This is a question we hear often from clients, and with good reason—a mortgage is typically one of the largest (if not the largest) ongoing expenses within a household. So it’s no surprise people are eager to knock it off their balance sheet.

And at first glance, this seems like a wise move—no more monthly payments, no more interest… But there are a few details to consider before you make this your next financial goal. Some of those details are purely mathematical, others are more emotional, and some relate to the basic principles of financial planning.

Let’s start with the basics.

“Do I have the extra cash to invest?”

Maybe you wouldn’t be reading this blog if you didn’t have some extra cash on hand, but it’s important to consider how a substantial investment will impact your other financial goals.

Because here’s the thing—once the money is in the house, it’s stuck there. Eliminating a mortgage payment might reduce your monthly expenses, but it also reduces your liquidity. If your HVAC system crashes and you need to replace it, you can’t exactly pull money out of the drywall to pay for it.

So, make sure you have an adequate emergency fund or other investments you could pull from if the need arose.

Something else to consider is whether you have other debts to pay off. If your credit cards or student loans have a higher interest rate than your mortgage, prioritize those.

If you’re debt free (or close to it) and have a solid emergency fund, it’s time to look at your long-term goals—Have you maxed out your retirement savings plans? Met your savings goals for your child’s education? If not, consider allocating your extra cash there first.

If your debts, emergency fund, and long-term goals are all squared away, it’s time to look at the math.

“Could my money be working harder smarter somewhere else?”

If you have a relatively low interest rate (around 3% to 4%), paying off your mortgage early means you would, in effect, earn 3% to 4% on that “investment.” In contrast, the average long-term stock market return is around 6% to 8%—so keeping your mortgage and investing your extra cash could mean earning more in the long run. Of course, markets fluctuate, so those numbers are never guaranteed (whereas saving on your mortgage would be), so you have to weigh the value of a lower, guaranteed return versus a higher, non-guaranteed return when investing that money somewhere else.

If you have a higher interest rate on your home loan (above 6%), paying off your mortgage early starts to look a little more attractive, at least from a mathematical standpoint—after all, it’s a guaranteed savings that could potentially match the interest earned on other investments.

If your home loan is somewhere in the 5% to 6% range, that’s where the math isn’t as influential. It’s not as likely you’ll get a greater return by investing the money than by paying off your mortgage, and it could be beneficial to eliminate those 5.5% monthly payments. This is where it helps to consider your emotional needs.

“What will it mean to me to have my home paid off?”

There is one sentiment that rings true in just about every area of financial planning:

“It depends.”

That’s because financial planning isn’t just about maximizing the numbers; it’s about helping you sleep at night—and what brings peace of mind is different for everybody.

For some, heading into retirement knowing they own their home free and clear is worth much more than any return they could get from another investment. They want fewer living expenses and more flexibility with their spending, and eliminating a mortgage payment does just that. For these people, paying off their home is the right choice, even when it’s not the “best” mathematical decision.

For others, the idea of “trapping” money in their home is more daunting than freeing. So even with a 7% interest rate, paying off the mortgage might not be the right choice.

So is paying off your mortgage the right choice for you?

It depends. But if you want help weighing the pros and cons, we’d be happy to discuss them with you so you can make the best choice for you—just schedule a call with us here.