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Should I Pay Off My Mortgage Early?

May 1, 2024

Mortgage Payoff Early or Invest

Written by:

jayson hardieJayson Hardie – Managing Partner – (636) 256-5712

We recently covered a hack to help you pay off your mortgage early. In this article, we will discuss whether paying down your mortgage early or investing those funds in stocks is better.

Many homeowners face a common dilemma: channel their extra funds into accelerating mortgage payments or divert them into investment avenues. Both options can carry their own set of benefits and risks, making the decision a nuanced one. As we examine the data, we will use historical truths about the stock market and mortgage rates and compare them to a hypothetical situation of what happens when you choose one versus the other. The math may be surprising and compelling.

History of returns on the S&P 500

The S&P 500 Index, or Standard & Poor’s 500 Index, isa market-capitalization-weighted index of 500 leadingpublicly traded companies in the U.S. Over time, the S&P 500 has been one of the most stable wealth-building investments widely available to mainstream investors.

Let’s look at the past 52 years; the return on investment, or ROI, on the S&P 500 has been over 12%. Now, during the financial crisis from October 2008 through March 2009, that same index fell by 56%. If you had decided to sell during that time, you could have lost nearly half of your investment value in a six-month time span.

Overall, during this 52-year time span, 12 of the 52 years, you would have lost money investing in the stock market if you sold. But by sticking with your investment and riding out the down years, you would still have landed an overall 12% growth in that period.

Ultimately, investing in quality stocks will earn you money in the long term. But the keyword here is long-term. Understanding the ups and downs that come with long-term investments can help you make a better choice.

Now, we’ll look at what Mortgage rates have done over a similar time frame.

Historical Mortgage Rates

We have taken a deep dive into mortgage rate history – but since 1971, the Freddie Mac 30-Year Fixed Mortgage Rate has been as high as 15%, as low as 2.5%, and at an average of approximately 7.5%. This does not include any subprime mortgages during this time frame. A 30-year fixed mortgage is a great financial product. Warren Buffet, widely accepted as one of the greatest investors in the world, believes the 30-year fixed mortgage is incredibly attractive due to its ability to be refinanced any time if rates go down.

S&P Rates Mortgage Rates

Looking at Numbers – How Large is the Difference?

If mortgage rates are historically at 7.5%, but I can invest and earn a 10%-12% return, then I should always invest excess cash in an S&P 500 fund…right?

Let’s say it’s 1992, and mortgage rates are 8%, and you take out a $400,000 mortgage. For simplicity’s sake, we won’t factor in a refinance. If you have an extra $100 each month, should you pay that toward your mortgage or invest?

Paying down the mortgage will save you approximately $94,000 on your mortgage.

Investing that money during the same time will build wealth of approximately $225,000.

Investing builds an extra $131,000 over the same time by using the same dollars. That’s a pretty compelling reason to think about investing your funds.

invest vs payoff

What’s the catch? 

To make this strategy work, you must have a stable source of income that allows you to invest in a long-term strategy since you’ll need to be able to ride out tough times and keep your money in your investments.

Of course, there’s crunching the numbers, and then there’s real life. There is a certain allure to paying off your mortgage early. You can save on interest, and it’s emotionally satisfying. It can also provide a sense of security and peace of mind and help reduce financial risk.

Here are some reasons why you may or may not want to pay off your mortgage early.

Interest Savings: By paying off your mortgage early, you can significantly reduce the amount of interest you’ll pay over the life of the loan. This can translate into substantial savings, especially with long-term mortgages.

Build Equity:
Paying off your mortgage faster also means building equity in your home quicker. This can help when it comes time to refinance, which you can leverage to make improvements to your home that could help improve your home’s value.

Security and Peace of Mind
: Eliminating mortgage debt reduces your financial risk. Without the burden of monthly payments, you have greater flexibility in times of financial uncertainty, such as job loss or economic downturns. Being debt-free can provide a sense of security and peace of mind.

Higher Potential Returns: Historically, the stock market has yielded higher returns compared to mortgage interest rates. By investing in diversified portfolios, you can grow your wealth faster than the rate at which you’d save on mortgage interest.

Tax Benefits: Certain investment vehicles, such as retirement accounts like 401(k)s or IRAs, offer tax advantages that can further enhance your returns. Contributions to these accounts may be tax-deductible or grow tax-deferred, providing additional financial incentives to invest.

Liquidity and Diversification: Investing your extra money offers liquidity and diversification benefits. Unlike home equity, which is illiquid, investments can be easily accessed in times of need. Additionally, spreading your investments across different asset classes mitigates risk and enhances your overall financial stability.

The bottom line is that, financially speaking, it is best to invest. When rates are low and borrowing money is cheap, you can earn even more by investing the extra money you save on your monthly payment in the market as well. But if you are on the fence, a two-pronged approach might be the best option for you. If your budget allows it, you might invest your extra monthly funds and use bonuses or any extra income as a once-a-year extra mortgage payment, which can still help you pay off your mortgage early and save on interest.

Ultimately, the decision to invest or pay off your mortgage early depends on your individual situation and financial goals. It’s important to consider your situation and seek personalized advice. Whether you decide to chip away at your mortgage or invest, both are smart financial moves that can help you accomplish your goals.

"By being open and recognizing our strengths and weaknesses, we can see opportunities for growth and ways to help each other."

- CEO, Jayson Hardie on Growth

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