Should I Pay Off My Mortgage Early?

Have you ever wondered, “Should I pay off my mortgage early?” Many homeowners ask this question because they want to get ahead financially. 

My Mom and Dad paid off their first home in 5 years. They wrote a check and bought their second home with cash – a beautiful, 2 story brick home on 3 acres in Southern Virginia.

Today, they say paying cash for this home and making extra payments on others was one of the biggest mistakes they made financially. They would never do it again! 

But mainstream financial advice says to pay off your mortgage quickly. What should you do? 

As Americans we are programmed to get out of debt and payoff a mortgage to attain financial freedom. 

Ask yourself these questions: Do you want to pay off your mortgage? Or do you want the money to be able to pay off your mortgage?

The decision to make extra payments on your mortgage, or to redirect this money to another investment is also an emotional decision.

If the emotional value of having your house paid off is more valuable than having the money to pay it off, then you may choose to make extra payments on your mortgage. But you should understand the benefits and downsides first.

Benefits of Paying Off a Mortgage Early

There is no question that paying off your mortgage early WILL save you interest. A lot of interest. 

For example, if you pay off a $300,000 mortgage at 3.5% in only 15 years instead of 30 years you will save $98,929.80 of interest. This is over 32.9% of the original mortgage loan.

Saving interest is probably the biggest reason for paying off your mortgage. There are some other benefits too which include:

    • Better Future Cashflow – without a mortgage payment that money can be used for other things
    • Peace of mind –Paying off your mortgage may provide you peace of mind
    • Simplicity – One less monthly payment

Problems with Paying Off a Mortgage Early

Now for the downsides of making extra payments on a mortgage:

  • Lower Cash Reserves – when you make extra payments on your mortgage, this usually translates to less money on hand for emergencies or other opportunities.
  • Lost Opportunity – what could you safely earn by “saving” your extra mortgage payments elsewhere? If this return is higher or similar to the rate you are paying on the mortgage, then you could have better financial options and flexibility by keeping your savings liquid and earning a modest return to offset the interest on your mortgage.
  • Lower Retirement savings – if you are making extra payments to pay off your home, it is harder to save for retirement at the same time. When you save less for retirement, the benefit of compounding growth in your favor is drastically reduced.
  • Losing a Tax Deduction – this applies to homeowners who itemize deductions which means they probably have higher than average income as well
  • Credit Score – Paying off your mortgage early, rather than making regular payments on time could have a slightly negative effect on your credit score

The biggest downsides of paying off a mortgage early are lower reserves (savings) while paying down the mortgage and the cost of lost opportunities. 

Should You Pay Off Your Mortgage Early?

Considering these pros and cons, is it smart to pay off your house early? 

Mom and Dad say NO – they never plan to make extra payments on a mortgage again because they do not want to have so much of their money tied up.

You see, after we moved to Virginia, the new business did not take off as quickly as expected. About that same time, my grandfather was in a serious car accident and came to live with us for 10 months with my grandmother, their foster daughter, plus my aunt and cousin. With five additional mouths to feed, expenses went up while income stayed low. Money was tight.

If Mom and Dad had been able to access the equity tied up in their new home, they would have had the opportunity to invest more in advertising the business to boost income. 

This was not possible because the income record on the new business would not qualify them for a home equity line of credit. They probably could have qualified for a mortgage when they first moved, but not when they really needed the money.

Now it was a cash crisis and lost opportunity for the business all tied up in one ugly situation. Mom and Dad worked through those tough times making ends meet as heroes, but they do not want to try it again.

Hindsight is 20/20

The major benefit which comes from not paying off your mortgage early depends on what you do with your surplus cashflow. A few years ago, Dad decided to revisit all their home purchases over the last 25+ years and see what he would have done in hindsight.

It turns out, they have made $350,000 buying and selling their various homes. But they would have made this money whether they made extra payments on the mortgages or not.

Dad came to this conclusion:  If they would have simply taken the extra payments they had paid on all their mortgages over the years (or bought with cash) and paid premiums on participating whole life insurance policies instead*, then they would have:

  • Had access to the cash they needed along the way
  • Still made the $350,000 of profit buying and selling their homes 
  • An extra $741,568 of cash value in their life insurance policies

You can watch him share this review during a live presentation here:

With better planning, they could have had the benefit of the security they thought they were getting by paying off their homes early without losing access to cash reserves or giving up lost opportunity on the business.They also would have had: 

  • Better Cashflow
  • Peace of Mind & Security
  • Better Cash Reserves
  • Better Retirement Savings
  • Better life insurance protection (in addition to their term insurance)
  • $4.3 million more permanent life insurance death benefit 

Participating whole life Insurance is an asset, not an investment. As an asset, it would have given Mom and Dad guaranteed access to cash along the way…without subjecting their cash reserves to riding the market rollercoaster.

So again, ask yourself: Do you want to pay off your mortgage? Or do you want the money to be able to pay off your mortgage?

With the low interest rates offered on fixed mortgages at this time, it makes better financial sense NOT to make extra mortgage payments and put those “extra” funds into permanent whole life insurance policies with high cash value and strong guaranteed growth.

Having cash values in a policy allows you to make other investments with the potential for higher returns (via policy loans), if you wish, but at least you lock in good guarantees on healthy cash reserves and start the compounding growth curve for retirement.

What Are the Results?

Obviously, life insurance gets more expensive the longer you wait, so what if you choose to pay off a mortgage first and then buy whole life insurance? This is an option, and it’s similar to what my parents ended up doing, but the compounding policy growth will never be quite as good as if you get the insurance when you are younger.

The moral of the story:  Get whole life insurance sooner than later and you will be able to pay off your mortgage sooner than 30 years, if you wish, while building a great asset.

Wait to get permanent life insurance and you can probably pay off your mortgage faster, but your guaranteed assets will suffer.

For example, if a 30-year-old male waits 15 years to buy whole life insurance, in order to pay off a $300,000 mortgage at 3.5% in just 15 years, instead of 30 years:

Projected cash values will be $206,016 less at age 65 than if this person bought the same policy 15 years earlier. The death benefit is also significantly less. 

In this case, we could say a family who buys the life insurance instead of paying off the mortgage faster is $107,086.20 ahead. This is serious money.

Here’s the math:

Policy for 30yr old – Cash Value at age 65: 428,736
Policy for 45yr old – Cash Value at age 65: 222,720

Difference: 428,736 – 222,720 = 206,016 

Interest NOT saved on Mortgage: -98,929.80

Net Result: 206,016 – 98,929.80 = 107,086.20

Policy for 30yr old Death Benefit at age 65: 853,673
Policy for 45yr old Death Benefit at age 65: 442,337 

853,673 – 442,337 = 411,336 more permanent death benefit at age 65

At McFie Insurancewe specialize in designing and selling high-cash value participating whole life insurance policies customized to meet your financial goals. Call us at 702-660-7000 to discuss your own situation and see if this strategy would be a good fit for you.

*These policies would need to be designed for high cash value and good long-term growth. At McFie Insurancewe specialize in designing and selling these types of whole life insurance policies.

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