Should you pay off your mortgage early?

In today’s low interest rate environment, whether or not to pay off a mortgage early is a question which is often asked and debated.  Oftentimes one could benefit more by paying off a loan over a longer time frame, as inflation will tend to degrade the real value of the loan principal over time.  In the current low interest rate environment the carrying costs of the debt are minimal.  Because a mortgage is a long term obligation, the additional funds can instead be invested in a diversified portfolio of equities and bonds, preferably in a ROTH IRA or ROTH 401k.

Many of the arguments for early mortgage payoff were valid in prior decades, when interest rates were much higher.  Take, as an example, the 1990’s when the 30 year rate hovered between 7% and 10%.  In these years, it was usually advisable to pay off a loan early, as significant savings could be realized by doing so.  As an example, consider a $500,000 30 year mortgage at an 8% rate, which was a typical situation in the 1990’s.  By paying off such a mortgage 10 years early, savings of over $300,000, or 60% of the loan principal, could be realized.

Contrast this with a $500,000 30 year loan at a 3% rate, which is more typical in today’s environment.  Paying off this mortgage 10 years ahead of schedule would result in savings of less than $100,000, or about 20% of the loan principal.  An argument could be made to pay off such a mortgage later rather than sooner, as one could more easily afford to carry the principal and invest the additional funds elsewhere.  Meanwhile, inflation will tend to reduce the real value of the loan principal over the 30 year period.