The financial wisdom behind early mortgage payoff

[UNITED STATES] In an era of historically low interest rates, the decision to pay off a mortgage early might seem counterintuitive. However, for some homeowners, the benefits of early mortgage payoff extend far beyond mere financial calculations. This article explores four compelling reasons why one couple is choosing to pay off their mortgage early, despite having an interest rate under 2%.

1. Paving the Way for Early Retirement

One of the primary motivations for early mortgage payoff is the facilitation of early retirement plans. For many, the dream of retiring before the traditional age of 65 is a powerful driving force in financial decision-making.

"My husband and I have been planning to retire at the age of 50 for more than a decade," shares the homeowner. "That puts our retirement date around five years from now. Having our mortgage paid off around that time would make this process easier by lowering our monthly expenses by $1,749 right off the bat — almost $21,000 a year."

This strategic move aligns perfectly with the couple's retirement goals. By eliminating their largest monthly expense, they're effectively reducing the amount of income needed to sustain their lifestyle in retirement. This approach is particularly beneficial when considering the 4% rule, a common guideline for retirement withdrawals.

"We plan to retire using the 4% rule, and having fewer bills will help," the homeowner explains. "Without a mortgage payment, our retirement income would only need to cover taxes, insurance (auto, health, and property), groceries, home upkeep, and other essentials."

2. Hedging Bets in an Uncertain Market

While the allure of potential stock market gains might tempt some to invest rather than pay down low-interest debt, this couple is taking a more balanced approach. They're not putting all their eggs in one basket, instead opting for a strategy that combines mortgage prepayment with continued investment.

"We're also not paying off our mortgage all at once — we're rounding up our monthly mortgage payment by $751 to pay $2,500 per month," the homeowner reveals. "This means we get the benefit of paying off our mortgage early and saving small amounts of interest while also continuing to funnel additional income into our retirement accounts, as well as our Health Savings Account (HSA)."

This balanced strategy allows them to benefit from potential market gains while simultaneously working towards a debt-free lifestyle. It's a prudent approach, especially given the unpredictable nature of the stock market.

"For reference, the S&P 500 went up 24% in 2023 and about the same in 2024. While nobody knows what the future holds, we can't assume those kinds of stock market returns will continue. With this strategy, we're making the most of every dollar."

3. Modest but Meaningful Interest Savings

While the interest savings on a low-rate mortgage might not be substantial, they're not insignificant either. Every dollar saved on interest is a dollar that can be redirected towards other financial goals or quality-of-life improvements.

"While interest savings aren't the main reason we're paying off our low-rate mortgage well before the end of its term, we are saving some money," the homeowner acknowledges. "It's not as much as we could earn if we invested the $751 we're overpaying on our mortgage each month, but it's not $0, either."

The couple's mortgage calculator provides a concrete example of these savings: "At the moment, the mortgage calculator for our home loan with Chase says prepaying our mortgage at this rate will save us an additional $6,494.16 in interest and cut our repayment timeline by 39 months."

While this might not seem like a substantial amount compared to potential investment returns, it's important to remember that these savings are guaranteed. Unlike the stock market, which can be volatile and unpredictable, the interest saved by paying off a mortgage early is a sure thing.

4. The Intangible Value of Peace of Mind

Perhaps the most compelling reason for early mortgage payoff is one that can't be quantified: peace of mind. The psychological benefits of being debt-free can have a profound impact on one's quality of life and overall well-being.

"A final reason we're paying off our mortgage is the same reason we paid off the loan on our last home," the homeowner explains. "We dislike debt and the stress that comes with it, and we very much prefer to live a lifestyle that's entirely debt-free."

This peace of mind extends beyond just emotional comfort. It can have practical benefits as well, simplifying financial management and providing greater flexibility in budgeting and spending decisions.

"Even though I still had to keep up with property taxes and homeowners insurance premiums on our old property, not having a mortgage payment made monthly budgeting considerably easier," the homeowner reflects. "It also meant we could splurge more on certain lifestyle purchases that are important to us, including regular weekend getaways and family vacations."

The decision to pay off a mortgage early, even one with a remarkably low interest rate, is deeply personal. It involves weighing financial considerations against personal values, long-term goals, and individual risk tolerance.

For this couple, the benefits of early mortgage payoff extend far beyond simple dollars and cents. It's about creating a stable financial foundation for early retirement, hedging against market uncertainties, saving on interest (however modest), and achieving the peace of mind that comes with a debt-free lifestyle.

"While paying off our mortgage early may not be the best mathematical choice, it's the one that will help my partner and me sleep well at night," the homeowner concludes. "And to us, that matters way more than just dollars and cents."

As with all major financial decisions, it's crucial to carefully consider your unique circumstances, consult with financial professionals, and make a choice that aligns with your personal goals and values. Whether you choose to pay off your mortgage early or invest those extra funds elsewhere, the key is to make an informed decision that supports your long-term financial well-being and peace of mind.