Does it make sense to pay off your mortgage early?

If you’ve got some extra cash, should you throw it at your mortgage?

When you own a home, the thought of a mortgage hanging over your head for decades can be daunting for many people — and it’s natural to want to pay off your mortgage as soon as possible.

But before you decide to use an inheritance, raise or your savings to pay off your mortgage, (or even before you decide to make extra payments), it’s important to take a step back and determine whether it really makes financial sense for you.

In some cases, the amount you save on interest when you pay off your mortgage early might not exceed what you would earn if you put the money to work elsewhere. On the other hand, sometimes it’s not about the return on other investments and more about peace of mind or freeing up cash flow for other opportunities.

Here’s what you need to know as you decide whether to pay off your mortgage early.

Will other investments beat paying off a mortgage early?

The biggest consideration is whether to pay off your mortgage or invest. What if, instead of putting money into getting rid of the mortgage early, you invested the cash elsewhere?

“Sadly, the math tells us, it’s almost always better to invest in other places than in your mortgage,” says Richard Bowen, CPA and owner of Bowen Accounting in Bakersfield, California.

Many mortgages today have rates of 3.5 percent to 5.5 percent, so if paying off your mortgage early leads to a return equal to your interest rate, that return is somewhat lackluster. Compare that to the annualized return for the S&P 500 — roughly 10 percent over the last 90 years.

Additionally, Bowen points out, you could take the cash you’d use to pay off your mortgage early and leverage it into buying a cash-flow-positive property like multi-family real estate or single-family homes that have the potential to offer higher long-term returns.

“The thing is, no one can give you a guarantee on an investment,” Bowen cautions. “You can put your money in the stock market and lose it. You can put your money in real estate and it doesn’t perform as well as you expected it to.”

See the full WFAA article

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