Frequently Asked Questions
Is it better to pay off your mortgage early or invest?
It depends on your mortgage rate, your expected investment returns, and how much you value being debt-free. In the article’s example, an extra $400 a month on a $500,000 mortgage at 2% saves about $28,000 in interest and cuts nearly five years off the loan, while investing the same amount at an assumed 7% return could grow to over $324,000 in 25 years. Paying down the mortgage gives a guaranteed return equal to your interest rate, while investing offers higher potential growth with more risk. The higher your mortgage rate, the stronger the case for paying it down.
Do extra mortgage payments go toward principal?
Generally, yes. Once your regular payment is covered, extra money can be applied directly to the principal balance, which reduces the interest charged over the rest of the loan. Extra payments made early in the loan have the biggest effect. Tell your lender to apply the extra amount to principal and check your statement to confirm it was.
Is there a penalty for paying off a mortgage early?
Some mortgages charge a prepayment penalty or limit how much extra you can pay each year, while many allow extra payments at any time. Many closed fixed-rate mortgages in Canada, for example, allow only a set amount of prepayment each year without a penalty. Review your loan documents or ask your lender before making large extra payments.
Should I pay off my mortgage before I retire?
Entering retirement without a mortgage lowers your fixed expenses, which reduces how much income you need from savings each month. That benefit has to be weighed against keeping enough cash and investments for emergencies, and against the taxes you could owe by pulling extra money from pre-tax retirement accounts to pay off the loan. A financial advisor can help you compare the options with your full retirement plan in view.
About the author
Contributing Writer, Wealthtender
Derek Condon is a Certified Financial Planner and Mortgage Advisor specializing in financial planning, investments, wealth-preserving insurance, mortgages, and others.
Derek helps his clients with a variety of goals. From someone who is just starting their investing journey to a retiree managing their wealth. From a first-time home buyer to someone refinancing to get their very best mortgage. And everywhere in between.