I work with a lot of families, most of them own homes and a rather large percentage of them have a goal to pay off their house early. But, is it a good idea?
I completely understand why paying your house off early is a big goal for many people. Your mortgage on your house is likely your largest debt you have and a 30-year mortgage can seem like an eternity to be making payments. However, there are tax benefits to having a mortgage and by paying more towards your mortgage monthly there’s less to set aside for your retirement. If you need money in the event you get laid off, have unexpected healthcare bills or some other event a bank is not likely to give you some of your extra payment money back to help you get by but you can take it out of your investment account.
But Jeremy, if I pay off my mortgage early I can then put everything towards my retirement and I’ll be fine! When saving for retirement, time is a critical component. Would you be able to catch up after paying off your mortgage early? Lets look at an example of a couple financing $200,000, over 30 years at 4% interest. Using these numbers your payments for your mortgage only would be about $955 a month.
Lets use the same example and lets say the couple has an extra $400 a month to apply to it. With an extra $400 a month towards their mortgage they’ll pay off their house in 17 years. 13 years early.
So lets now compare how your retirement would look after the 30 year period, the original mortgage length. If you go with the strategy of paying off the mortgage early and then funding your retirement you’ll not apply anything towards your retirement for 17 years and then set aside $1,355 for the last 13 years. If you aren’t trying to pay off your house early you’ll pay your mortgage payment of $955 and apply $400 a month towards your retirement for the entirety of the 30 years. After 30 years, earning 8% a year, using the mortgage acceleration strategy you’ll have saved $368,166.22 for retirement. However, paying off your mortgage normally and saving for retirement throughout the 30 years you’ll of saved $571,069.70. One of the keys to saving for retirement is starting to save early.
To sum up my opinion on paying off your house early, I don’t believe it should be your highest priority. By putting your retirement first you will likely have more saved towards your retirement and continue to have a tax deduction for the interest paid on your mortgage. If you would still like to pay off your house early, I’d consider having your payments changed to bi-weekly instead of monthly. It will aid in your desire to pay off your house early and not eat into what you’re able to save too much if at all. With that being said, everyone’s situation is different and if you can properly fund your retirement savings and still have money left over at the end of the month. I’m not at all against you applying it towards your mortgage then. If you’d like to discuss your specific situation feel free to call my office at 210-960-7899 or send me an email at firstname.lastname@example.org