The Case For Not Paying Our Home Off Early

Whether you are a diligent saver or the recipient of a financial windfall, the idea of paying off our mortgage early can be quite alluring. According to Business Insider, this can result in an extra $2,883 a month in our pockets (average mortgage payment on a 30-year fixed mortgage).

While there are undoubtedly benefits to being mortgage-free, as with any financial decision, there are also reasonably sound arguments for not paying off our homes early (seriously).

Therefore, today we'll explore three crucial factors to consider before deciding to pay off our mortgage ahead of schedule.

Potential Overexposure to One Asset Class

By paying off our home early, we are tying up a substantial portion of our wealth in a single illiquid asset.

This can make it challenging to access our funds quickly in case of emergencies or unexpected expenses.

In addition to a lack of liquidity, owning our homes can easily result in overexposure to the real estate market. This overexposure, and by extension, lack of diversification, will result in our wealth being more at the mercy of the fluctuations of a single market.

In the event that we are unable to weather short-term fluctuations in the market, we are increasing our vulnerability to realizing significant losses (i.e. having to unexpectedly sell the house, etc.).

Opportunity Cost of Paying Off Low-Interest Debt

When considering the opportunity cost of paying off low-interest debt, such as a mortgage, it's essential to compare our mortgage’s interest rate to that of other debts we possess.

The avalanche method of debt repayment, which prioritizes paying off debts with the highest interest rates first, is the most financially efficient approach in regards to debt repayment.

By focusing more on paying down our higher interest debts such as credit card debt or personal loans (vs a low-cost mortgage), we can reduce our overall interest payments across the board and achieve debt freedom more efficiently.

On the other hand, if our mortgage has a higher interest rate, then the argument for prioritizing paying off our homes earlier becomes much stronger. That is because the interest payments that can be saved by paying off a mortgage early can potentially match and/or outweigh the gains of paying down other forms of higher interest debt.

Opportunity Cost of Investment Opportunities

Tying up a large chunk of our wealth in our homes immobilizes capital that could otherwise be invested in assets with potentially higher returns.

While there is no doubt that paying off a mortgage early offers the priceless security of owning a home outright, it can come at the expense of missing out on opportunities in the investment market.

With the stock market’s annual average return at 10%, a low-cost mutual fund tracking the stock market’s performance has the ability to easily outperform the capital appreciation of our homes, especially when taking into account home repairs, property insurance, and property taxes.

This is compounded by the fact that we don’t technically “realize” our home’s returns until we sell the property. The only real ‘return’ that we are making is from forgoing monthly mortgage payments (which, in some cases, may be sufficient for some individuals).

Thus, we should consider the opportunity cost of tying up funds in a home when strategizing how we want to build wealth.

Final Thoughts

At the end of the day, life is not all black and white.

While there are some clear mathematical advantages to not paying our home off early, we would be amiss to discount the litany of social and psychological benefits of not having a mortgage. There’s something to be said about the comfort of having one less bill to worry when things inevitably get tough.

When uncertain, it's wise to seek guidance from a Certified Financial Planner. Engaging in a personalized discussion allows us to gain clarity tailored to our unique circumstances and determine the most advantageous course of action.

Disclaimer: Nothing in this article should ever be considered advice, research or an invitation to buy or sell securities. I am not a financial advisor.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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