Should You Really Pay Off Your Home Early? The Risk of Holding On To Debt.
Buying a home is one of the great goals and opportunities for many Americans like you and me. With the strength of the middle class and the US dollar, low interest rates, and fairly predictable housing value growth, buying a home is easy and common in America. It can represent a good long-term investment, especially when considering that rent generally increases, and some day, we may even pay off that old mortgage!
But we have a problem with this model.
Society has taught us to hold on to our mortgages as long as possible. What is the reason? Because we can theoretically earn more interest in the stock market than what it costs us to keep our mortgage; in other words, we can earn more money over time by investing in the stock market and keeping our mortgage until it’s fully paid, usually in 30 years.
On the one hand, this can be true. According to US News & World Report, the average interest rate for a mortgage in the US is about 4.28%. On the other hand, Investopedia notes that, over the life of the S&P 500 index, investors have seen an average return of about 10%.
Let’s say that you had an extra $100 per month to invest either in the S&P 500 or to pay off your mortgage. In theory, you’ll earn more money by investing in an asset that has a higher rate of return. By investing that $100 in the stock market, after 10 years, that investment would be worth over $5,000 more than investing in your mortgage.
So why should you consider investing in your mortgage: risk!
Finance professionals aren’t just interested in potential gains, but potential risks to those gains. The S&P 500 won’t always earn 10%. But as long as you have your mortgage, you are guaranteed to pay the interest rate.
Imagine it’s 2008 again. You have a mortgage, a job, and an investment you made instead of paying off your mortgage early. The stock market tumbles and you lose your job. You no longer have the same value in the investment, and you realize you can’t pay your mortgage. You could lose your home.
Now, this is an extreme example, but it is an example that many Americans actually faced in 2008. There is very little we actually need in this world. But a home is one of them. The sooner you can pay off your home, the sooner you can eliminate a major risk from your life. Imagine how good it will feel to not have to pay rent or a mortgage!
My recommendation is that you pay off all of your other debts first, build a six-month emergency fund, then start attacking that mortgage. When you buy a house, be sure to get a 15-year mortgage. Get that mortgage paid off quickly, then you can focus on other investments for the future. Your home is an amazingly important asset. The things you do today can help you keep it!
Brad Eaton is a Professional Financial Coach. He has a passion for helping ordinary people like you take control of your finances so you can wake up each day focusing on what’s really important in life, like God, your family, and service to others.
Brad also teaches a biblical finance course called House on the Rock Academy, where he teaches God's people how to live in freedom with their finances.
Lastly, Brad is a student at the Southern Baptist Theological Seminary, where he is pursuing his M. Div. to eventually plant churches internationally.
Reach out today to see how Brad can help you live in financial peace.