The majority of couples are rightfully comfortable borrowing money to buy a home that fits within their budget. However, it is sometimes difficult for people to distinguish between a healthy amount of debt that improves the life of your future self, and unhealthy debt that anchors couples trying to reach their financial goals.
Money is a leading cause of divorce and stress in a marriage. It’s wrong to believe that deciding whether to pay off your mortgage or invest is strictly a financial decision.
Couples often experience conflict and dissatisfaction as a result of debt, which is a significant stressor in marital relationships. Research reveals that financial disagreements, particularly debt-related, are among the primary sources of marital discord.
Debt also has pervasive impacts on performance at work, physical health, and relationships.
Deciding whether to pay off your mortgage early or invest is a relationship decision, first. The purpose of this post is to share the numbers and psychology behind the decision of whether to pay off your mortgage early or invest.
The Case for Paying Off Your Mortgage Early
In a previous post, 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.”
Let's assume 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.
It's clear that borrowers in a high interest rate environment would have to pay more for a home. The higher the interest rate, the more expensive the loan. The borrower would save nearly half a million dollars by making extra $1,000 monthly payments.
“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.
Amortization Calculator
Click here to access the amortization calculator. In an amortization schedule, you can see how much money you pay in principal and interest over time.
The Case for Investing More
According to Michele Kruger, Ph.D. and CFP®,
“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.”
You can see that the financial advantage is far less significant than a high-interest rate mortgage when using an interest rate of 3%, which was not uncommon a few years ago.
Paying Off My Mortgage vs. Investing More: The Math
Rather than using an extra $1,000 monthly to pay off your mortgage early to save $100,000, say you invested that money in a no-fee index fund that earned the market average.
What is the result? That would leave you with a quarter of a million dollars more.
Investment Calculator
Click here to access the compound interest calculator.
Learn More
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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