September 29, 2022

In most cases, paying off debts early is a smart financial idea, as you’ll save money on interest owed. But when it comes to a mortgage, this isn’t always the case — in some cases, you may be penalized and end up paying more if you pay this debt off before the full mortgage term. Plus, there are other reasons why it may not make financial sense for you to pay off a mortgage early.
Find Out: States With the Highest Property Taxes
Read: 10 Common Mortgage Mistakes That Hurt Your Finances
Here’s why it might not pay to pay off your mortgage early.
“With inflation at the highest level we’ve seen since 1982, it’s time to dust off the inflation playbook,” said Gary Zimmerman, CEO at MaxMyInterest. “In a high inflationary environment, the nominal value of your house goes up, the nominal amount of debt (your mortgage) stays flat, but the real value of that debt goes down, and, as a result, the equity in your house increases. Owning real property, such as a house, coupled with a low-interest rate mortgage, tends to be a good way to hedge against, or even beat, inflation.”
Zimmerman notes that this rule of thumb only applies if your interest rate is lower than the inflation rate — which will be the case for many borrowers right now.
“A prime borrower who locked in a mortgage over the past few years is likely to have an interest rate that’s significantly lower than the current pace of inflation,” he said. “As a result, most people should not pre-pay their mortgage. In fact, more affluent borrowers might consider increasing the size of their mortgage to take advantage of low-cost funds and magnify the benefits of inflation.”
Discover: The Cost To Own a 3-Bedroom Home in Every State
“A con of paying off your mortgage early is that the payments are higher and may crowd out other investments — for instance, contributing to a retirement plan or funding a child’s college fund,” said Robert R. Johnson, Ph.D., CFA, professor of finance at Heider College of Business, Creighton University. “Some borrowers mistakenly view the purchase of a home as their chief investment. If mortgage payments are so large as a percentage of monthly income that people can’t adequately fund their retirement account or a child’s college education account, then it may be wise to simply pay your mortgage over the normal term of the loan.”
Investing in the stock market may also be a better use of your funds than paying your mortgage off early.
“Noble laureate economist and Yale professor Robert Shiller makes a compelling case that real estate, particularly residential homes, is a much inferior investment when compared to stocks,” Johnson said. “Shiller finds that on an inflation-adjusted basis, the average home price has increased only 0.6% annually over the past 100 years. Contrast that with the stock market. According to data compiled by Ibbotson Associates, the average return on the S&P 500 has been approximately 10% while inflation has averaged around 3%. The inflation-adjusted return of the stock market over the past 90 years has been approximately 7%.”
Take a Look: Here’s How Much Mortgage Rates Have Fluctuated Over the Past Decade
“Although a mortgage is often the largest debt in the household, it usually has one of the lowest [interest] rates and a rate below what can be earned on that money,” said Doug Perry, strategic financing advisor at Real Estate Bees.
Instead, you’d be better off paying off your highest interest rate debt first, which is often unsecured debt such as credit card debt and personal loans, Perry said.
Paying off your mortgage early may give you peace of mind, but it should never be prioritized over building up an emergency fund.
“Once you pay off debt or pay down debt, you now have more equity but less in available cash when needed,” said Dr. David Phelps, real estate investor and founder and CEO of Freedom Founders. “There is safety in cash and cash flow. Equity also provides a level of safety, but cash flow is the oxygen that maintains your business or personal revenue needs. Equity by itself cannot do that.”
Read: Strategies To Pay Off Your Mortgage Earlier
“While early payoff penalties for mortgages are not very common, they do exist,” said Tolen Teigen, CFA, CFP, chief investment officer at FinDec. “You would have to look at what the penalty is and the interest rate on the penalty, and weigh the interest rate you’d be paying with the penalty versus anything else you have debt-wise.”
More From GOBankingRates
How Much You Should Have in Your Savings Account at Every Stage of Life
Find Out Which Banks Are the Top 100 Banks Leading the US in 2022
How Has COVID-19 Impacted the 2022 Tax Season?
35 Useless Expenses You Need To Slash From Your Budget Now
This article originally appeared on GOBankingRates.com: Why Now Is Not the Time To Pay Off Your Mortgage Early, According To Experts
Markets reporter Ines Ferre joins Yahoo Finance Live to highlight the circumstances surrounding Costco's latest earnings report and the impact of increasing membership fees.
In this article, we will look at billionaire Ken Fisher’s top 10 growth stock picks. If you want to explore similar stocks, you can also take a look at Ken Fisher’s Top 5 Growth Stock Picks. Ken Fisher is an American billionaire investor and financial analyst. Mr. Fisher is the hedge fund manager of Fisher […]
