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“What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?” 

– Adam Smith, Scottish economist, philosopher, pioneer of political economy

For many people, owning a home is an essential part of the American dream, with several economic benefits.  To achieve this dream, it has been instilled in us that a mortgage is good debt, a liability that has the potential to increase your net worth and improve your life. 

But the pandemic has challenged old financial rules.  Droves of workers have left their jobs during the “Great Resignation,” either for health reasons or to pursue better paying and more meaningful work.  The U.S. Bureau of Labor Statistics announced that 4.3 million Americans, or 2.9% of the entire workforce, quit their jobs in August 2021.  Due to changing circumstances, many homeowners are questioning if they should pay off their mortgage early. 

Reasons to Pay off Your Mortgage Early:

  • Better cash flow: For most Americans, a mortgage is the largest household expense.  Eliminating it can free up a significant amount of the cash required to meet monthly expenses.  Reducing fixed expenses going into retirement can make you much more flexible in the face of whatever might happen, whether it’s health care bills or a bad stock market. 
  • Interest savings: When you pay off your mortgage early, interest savings are a guaranteed return on your investment.  For example, if your mortgage interest rate is higher than what you could earn in a bank checking account, it may make more sense to pay off the mortgage than to invest in low-yielding fixed income. Many people are told they can earn more by investing in the stock market than by paying off their mortgage.  However, for those nearing retirement, paying off the mortgage could be a great move if you do not want to take on additional risk. 
  • Peace of mind: If you have the money to pay off your mortgage and there is not a liquidity issue, then your financial peace of mind is a legitimate factor in the decision.  If you do not like the idea of constant debt, paying your mortgage early could ease your burden. 

Reasons to Consider Keeping Your Mortgage:

  • Insufficient retirement savings or cash reserves: Your top priority should be to ensure adequate retirement savings which includes contributing to your 401(k), IRA, or other retirement accounts.  But even if you have the cash to pay off the loan, do not deplete your emergency savings cushion. 
  • Opportunity costs: First, review all your loans.  It may be better to pay off higher-interest loans first, especially nondeductible debt like that from credit cards.  Then compare your mortgage interest rate to what you could earn from investing the money.  For example, if your mortgage interest rate is lower than what you could potentially earn investing in the stock market, you may be better off keeping the mortgage and investing the extra funds. 
  • Loss of tax breaks: If you itemize, you may lose out on tax deductions for mortgage interest on your individual income tax return. 

Middle Ground:

  • Make an extra principal payment: An alternative of paying off your mortgage early is to chip away at the principal by making an extra principal payment each month.  This can save a significant amount of interest and shorten the life of the loan.
  • Consider refinancing: Mortgage rates are at historic lows, which means it is a great time to refinance.  This could save you hundreds of dollars on your monthly mortgage payment which you could use to pay down principal or invest.