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Should I Pay Off my Mortgage?
written by Mike Ballew August 6, 2023
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Conventional wisdom says you should not pay off your home mortgage early. Join us as we examine this myth and prove it wrong.

Mortgage Interest Deduction

The first argument for not paying off your mortgage is you need it for tax deductions. Prior to the tax reform act of 2018, that was true. The 2018 tax reform act drastically increased the standard deduction. This has the effect of nullifying the tax deduction argument.

You can only deduct mortgage interest if you itemize deductions. In order to itemize deductions, your mortgage interest plus other deductions must exceed the standard deduction. The tax reform act significantly increased the standard deduction over the few thousand that it used to be. The standard deduction for married couples filing jointly is $29,200 ($14,600 for singles). You would have to own a McMansion to have that much mortgage interest.

Investment Return vs. Mortgage Rate

The second argument for not paying off your mortgage is almost any investment will have a higher return than what you’re paying in mortgage interest. Over the past 100 years, the average annual return from the stock market is a little over 10%. That’s probably more than what you’re paying in mortgage interest. 

On its face, it does seem reasonable that you would get a better return by investing extra cash instead of using it to pay off your mortgage. However, the stock market is not always a sure thing. For example, in 2022 the market lost 22%.

Another issue is human nature. We are not robots or computers; we don’t always do the right thing. This argument assumes you will invest the cash. Maybe you will, and maybe you won’t. You might change your mind and spend the money instead of using it to pay off your mortgage.

The Right Choice

Paying off your mortgage is the right thing to do. It gives you peace of mind – it's your home and you own it. Think how nice it will be to have all that money that was going to the mortgage payment in your pocket as spending cash.

If you lose your job, it will be less stressful without a large mortgage payment hanging over your head. When you go to buy another home, you can buy the new home before you sell your existing home without having to worry about making two mortgage payments.

The Road Less Traveled

Paying off your mortgage is much more feasible if you have a 15-year mortgage. That’s because your mortgage is paid down more quickly with a 15-year mortgage. Unfortunately, the vast majority of homeowners opt for a 30-year mortgage. The monthly payments are a bit higher on a 15-year mortgage, but cutting the loan term in half makes it well worth it.

If you have a 30-year mortgage and you now regret it, you can change course. Most mortgages allow you to pay the higher 15-year payment which has the effect of turning your 30-year mortgage into a 15-year mortgage.

If you want to see how much you can save by paying off your mortgage at a 15-year rate, there are online calculators available. This one at Bankrate does a good job: Bankrate Calculator.

Closing Thoughts

Debt is never a good thing. Being debt-free is a wonderful feeling. There is nothing wrong with paying off your mortgage. In fact, it's a lofty goal that we should all aspire to.

Photo credit: Pixabay Eggstack News will never post an article influenced by an outside company or advertiser. Our mission is to help you overcome uncertainty about retirement planning and inspire confidence in your financial future.
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MIKE BALLEW
Eggstack founder, Financial Planning Association member, engineer, and software developer.