A blog post on the Financial Security Project at Boston College argues that paying off your mortgage faster is a dumb idea given how mortgage rates are scraping the bottom of the barrel these days. In their mind, there’s not much incentive to pay off a mortgage sooner when the money could easily be put toward other expenses like saving up for retirement or scaling back debt.
It’s the classic fork in the road that first-time homebuyers seem to come to when they’ve amassed enough money to catch up with their budget. So does the blog make a valid point?
Well, the answer is yes … and no.
“Most people are pre-programmed into thinking if I have extra money, I’ll put it in my house,” Robert Stammers, director of investor education at the CFA Institute, told BI in August. “That was OK in the past because the interest rates were high, but these days it just doesn’t make sense. People need to think of the best place to put that money.”
In the blog’s defence, there are plenty of reasons not to pay down your mortgage right this second. If clearing away debt isn’t an issue, and there’s money left over to burn, socking some of that cold, hard cash away in an interest bearing account for retirement is clearly the smarter way to play it.
And as we’ve written before, there’s a psychological benefit to paying off the bill. Those nearing retirement—or drowning with an underwater mortgage—would be wise to clear up their balance sheet as soon as possible, since they don’t want those bills interfering with large expenditures like health care or supporting children after college.
That said, the blog should have bolstered its point by outlining the three reasons it’s a dumb idea to pay off your mortgage early. They are: not being diversified, or tying up all your income in a home; being deep in debt (see everyone living paycheck to paycheck); and shocker of shockers, just being young.
The latter is key as your 20s and 30s are the prime time to build up your nest egg as much as you can. This goes back to the virtue of compound interest, meaning that money will quickly accrue over time the longer it sits in the bank—a win for retirement savings.
Having the luxury of time also means being able to spread mortgage payments out while paying off other expenditures like student loan debt. If a homebuyer isn’t quite set in her career—and really, who is these days?—then it’s worth it to shore up an emergency fund just in case the bottom falls out.
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