OneBite® - Eating the Financial Elephant

Should you pay off your mortgage early?

Jun 29, 2022

By: Shawn Meade

Tags: Life, Family

When it comes to finances, people often have a running inner dialogue.

“What is bitcoin?” “How do I pay less taxes?” and “How do I retire early?” “Will my family be taken care of if I die?”

But overall, the top question is, “Should I pay off my mortgage early?”

There is no easy answer because the decision depends on many variables:

  • Your current mortgage rate
  • Whether you can deduct your mortgage interest as an itemized expense
  • How much longer you have to pay on your mortgage
  • When you plan to retire
  • Your risk tolerance
  • How much money you’ll have going into your retirement
  • Whether you like known outcomes or prefer to gamble a little

Numbers vs. emotions

Keeping a low-interest-rate mortgage makes more sense than paying the loan off early with a lump sum of cash because you can invest the cash to earn a higher rate of return in the markets long-term (as opposed to saving some interest expense each year going forward).

For example, if you can get 6% to 9% in the markets over a long period, why would you pay off a 3¼% mortgage that might be tax deductible?

The biggest reason is the lack of a guarantee. It’s hard to throw “guaranteed” around in the investing world. Only a few investment products can put that word anywhere — for example, FDIC-insured products such as CDs, certain life insurance offerings and U.S. Treasury bonds.

Paying off your mortgage generates that guaranteed rate of return.

A quantitative and qualitative decision

So, how do you stop mulling over the choices and decide what’s best for you? Here is a good starting point.

You should probably pay off your mortgage if you:

  • Like guaranteed stuff
  • Don’t want to owe anyone anything
  • Don’t want to stay on top of making payments
  • Don’t want to worry about a mortgage payment if you ever get laid off or become disabled

You should probably keep your mortgage loan (and invest the cash you would use to pay it off) if you:

  • Have the stomach for stock-market volatility
  • Have the ability to budget for your mortgage payment
  • Have a low mortgage rate
  • Like to maximize your growth potential

In many cases, the answer is clearer after doing this analysis.

How we can help

Which option would bring you inner peace when it comes to paying off a mortgage early? If you still aren’t sure, we’re here to help you decide — and achieve — whatever will bring you peace of mind.

Learn more on our private client services web page.

Author(s)

Shawn Meade, CFP®, CPA, MS
Advisors
View Profile

1 https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220615.pdf 
2 https://www.cnbc.com/2022/06/22/powell-tells-congress-the-fed-is-strongly-committed-to-bringing-inflation-down.html 
3 https://www.bls.gov/news.release/pdf/cpi.pdf  
4 https://www.bls.gov/news.release/empsit.nr0.htm 
5 https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_070122.pdf 
6 https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2022 

U.S. Stock Market: Russell 3000 Index
International Developed Stocks: MSCI EAFE NR Index
Emerging Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Bloomberg Barclays Aggregate Index
Emerging Markets Bonds: JPM EMBI Global Diversified TR Index
Large Cap Value U.S. Stocks: Russell 1000 Value Index
Large Cap Growth U.S. Stocks: Russell 1000 Growth Index
Small Cap Value U.S. Stocks: Russell 2000 Value Index
Small Cap Growth U.S. Stocks: Russell 2000 Growth Index
Int-Term Municipal Bonds: BBgBarc Municipal 1-10Y Blend 1-12Y Index
High Yield U.S. Bonds: ICE BofA BB-B US CP HY Constrained Index

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services and fees is set forth in Wipfli Financial’s current Form ADV Part 2A brochure, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.

Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.

Source: © [2019] Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Find an Advisor