Quite often, you hear people talking about how they want to pay off their mortgage quickly. It is a massive loan that lingers over your head every month, and who wants to have that amount of debt for an extended period? Wouldn’t you rather get it out of the way as quickly as possible, and free up some extra money each month?
Actually, no. As the title suggests, I’m in no rush to pay off the mortgage on my condo I bought in 2014. It has nothing to do with not having enough money to pay my condo off. Between my business and investments, I could — if I wanted to. However, I’m choosing to keep paying my mortgage and invest the rest.
Click to read more about why it might be best to focus on saving your money.
A Drain on Savings
For one, paying off the mortgage just to have that feeling of finally owning my home would snatch up so much of the money I worked hard to save. That is a significant factor to consider. Although it frees up whatever I am paying each month in mortgage payments, how hard of a life will I be living until I’m back to where I was before?
Investments Pay Off Big-Time
Honestly, though, the biggest reason why I won’t pay my mortgage off right away is the fact I make more money through my stock investments than what I pay in interest on my mortgage. Each month, I am making more money than what I am giving back to the bank. So, to me, that seems like a no-brainer. I’m still coming out on top in the end.
Typically, the average annual rate of return is 7 percent. Look at the interest rate on your mortgage. I’m sure it is not more than 7 percent, as right now the average rate hovers just below 5 percent. My current interest rate is 2.89 percent. Even when it is time to renew my mortgage in the summer, my offered rate is 3.19 percent. That is significantly lower than my 7 percent return, which means more money is going into my pocket.
More on Paying Down Your Debt: 7 Things to Consider Before Paying Off Your Mortgage Early
Cheating Yourself Out of a Tax Break
But wait, there’s more. You can use your mortgage at tax time to lower your net income. If you have the opportunity to save on your income tax, why wouldn’t you? Using the interest paid on your mortgage on your tax return is a smart move. However, you need to have a mortgage to utilize this. So, if you completely pay it off, there is no tax break.
On top of that, I would max out my retirement savings and use that as a tax break, as well. Maxing out my contributions towards a retirement account lowers my taxable income. My contributions could actually take my income to a lower bracket, which means less of my income is taxable.
Do you see where this is going?
Playing the Long Game
The more that I can invest and put into my retirement savings, the happier I will be. Not only am I better off going this way each year (my investment is quite more than my interest payments on the condo), but I’m also smartly securing my future.
Since I own my business, I would rather keep more money in my business account as an emergency fund or as long-term savings. It would be a little hard to do that if all of my disposable income went toward my mortgage. I’m left with financial flexibility by going this route. I may end up selling the condo and buying a bigger house, or looking at rental properties. No matter what I choose, though, my investments allow me to do what I prefer.
Are You Willing to Gamble?
There are other factors to consider before making this type of decision, as every person’s situation is unique. Are you willing to take the risk of investing? There is no guarantee you will get a return of 7 percent, as the markets fluctuate on a daily basis.
Also, consider how you feel mentally about living with a mortgage for a long time. It is a good feeling to be able to say you actually own your home with no mortgage. Is it worth, though, missing out on potential income from investing?
In my situation, my smartest choice is to not rush into paying off my mortgage. I can’t ignore the numbers.
Click through to read more about why you should rent a home instead of buying one.