might otherwise rush to put into additional mortgage payments could potentially yield a higher return if invested elsewhere. For instance, investing in stocks, bonds or mutual funds could offer returns that surpass the cost of your mortgage interest over the long term.
If you’d rather opt for a more conservative investment choice, consider investing into US Treasuries, money market funds or a high yield savings account. With the Federal Reserve raising rates substantially over the past couple of years, we’ve seen interest rates in each of those three cash alternatives rise in tandem. Many of these are now paying somewhere in the 4.0-5.5% range. In theory, you could be making money by earning 4.0%+ in a conservative asset and paying down debt that is accruing only 3.0%.
Liquidity Benefits
Keeping all your equity tied up in a home can limit your financial flexibility. We find it’s often better to diversify the types of assets you hold to reduce risk. If your wealth is tied up in your home, your financial well-being is heavily tied to the real estate market. It can also be more restrictive when you need to access your equity. One way to access the equity in your home is a Home Equity Line of Credit (HELOC). A HELOC used to be a great option, but with rates rising, many of the borrowing rates through banks are now 8.0% or higher. Having liquidity ensures you have access to cash for emergencies without needing to rely on selling your property or borrowing against it. This is crucial because tapping your home equity typically takes time and may not be possible.
Tax Benefits
If you itemize deductions, your mortgage interest payments are tax-deductible, which adds an extra layer of benefit to maintaining a mortgage. This means the actual cost of the mortgage interest, after tax deductions, is even lower than the rate you see printed on your monthly statements.
Summary
Opting for a slow repayment of a low interest mortgage can be a useful strategy within a broader financial plan. It allows homeowners to maintain greater liquidity, flexibility and potential for higher investment returns. Of course, this strategy is not without risks, as investments can fluctuate, and yields in savings/money market accounts are not guaranteed. It’s crucial to consult with a financial advisor to tailor a strategy to fit your personal situation.
Reach out to your Shakespeare Fee-Only Financial Advisor at (262) 814-1600 with any questions regarding your personal mortgage.