On Wednesday, the Fed bumped up interest rates again, its third 75-basis point hike since June, and signaled that there could be two more such hikes by the end of this year. The conventional wisdom has the Fed acting properly, and aggressively, in an attempt to counter inflation raging at 40-year high levels. But conventional wisdom isn’t always right – and we can learn a lot by consulting the contrarians. Few top investors are more contrarian than Cathie Wood. The founder and manager of ARK Inv
After popping briefly yesterday on positive analyst commentary over its 2022 Global Technical Conference performance, Nvidia (NASDAQ: NVDA) stock is trending lower again Thursday — down 5% through 11 a.m. on some curious comments from the company's CEO. Commenting on what some analysts have called the "eye-watering" prices announced for its latest series of GeForce RTX graphics, Nvidia CEO Jensen Huang asserted that "Moore's Law is dead" — and that semiconductor prices are only going up from here. To refresh your memory, Moore's Law is an assertion made by legendary Intel engineer Gordon Moore in 1965, that the number of transistors in an integrated circuit roughly doubles every two years, with the result that semiconductors will get both better and cheaper over time.
Less than five months after discouraging conversations with the U.S. Food and Drug Administration led Spero Therapeutics Inc. to pause work on a drug and lay off 110 people, the company is licensing that same drug to GSK plc for up to $291 million.
Yahoo Finance's Seana Smith breaks down trending tickers moving in after hours trading.
“We printed up too much money, and just thought the party would never end,” Icahn said, adding that with the Fed raising rates to fight inflation, "the party's over."
Carnival (CCL) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.
Growth and technology stocks are leading the market lower today, but early-stage electric vehicle (EV) stocks are tanking even more. The Nasdaq Composite Index moved down by more than 1.2% as of 2:55 p.m. ET, but EV start-ups Rivian Automotive (NASDAQ: RIVN), Lucid Group (NASDAQ: LCID), and Nikola (NASDAQ: NKLA) were faring much worse. At that time, Rivian, Lucid, and Nikola had dropped 4.6%, 8.6%, and 9%, respectively.
The market has soured on these stocks, but insiders are buying. Is it time to load up on these companies?
Shares of Bristol Myers Squibb (NYSE: BMY) were bouncing 3.4% higher as of 3:31 p.m. ET on Thursday after slipping a little earlier this week. Instead, today's move appeared to be the result of investors seeking relatively safe stocks as the Nasdaq Composite index and Russell 2000 small-cap index fell. Bristol Myers Squibb has seemed to be sort of a safe haven for investors throughout much of 2022.
Investors waiting for Palantir Technologies (NYSE: PLTR) to report a quarter with breakout growth are likely in for a longer wait, according to a Wall Street analyst. Given the uncertain economic environment, it appears fewer investors are willing to continue to wait. Shares of Palantir were down more than 5% on Thursday afternoon as Wall Street continues to shy away from more speculative growth stocks.
If you're investing in the cannabis industry, you need to be aware of how overly bullish some companies and CEOs are about their prospects. Tilray Brands (NASDAQ: TLRY) falls into that crowd, pumping itself up to be a $4 billion business in just a few years. There are warning signs about Tilray's promises and forecasts that investors shouldn't ignore.
The latest Federal Reserve rate hike and Fed Chair Jerome Powell's vow to do whatever is necessary to fight inflation are rippling through markets, sending shares down due to investor fears that the Fed's actions will push the economy into a recession. Travel is perhaps the ultimate big-ticket discretionary purchase, and airline stocks are tumbling as part of the broader sell-off. Shares of JetBlue Airways (NASDAQ: JBLU), American Airlines Group (NASDAQ: AAL), and United Airlines Holdings (NASDAQ: UAL) are all down as much as 5%, with shares of Delta Air Lines (NYSE: DAL), Alaska Air Group (NYSE: ALK), and Southwest Airlines (NYSE: LUV) all down 3% or more.
UBS analysts upgraded Eli Lilly stock to Buy, stating that the pharma company's Type 2 diabetes medication could become a best-selling drug. 
This year's market slump created several growth stock bargains. But not every apparent bargain is what it seems.
Yahoo Finance Live’s Julie Hyman discusses Novavax stock performance after JPMorgan downgrades its shares to Underweight from Neutral.
Near-term storm clouds are gathering, but the stock looks like an excellent value for investors willing to ride out the volatility.
Shares of several payments and fintech stocks struggled to shake off a hangover from the Federal Reserve's September meeting yesterday, in which the Fed delivered another big rate hike. Shares of the large payments rail Mastercard (NYSE: MA) traded nearly 1.5% lower in the final hour of trading today. Shares of the buy now, pay later (BNPL) company Affirm (NASDAQ: AFRM) traded more than 6% lower, and shares of digital bank SoFi (NASDAQ: SOFI) were down nearly 5%.
The retreat is being driven by soaring inflation and rising interest rates, which are putting the brakes on the economy and forcing investors to rethink their growth expectations. Upstart Holdings (NASDAQ: UPST), for example, uses artificial intelligence (AI) to originate loans for banks on other lenders, and investors have doubts about how well its lending models will hold up as household finances deteriorate. Upstart's main goal is to displace the standard tools used to size up the risk in consumer lending.

source

Leave a Reply