Editor’s note: This column has been updated from an earlier version.
You recently bought a home. Congratulations. Your new mortgage company just sent you a payment statement, which includes the teaser: “You can save a lot of money by paying extra each month.”
Well, maybe, but that’s only one part of the picture. Many investment advisers, myself included, might argue that if you invested the extra money you were pumping into your mortgage, you could come out ahead.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
With mortgage interest rates as low as they’ve been, it’s likely that your investments could out-earn the interest you’d be paying.
In addition, there’s inflation to consider. Unless you have an adjustable rate mortgage (ARM), mortgage payments are fixed, meaning they remain constant. Thus, when adjusted for inflation, they become progressively smaller over time. Unfortunately, the message of “pay extra and save” fails to consider the Time Value of Money.
Is it ever OK to pay off a mortgage early?
Yes! There are some valid reasons why someone might want to pay off their mortgage early.
- Income issues. If you expect your retirement income will be less than your earning years, then timing the completion of house payments for retirement may make sense.
- Peace of mind. There are people who simply do not like having a house payment loom over their heads. This would be particularly true for someone in an uncertain job situation. Having no mortgage payment protects the home from foreclosure if employment is suddenly terminated and prospects of finding a new job are low.
- Medical issues. A person who has a developing or worsening chronic illness may find getting out from under a mortgage before the disease worsens to a point of being very expensive is a big financial advantage and in line with good planning.
- You have an adjustable rate mortgage (ARM). Less common now than a decade ago, these lending devices are structured to provide a low monthly payment in the initial years and rises later when (presumably) you earn more and can afford more – at least that’s the “official” theory. However, it was ARMs that contributed to the mortgage default bubble in 2007. If you have one, paying it off sooner than later is a good idea, as interest rates are on the rise these days.
Are There Other Ways to Reduce a Mortgage Payment?
Yes. Rather than paying your mortgage off early, you may want to consider refinancing, although as interest rates rise, the value of this option may be vanishing.
The decision to pay off a mortgage ahead of schedule is something to discuss with an independent financial planner. While there are times when paying off a mortgage early can make sense don’t buy into the canned line “you’ll save so much,” because in some ways, it simply may not be true.
-
Amazon’s Try Before You Buy Is Ending — Here Are the Best Alternatives in 2025Amazon is ending its Try Before You Buy program on January 31, but you still have options. Discover the best alternatives, including clothing, eyewear and styling services.
-
Stock Market Today: Stocks Slip as Inflation Worries RiseConcerns over price pressures are growing ahead of next week's Fed meeting.
-
Secure Your Retirement Paycheck: The Power of Three BucketsPutting all of your nest egg in one basket is risky. Try putting it in three buckets for short-term, medium-term and long-term needs instead.
-
Five Reasons You Might Hate Your Insurance Company (and Why You Shouldn't)Stories about insurance companies letting down their customers are easy to come by, but there's another side to many of those stories.
-
How to Get Your Kids into Investing: A Family Project to TryTo teach your children about investing, put your money where your mouth is with this fun and potentially profitable exercise.
-
Risk On, Risk Off: The Mr. Miyagi Approach to Retirement PlanningThe first 10 years of retirement are some of the riskiest for your investments, but channeling your inner Karate Kid may help defend your funds against losses.
-
Opportunities and Challenges When You Inherit an IRANew SECURE 2.0 Act rules have kicked in to reshape distribution and taxes for inherited IRAs and retirement plans. Read on for strategies to help beneficiaries.
-
Getting Divorced? Beware of Hidden Tax Traps as You Divide AssetsDividing assets fairly in a divorce means looking beyond their current values and asking whether they'll create tax liabilities — or tax breaks — in the future.
-
All-You-Can-Eat Buffets: Can You Get Kicked Out for Eating Too Much?Don't plan on practicing your competitive-eating skills at an all-you-can-eat buffet. You can definitely get kicked out. Plus, don't be a jerk.
-
A Social Security Storm Is Gathering: Here's Your Safety PlanIf Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
