The Common Sense Investor

Normally, you should only pay your mortgage early if the interest rate is higher than the return you might expect to get by investing your money instead.

It’s not uncommon to hear common folks repeat the principle “always try to be debt-free.†This principle is a broad-brush concept that compels people to think that, whenever the opportunity arises, they should pay off all of their debts because a debt is a debt is a debt. In other words, all debts are liabilities that should be addressed immediately. For some, the goal of being debt free is one of the primary motivators in life and job.

For the most part we do follow the common advise and try to eliminate most forms of debt in our lives, especially high-interest debt. Also, it is a natural reaction that the bigger our debts, the more worried we get. We wonder if we will ever be able to repay everything or how long it will take to pay back the loan. That’s why when we get a windfall or find ourselves in a situation where we can lower the loan or completely pay it off we tend to do so.

Being debt free was extremely important to my grandparents and is somewhat important to my parents. For me, the key is to be comfortable with low-interest, manageable debt that enables greater overall acquisition of wealth. It turns out that mortgage loans are exactly this type of debt.

But as there are no hard and fast rules in life, it follows that even when it comes to your finances and how you treat debt there are also no hard and fast rules. This is quite evident with mortgages.

Finance experts advise that when it comes to mortgages there are certain situations when it would be a good idea to hold off on your “windfall†and not pay your mortgage early. In fact, based on recent surveys, a very large number of people with great wealth still carry a mortgage.

Of course there are strong arguments for both paying your mortgage early and for holding off payments. The best barometer to determine which decision to take would be your personal and financial goals. What do you want to do with your money and what financial achievements do you want to attain within a certain time period?

In order for you to make a more informed judgement, here are some reasons where paying off your mortgage early might be OK:

* You want to eliminate all of your debts (psychological/emotional)
* You have plans to take an early retirement. By eliminating your mortgage payments you can save faster for your retirement and, thus, quit your job at an early time.
* You want to be attain a personal state where you have more options and choices in life and eliminating debt frees you up to achieve this status
* You always take a standard deduction and have never tried to itemize
* You are the type who wants to see a guaranteed rate of return. You can ensure that savings rate only if you pay off your mortgage.
* You are living in a country where you do not get a tax benefit for carrying a mortgage

On the other hand, below are some reasons for not immediately paying off your mortgage:

* Your main financial goal is to gain wealth
* You want to distribute your assets in such a way that you will be able to meet your goals at a faster pace.
* You are in a high tax bracket and the added deduction can actually lower your income tax bracket and ultimately your taxes
* You are convinced that the money can be better served in another investment with better returns

In the end, do what you feel comfortable with, but keep in mind that often you can do better things with your money than pay off your mortgage. By understanding that, you can free yourself to maximize your wealth.