Paying off our home loan isn’t really paying off.
For a long time we made additional payments for ours mortgage.
We did it even though it is generally the case makes no financial sense To prepay a home loan early, you can get a better return on investment elsewhere. Even so, we wanted to be out of debt sooner rather than later. We have already invested a lot and therefore spent a little more money on our monthly home loan.
We didn’t make any additional payments last year – probably forever. And there are two big reasons why we made this choice.
1. We have refinanced to a lower-interest loan
When you pay off a debt early, your return on investment is the interest you save.
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Since mortgage rates are generally well below what you will make by investing in the stock market, it is usually better to invest than to repay the home loan debt early.
Despite this basic math reality, we still made extra mortgage payments when our interest rate was 4% because we liked the idea of no longer having that loan. But we refinanced our home loan When interest rates drop to record lows and we are now paying just under 3% interest on our mortgage.
With an interest rate this low, I really can’t justify putting extra money on the mortgage anymore, even if the idea of being debt free feels good.
2. We don’t want to lose our tax deduction
My husband and I list our taxes so we can deduct mortgage interest. If we repay our loan early, we will lose that deduction.
We chose not to do this as it means that the government is in some way subsidizing our mortgage costs. We also believe our taxes could rise in the coming years, which would add even more to the value of the mortgage interest deduction.
You could argue that there is no point paying interest if your tax deduction doesn’t fully cover what you’re paying. In other words, the deduction lowers our already low interest costs even further because we pay the interest with it untaxed Dollar. As a result, the gap between mortgage repayment and the potential return on investment becomes even greater.
Going mortgage-free is an ambitious goal that I wanted to achieve long ahead of time. But it’s important to look at the math.
If you received or recently refinanced a mortgage when interest rates were hitting record lows (or planning to do so soon), paying off mortgage debt early makes less sense than it was before those lows. This is especially true if you are requesting a deduction for your interest expenses.
Instead, invest your money and take advantage of tax breaks and favorable tax rules that can help you grow your wealth.