A couple of months ago I had the (mis)fortune of closing on a house in a crazy housing market. Prior to finding the house we wanted, I shopped around and found a great mortgage broker who was used to working with physicians and was also familiar with physician home loans.
The process was “smooth-ish” and we closed in about 45 days. In the end, we got the house we wanted for under the appraised value and we got a great rate (2.625%). So all in all it was a win.
Prior to this home, I have never considered paying a home off early. I’ve always believed paying the mortgage off faster than the prescribed 30 years was not smart from a mathematical standpoint. I am further convinced of this after the recent release of the Consumer Price Index and inflation being at 4.2%,
However, I’ve never been afraid to challenge my thinking and I wonder if it is it smart to pay your mortgage off early while your young? There has to be some type of benefit, right?
Well, the answer to that question is a bit complicated. Mortgage rates currently are at an absolute low compared to the highs experienced in the 1980s. These are not the same mortgages that prior generations faced. This is a different animal.
Additionally, we live in a time where the S&P 500 has returned on annualized basis roughly 10.7%. So there is a huge opportunity cost when making extra payments on your mortgage compared to doing essentially nothing and getting a free ride with the S&P 500.
Theoretically, paying off my mortgage early would give me a guaranteed 2.625% return. Although, factoring in mortgage tax deductions, this return is lower than 2.625%.
From a numbers standpoint it doesn’t make sense to me to pay it off early, but numbers aren’t the only thing to consider.
I remember a guest blog post from Mustard Seed Money on the Physician on Fire blog which tackled this subject. In that post, Rob, the author of Mustard Seed Money, details how paying off his mortgage early allowed him to feel unburdened and provided him the opportunity to take more risks at work. The result of those risks, led to additional promotions and pay raises, which may not have been available had he not taken on riskier assignments. Thus for Rob, he replaced his stock market gains with personal professional gains and pay raises. Paying off his mortgage early made sense.
The psychology behind paying a mortgage off early is something I have not considered. Paying off a mortgage early, when the interest rate is low doesn’t make sense for me, however it may make sense for you.
Personal finance is personal for a reason. Whether you decide to pay off your mortgage early vs take your time, do what’s best for you and your psyche. Sometimes you have to ignore (or not ignore) the math.
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
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