Paying Off Your Mortgage Early vs. Investing – What Do You Do?
Are you working to pay off your mortgage early or invest? This was a question posed in a forum recently and it got me thinking, was I doing the right thing? I’ve been more focused on investing but should I focus on paying off my mortgage? I didn’t know, so I asked the best personal finance guru I know, my dad.
Not only did he give me his answer, but he wrote a whole article about it (Well, only because I asked him :-)!
So here’s his well-written doctoral response,
Many first-time home buyers start out with a motivated mindset of paying off a new house as soon as possible. People of all ages in the United States apply for mortgage loans with different strategies for paying the loan off.
According to a study by Del Valle, (2018) 72% of millennials have a desire to pay their mortgage off early before traveling and starting a family, while baby boomers are satisfied with affordable interest rates and low monthly payments.
Home Mortgage pay-off strategies are popular and tend to resonate more with people purchasing a new home than people asking about retirement plans. With a mortgage payoff plan, the economic burden for the homeowner can result in mortgage freedom.
Economic freedom from monthly mortgage payments can open the door to many other possibilities. Edwards (2009) says the whole idea of a pay-off plan is to shave years off a home mortgage to have extra money for retirement, travel, home remodel, and other interests.
Mortgage freedom can also mean that people can make financial decisions without being stressed out about making monthly loan payments.
When home buyers are contemplating a mortgage, there are 7 key factors to consider:
- Location and size of the property
- Financial interest rates
- Type of loan (FHA, Fixed or Adjustable, etc.)
- Mortgage down payment
- Age of property
- Length of term (15 or 30 years)
Based on loan approval, millennials are drawn to strategies like making bi-weekly payments that can pay down the home loan more quickly saving a substantial amount of interest. This group of people are born between 1978-2004.
Del Valle, notes millennials are people who look to mortgage their home for the shortest possible loan term, this strategy is interesting and will increase the monthly payments, however, the loan is paid down quickly without having to pay extra on the monthly note.
According to Forbes this group is interested in putting extra money down that comes into the household towards the mortgage loan, for example, a raise from the job, the bonus money from the employer, income tax refunds, etc.
Baby boomers think differently than millennials, and this includes strategies to pay off a home over a long term. Baby boomers are people (people born between 1945-1964) who are in a stage of life that brings more wisdom and stability toward home ownership.
This difference alone changes the dynamics of home ownership to thinking long term. Some baby boomers are not as motivated as millennials to pay the house off. Subsequently, baby boomers like to keep a clean history of making loan payments at the same time anticipating refinancing for a lower interest rate.
This proven strategy will decrease the amount of interest for the homeowner over time. Baby boomers also like to consistently pay on the principal each month to significantly reduce the amount of time required to pay off the mortgage loan.
Recommendation: For many homeowners, the mortgage note is usually the costliest expense for the household as 78% of US citizens live paycheck to paycheck according to CareerBuilder. Therefore, the author is often cautious about recommending Financial programs; this provision is due to some stringent banking requirements and end-dates that are not acceptable.
However, if you are in the market for a new home regardless of age, feel free to research the opportunities to suit your needs. Research the different lending institutions or government programs that fit your needs and seek professional guidance when dealing with mortgages and purchasing property.
The home pay-off topic continues to be interesting as there are no clear answers to the best strategy for mortgage freedom. The best approach for mortgage pay-offs will depend upon the specific factors suited for the homeowner.
It is unclear whether the real estate market will be better than the year before. However, what is clear, is that millennials desire to pay off their homes early and baby-boomers are comfortable with their low monthly payments for the next 30 years. The good news is whichever age group people are in they are likely to find strategies that are suited for their household.
Edwards, J. R. (2009). The economic state of America in a service-oriented economy: An economic outlook of the United States. Consortium Journal of Hospitality & Tourism, 12, 89-99.
Thanks Dad! As a millennial, I think I will work towards doing both. Because, why not?
I wanted to add this comment from the forum I discussed earlier because it goes with what my dad was saying and I loved the points he made,
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