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Homeowners should consider prioritizing building their emergency fund over paying off their mortgage early as holding onto cash can provide a safety net for unexpected expenses and offer better returns through investing, and potentially save on interest by refinancing at a lower rate later.
Should You Prioritize Paying Off Your Mortgage or Building Your Emergency Fund?
According to the report of The Motley Fool, many homeowners are deciding whether to pay off their mortgages early or make extra payments. While it’s often thought that paying off a mortgage sooner will save money on interest and current financial conditions may suggest otherwise. Mortgage rates were very low around 3% or less in 2020 and 2021, and now savings accounts offer 4% or more. This means homeowners might benefit more from saving or investing their extra money rather than paying down their mortgage. Keeping cash on hand can also provide a safety net for unexpected expenses.
(photo: Quora)
Should You Pay Off Your Mortgage Early or Invest?
The benefits of investing instead of paying off a mortgage early become clear when you look at potential returns. For example, investing $5,000 in stocks with an average return of 10% could grow to about $65,000 over 27 years. In comparison, paying down a $200,000 mortgage at 3% early would only save around $6,000 in interest. This shows that investing might give a better financial return than paying off a mortgage faster.
Even if mortgage rates are higher, like 7% holding onto cash can still be wise. With good credit, homeowners might be able to refinance their mortgage later at a lower rate and saving on interest. Keeping cash also helps avoid high borrowing costs for repairs or emergencies which can be expensive if taken out as a home equity loan. Keeping cash for future opportunities and emergencies might be a better strategy than making extra mortgage payments.
