Paying off your mortgage early is often seen as a financial fallacy for several reasons. Firstly, mortgages are usually the cheapest debt a person can have, with interest rates often significantly lower than other forms of debt such as credit cards or car loans. By focusing on paying off your mortgage before these higher-interest debts, you may end up spending more in interest overall.
Secondly, investing extra money instead of paying off your mortgage can often yield a higher return over the long run. Many investment avenues available, such as stocks or mutual funds, tend to yield higher returns compared with the interest saved by paying off a mortgage early.
Lastly, the tax benefits associated with mortgage interest can be beneficial. In certain tax brackets, the amount paid in interest can be deducted, reducing your overall taxable income.
Now, it’s easy to empathize on why this fallacy is prevalent. Owning a home free and clear is, without a doubt, a sense of security and a significant achievement. It eliminates a substantial monthly expense, possibly allowing for more flexibility in personal spending and saving. The sense of relief and security associated with being mortgage-free is psychologically appealing, which can often cloud financial judgment.
An effective financial strategy in this context would be to prioritize paying off high-interest debts first, then build an emergency fund. Once these are in place, focusing on investing your surplus cash for the long-term should be considered. This should be balanced with paying down your mortgage at a reasonable rate.
Relevant resources for further reading include:
“The Total Money Makeover” by Dave Ramsey. Book Link. Provides insights on managing debts including home loans.
“Bogle on Mutual Funds: New Perspectives For The Intelligent Investor” by John C. Bogle. Book Link. To learn for whom and when investing is better than paying off low-interest debts.
“The Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse of the American Dream” by Timothy F. Howard. Book Link. Discussion about the mortgage industry.
“Home Buying For Dummies” by Eric Tyson and Ray Brown. Book Link. Contains useful advice on managing mortgages.
“Mortgage Loan”. Wiki Link. Understanding the general principles and challenges related with mortgages.