There are financial advantages to paying down a mortgage, and there are also non-financial benefits. No matter how favorable the terms of a mortgage, it is a form of debt. Paying down a mortgage means you'll be debt free that much sooner, and you will then have additional funds available to spend or invest on other things.
The Total Cost of a House
You've heard homeowners refer to a house as a “money pit” because of all the expenses of repair and maintenance. You might be surprised, even shocked, to learn that one of the deepest pits is the cost of the mortgage over the life of the loan. Your house doesn't just cost the $250,000 you paid for it at the closing. If you have a 30-year mortgage at just 5 percent interest, you will have paid a total of $483,139 at the end of the 30 years. Contrast that with a loan for the same amount and at the same interest rate but paid off in 15 years. The total loan cost over 15 years would be $355,857. The quicker you pay down the mortgage, the lower your overall cost.
Why Not to Pay Down a Mortgage
You might think you'd be crazy not to pay down a mortgage, yet many financial professionals discourage paying down a mortgage for a couple of reasons. For one, the IRS allows a you to deduct home mortgage interest from your income taxes. Financial advisers also suggest that the money you are not using to pay off the mortgage would otherwise be invested in some way that will get a good return on your investment.
Investing Your Money
While many would advise you against paying down your mortgage for those reasons, paying down your mortgage will also mean that the day will come sooner when you do not have a large monthly payment and will instead be able to invest that money in some other way. If your mortgage interest rate is lower than the returns on your other investments, then it is not financially beneficial to pay the mortgage down. Most investments, however, bring an uncertain rate of return.
The Known and the Great Unknown
Unless you have an adjustable-rate mortgage, your interest rate and monthly payments are a known fact. Your alternative investments are the great unknown. The stock market could be bullish and return 12 percent or more. Or it could repeat the bear market of 2008, when stocks lost half or more of their value, and you'd be kicking yourself that ypu didn't just pay down your mortgage instead of putting your money in stocks. If you're a conservative investor and risk averse, you might decide not to gamble on the unknown and put your money into the certainty of your home.
The Joy of Debt Free Living
The greatest benefit of paying down your mortgage may be the comfort of knowing you own your home outright. You won't live in fear of foreclosure or have that nagging feeling that your forgot to make your monthly payment. Every mortgage has a scheduled payoff date, so it is always an end goal to completely pay the loan down eventually. You might be happy that you decided to make that day come earlier than expected.
Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.