A home mortgage is something that the majority of Americans need to obtain in order to purchase a primary residence. A mortgage is considered “good debt” because it is tied to an asset that has the opportunity to appreciate in value over time. It is usually issued at a lower interest rate compared to consumer loans and the interest can be tax deductible.
A common question people have is whether or not they should pay down their mortgage early. The first thing to look at when trying to answer this question is the interest rate on the loan. Since the Financial Crisis in 2008, we have seen historically low interest rates. According to FreddieMac, the average 30-Year Fixed-rate mortgage has been between 3.5% and 5.5% since 2010. It is important to take into consideration the opportunity cost of paying down your mortgage. If you have a low rate (in the 3.5%-4.5% range), it may make sense to invest that money rather than using it to aggressively pay down the mortgage. Going back to 1926, the average annual return on a 60% stock and 40% bond portfolio is about 8%. If you’re a long-term investor, it would make more financial sense to invest that money in a diversified portfolio instead.
Another aspect of this decision is the emotional side. A housing payment (whether it be rent or mortgage) is often the largest expense item in a person’s budget. For some people, you cannot put a price on the feeling of owning your own home free and clear and never having to worry about a mortgage payment again.
Are you wondering if you should pursue paying off your mortgage early? Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™. We’ll help you answer this question and provide you with the advice you need to help meet your financial goals.
