Many people have the desire to not have a house payment. So, they either make additional payments on their mortgage or when they have a windfall of cash they want to pay off their mortgage. However, this may not be the most financially sound thing to do.
With mortgage interest rates at 40-year lows, it may be more financially sound to apply that extra payment or windfall toward a savings or retirement account.
The average 30-year mortgage is currently around 3.5% today. With the average return of the stock market, as measured by the S&P 500 Index, being 10.5% since 1957—that’s a margin of 7% that you could be taking advantage of.
As an example, a 30-year mortgage at 3.5% would cost you $185,000 in interest over time, while that same $300,000 invested in the S&P 500 would have grown to over $6.1 million over the past 30 years. Basically, saving $185,000 in interest cost you the potential of growing your money to over $6 million!
There is a difference in debt and “good-debt.” When you are able to use other people’s money at a very low cost, as in a mortgage lender, then you should.
The caveat in this scenario is that you do have to invest the difference to get that margin. While not having a mortgage and monthly payments may help you sleep better at night, paying your mortgage off early may not be your smartest financial choice.
Mark Johnson is a financial advisor for Heartland Wealth Management, 3351 W. Rock Creek Road, Suite 130, Norman, OK 73072. He can be contacted at 405.561.7051 or Mark.Johnson@heartlandwm.com.