Does It Make Sense to Pay off Your Mortgage Early?

When you buy a home with a mortgage, it is natural to want to pay off the mortgage early instead of letting it hang over your head like the Damocles Sword for years and years. This can be especially disconcerting when you are preparing for retirement. Naturally, you want to to pay off all your dues as early as possible.
However, before you even start thinking of using your savings, inheritance, and a raise from your job to pay the mortgage off early, it is important that you take a few steps back to determine whether doing so will prove beneficial or not. As you will learn, there are several Do’s and Don’ts to a home loan.
Here’s something for you to know: the amount you save on interest on paying off your mortgage early may not be more than your earnings if you had invested the same money elsewhere instead of early repayment. In such a case, early repayment is not that financially sensible, right?
However, there is also the thing that early repayment of your mortgage gives you a lot of peace of mind. After all, after paying off the loan, you are now free to profit from other investments, and you don’t have to worry about the monthly investments.
To help you to make a decision, here are a few things you need to know, courtesy of mymoneykarma:

Is using money for investing better than early mortgage repayment?

So what really happens when you decide to invest your money somewhere else?

Richard Bowen, CPA and the owner of Bowen Accounting, California, says that it not just makes more sense but it is also more financially viable to invest somewhere else.

Here’s what happens:
Most mortgages have interest rates between 3.5% and 5.5%. This means that the returns you can get after an early repayment is generally the same as your interest rate. This is lackluster to say the least. On the other hand, the annual returns for S&P 500 is around 10%.
In addition, while making such investments, you can take out the cash from dividends etc. to start paying off your mortgage and thus transfer it into a cash-flow positive property. These have a potential to get greater returns in the long term.

However, here’s a word of caution: Investments may give greater returns and interest rates, but also carry risks. You can invest a lot on the market and end up losing it. Even investing in real estate is not without risks.
There’s a potential downside to paying off the home loan early on as well.

After an early repayment, the price of the property takes a plunge, leaving you in considerable loss. After all, buying a home is investing in real estate too.
So at the end of the day, consider carefully which road you’ll take as both have certain risks.

Do you want all your money to be tied up in repaying mortgage?

Before you decide to use a large part of your savings to repay the mortgage early, consider the liquidity factor. A property is a non-liquid asset. It can take years to sell it off for some capital.
You are depleting your cash reserves - money that you may need later on - for early repayment of the mortgage.
A possible solution:
Here’s a good solution for such situations, but it’ll need some planning and consistent effort on your part. You’ll have to build an emergency fund, in addition to mutual funds, treasury bills, stocks, marketable securities, and other tangible assets.
Thus, while you are giving money for early repayment, you’re also investing money in tax-advantage retirement accounts and the property, thereby having enough liquid cash from investments to have liquid cash in case of emergencies.
It is best to have a 6-month safety cushion to protect yourself during emergencies.

So how will you want to use the money if not for early mortgage repayment?

Time to be brutally realistic. If you don’t use the money for an early mortgage repayment, where will you use it? 

If you struggle to keep money intact in the bank, or if you have a habit of spending money quickly, it may make more sense to pay off the mortgage early.
An early repayment of your mortgage will save you thousands in interest over time, and shall additionally help you build a property equity faster.

How important is peace of mind to you?

Let’s face it. Sometimes, peace of mind is the only thing that matters.

It brings a great deal of mental peace to know you don’t have to pay mortgage EMIs anymore, and that now your funds are not tied down. For those saving for retirement, this is very true.
Doing so may not carry much financial potential, but peace of mind can certainly not be measured in terms of money. Paying back the home loan means you can:

• Establish a home equity faster

• Develop an emergency fund or emergency income source

• Make home improvements sooner

So what do you think? Is it more worthwhile to pay off the mortgage, or to invest instead?