I normally stick to design ideas on here, but today I’m feeling passionate about finances. My husband and I live extremely frugally so that our money goes as far as possible. It’s one reason I upcycle and thrift so frequently. It’s also why I choose to build and create on my own, as opposed to paying someone else to do it. I’ve had numerous friends share this article by Dave Ramsey about paying off your mortgage early. It promises “financial freedom,” extra money for retirement, and overall happiness. However, paying off your mortgage early may not make financial sense to everyone. It certainly doesn’t for us, and here’s why:
- Opportunity cost: We have a VERY low interest rate. Making double payments on our mortgage means losing out on investment opportunities that could earn me more than my home interest is costing me. We choose to invest the money that could be an extra mortgage payment every month. General rule: the lower your interest rate, the less you stand to benefit from paying off your mortgage early. The trick here is you HAVE to actually invest the extra money; sitting on it or spending it will not increase its value.
- Taxes: Our mortgage is a large component of our tax strategy, since we itemize our taxes and appreciate the Mortgage Interest Tax Deduction.
- Other financial needs: These don’t apply to us since we are debt-free besides our mortgage, but if you have credit card debt or student loans, you might consider prioritizing that over your mortgage. That being said, I personally prioritized investing my extra money over paying off my student loan debt early since I knew I could get a return on investment that was higher than my loan interest rate. It paid off, and now my loans are paid off (and I made extra money on my investments).
- Diminishing value: Consider that $1 went a lot further in 1986 than it does now. With that same concept in mind, your money is more valuable now than it will be in 30 years; every year your money diminishes in value. If you pay double on a mortgage payment every month in the present, you are spending money that is more valuable than it will be in 20-30 years.