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A Reddit user recently asked whether it makes sense to pay off a portion of their mortgage early to cut back on the 6% interest rate.
The downside is that the person would use money from savings that would otherwise go toward paying off a car loan with a lower interest rate.
Redditors largely answered the question with math. Because the mortgage interest rate is higher than the auto loan rate — and also higher than the interest someone could earn by putting savings in a high-yield savings account — many suggested putting the money toward the mortgage principal.
Others pointed out caveats, such as ensuring the original poster still had access to sufficient emergency funds before paying off a large sum.
I asked a few financial professionals for their views, which overlapped with the Redditors’ perspective and added nuanced insight.
Consider your financial goals
When a client asks Roland Chow, a financial planner and portfolio manager at Optura Advisors in the San Francisco Bay Area, if it makes sense to pay off a mortgage early, he often answers the question with a different question: What is the objective?
“Do they want more security in retirement, or money to give to kids? Do they want to minimize their expenses?” he asks. If a primary goal is to reduce monthly expenses, then paying off a mortgage could make a lot of sense.
But if a bigger priority is to preserve savings, then it might be better to leave the mortgage alone and let savings grow. Chow recommends modeling out multiple scenarios to see how the different choices would impact expenses and savings going forward.
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Protect your savings
If a mortgage holder opts to apply some savings toward a mortgage payoff, it’s important to make sure there’s enough available cash left over.
“Do not sacrifice that emergency fund,” warns JB Beckett, founder of the Beckett Financial Group in West Columbia, South Carolina.
He urges people to consider their own financial situation — including how much savings they have — when weighing mortgage payoff decisions. “For some people it makes sense, and for others it doesn’t,” he says.
“It can be so tempting in our instant gratification society to say, ‘OK, I have $30,000 left on the mortgage and $30,000 in savings, let me liquidate savings to pay it off.’ But what happens if you have an emergency and you have no money left?” Beckett adds.
Calculate the opportunity cost
It’s also worth thinking about what else you could do with the money, Beckett says.
For example, if you invested the money in the stock market, you could potentially earn returns that outweigh the benefit of paying off the mortgage. (The stock market, of course, can also go down.)
You could also put the money into a college savings account, pay off another outstanding debt or fund a future goal — the possibilities are endless.
Look at the interest rate — and your psyche
Like many Redditors suggested, Chow and Beckett say to take the mortgage rate into consideration.
The higher your mortgage rate is, Chow adds, the more likely it is that paying it off early could make sense.
Since the poster’s rate is relatively high (over 6%), paying off the mortgage early could make sense, depending on savings and other factors.
But it’s not always about hard numbers, Chow says. “That becomes more about a person’s psychology and lifestyle choice, which is always an important consideration.”
In other words, if someone feels strongly about not carrying debt, they might be more inclined to pay it off than someone who is more comfortable with debt, and there’s nothing wrong with that.
“At the end of the day, you have to go with gut instinct and what reduces stress,” Beckett says. “Some people just cannot stand to have debt.”
Reddit is an online forum where users share their thoughts in “threads” on various topics. The popular site includes plenty of discussion on financial subjects like whether to pay off a mortgage, so we sifted through Reddit forums to get a pulse check. People post anonymously, so we cannot confirm their individual experiences or circumstances.
