Why would a married couple want to pay off their mortgage early?
I asked Michele Kruger, Ph.D. and CFP®, a Senior Financial Planner at Gratus Capital and a Part-time Lecturer at the University of Georgia, why a married couple would want to pay off their mortgage early.
“Married couples may want to pay off their mortgage early if they have a high-interest rate,” according to Kruger.
The high cost of a high interest rate mortgage
We have been spoiled with the lowest interest rates in history over the past 15 years. Rates ticked up after COVID-19, and the cost of borrowing is higher for folks with lower credit scores. With this as context, let’s create an example assuming a 9% interest rate on a $400,000 loan to purchase a home at a price just over the national average, assuming a 10% down payment.
As you can see, borrowers would pay significantly more for a home in a high interest rate environment. The higher the interest rate, the more expensive the loan.
Amortization Calculator
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The advantage of paying off a high interest rate mortgage early
As you can see, by making a $1,000 extra monthly payment, the borrower would save nearly half a million dollars.
“Even if they have a low-interest rate, they may want to pay off their mortgage if they are worried they would spend their excess cash flow rather than allocate it towards their saving and investing goals,” according to Dr. Kruger.
The Psychology of Debt
Borrowing to buy a home that fits within the framework of a financially healthy budget is rightfully appropriate for most couples. I would panic if I had credit card debt or similar types of debt, which is not an uncommon feeling.
According to research, debt can create financial worries in some, creating significant psychological distress and impacting an individual's overall well-being. These feelings can manifest into anxiety, depression, and a feeling of helplessness.
Debt also has pervasive impacts on performance at work, physical health, and relationships.
Some cannot distinguish between a healthy amount of debt that improves the life of your future self and unhealthy debt that serves as an anchor for couples trying to sail toward their financial goals. For example, Tightwads don't just love to save; they hate to spend.
Thus, your personal relationship with debt and your spouses should be considered.
The Damage Debt Does to a Relationship
Debt is a significant stressor in marital relationships, often leading to conflict and dissatisfaction among couples. Research reveals that financial disagreements, particularly debt-related, are among the primary sources of marital discord.
Why would a married couple not want to pay off their mortgage early?
Using a 3% interest rate, which was not uncommon a few years ago, you can see the financial advantage is far less significant than a high-interest rate mortgage.
As you can see, there is far less of a financial advantage to pay your mortgage off early when the interest rate on the loan is low.
But according to Michele Kruger, Ph.D. and CFP®, there are more factors at play.
“Married couples may not want to pay off their mortgage early if they have a low-interest rate and feel confident they would save or invest the excess cash flow they are considering directing to their mortgage.”
Should I pay off my mortgage or invest
Using strictly math, the decision can be easy.
Rather than applying an extra $1,000 monthly toward paying off your mortgage early to save just over $100,000 over the life of the loan, assume you used those dollars to invest in a no-fee index fund that earned the market average over the same period.
The result? You would be a quarter of a million dollars ahead.
Investment Calculator
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More than math
John Stoj is the founder of flat-fee RIA Verbatim Financial. I asked John what factors help determine whether couples should pay off their mortgage early or invest more.
"While there is real math behind the decision whether or not to prepay your mortgage, in the end, like many things in personal finance, the right answer is personal. How long do you plan on being in the home? How close are you to retirement?”
“Some folks think mortgage rates would impact the decision most, but they may or may not figure in, depending on whether refinancing makes sense. In the end, it often comes down to how much emotional value a person would get from no longer having a mortgage."
Related: Is a Home an Investment?
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Citations
Ryu, Soomin, and Lu Fan. “The Relationship Between Financial Worries and Psychological Distress Among U.S. Adults.” Journal of family and economic issues vol. 44,1 (2023): 16-33. doi:10.1007/s10834-022-09820-9