Despite having a free and clear home, the pleasant peace of mind of deciding to pay off a low interest rate mortgage isn’t always easy. If your mortgage rate is lower than a risk-free return on investment, it usually makes more sense to keep the mortgage and invest excess cash elsewhere.
What is considered a low-interest mortgage?
I define a low-rate mortgage as an interest rate below or below the risk-free rate of return. The risk-free interest rate can be equal to the Treasury bill or bond of your choice, or even the current money market interest rate you can earn in cash.
For example, if your mortgage rate is 4%, and your money market account offers 4.2%, then your mortgage will be in the lower interest. Conversely, if you have a 2.5% mortgage but a 10-year bond generates only 0.6%, a mortgage isn’t really low risk, as alternative risk-free investments don’t offer a better return. Furthermore, if inflation runs at 7% and mortgage rates are 5%, the effective actual mortgage rate is negative and the debt is cheaper over time.
When evaluating whether to pay off your mortgage early, you must always consider the opportunity cost of investing this money elsewhere. Financial decisions should never be made in a vacuum.
I think the 10-year Treasury bond yield is the most important financial figure because it is the benchmark for financial relativity. With this point in mind, let’s review the only good reason to pay off a low-interest mortgage earlier.
The only good reason to pay off a low interest rate mortgage
Since I started buying real estate in 2003, I have paid off several low-interest mortgages. Here are a few legal reasons why I found to do this.
1) You no longer want to own your own home or invest in property
The easiest way to pay off your mortgage is to sell your property. If the value of your home exceeds the loan balance, the mortgage is automatically repaid in the transaction. You can repay without actively saving for years early. The main challenge is going through the sales process, which can take 30-45 days.
There are many reasons you might want to sell: relocation, retirement, layoffs, upgrades or just want to reduce liability.
For example, in 2017, after my son was born, I no longer wanted to be the landlord of a four-bedroom house that turned into a party home. My neighbors have four or five young people living there, occasionally complaining about noise and reckless behavior. So I sold the property and eliminated the 4.25% mortgage. I then reinvest my home sales proceeds in stocks, municipal bonds and private real estate, roughly the same.
The relief of not managing just the rent is worth not to get any additional rewards from the gains. Fortunately, the stock and private real estate markets continue to appreciate, which makes it a win-win situation.
2) You have a specific and better use of your home net worth
Money is the most powerful when money has a definite purpose. Set clear goals for your savings and investments to make financial decisions easier and more disciplined.
As you repay your mortgage and the value of your home rises, your equity will grow. While many homeowners have sat on their equity for decades, some may find better uses.
Here are some valid reasons to use home equity elsewhere:
- Rotate capital into better investment – If real estate has performed more than years and another asset class, such as stocks or bonds, looks more attractive, you may decide to cash in and diversify. Conversely, if your home is very grateful but residential commercial real estate doesn’t, you can spin to someone who is underperforming.
- Paying for university tuition – If you purchased a rental property when your child was born, you can sell or refinance to help them fund their education after 18 years.
- Fund your retirement – Many retirees reduce size and cash out their interests to simplify their financial position and reduce costs.
Strategic use of home equity can unlock new financial opportunities as long as alternative investments or use of funds are taken into account.
3) Your real estate exposure is too large
Everyone should make target assets allocations for real estate relative to their total net assets. If the value of a property surges, you may find yourself overexposure of real estate, prompting a need to rebalance.
Some common scenarios where this happens include:
- An extended real estate bull market will make your real estate disproportionately valuable.
- You bought a new dreamer before selling your old home and temporarily owned more real estate than planned.
- A stock market crash will reduce your non-existing real estate assets and make your real estate portfolio bigger.
- You accidentally inherit the property, further increasing your real estate exposure.
If your target real estate allocation is 50% of your net worth, try to keep it 40% to 60%. Anything outside of this scope justifies the sale of the property and relocating funds.
4) You are tired of local governments and property taxes
As property values rise, so do property taxes. At some point, you may feel that your tax burden is too high, especially if you think local governments are poorly managed or fail to address key issues.
While property taxes fund essential services such as schools and public safety, inefficiency and corruption can erode trust. Some homeowners have reached a breakout point and decided to sell rather than continue to fund governments they don’t support.
I’m most willing to pay property tax
for me, Maximum The amount I am willing to pay for property tax is $100,000 per year. Property taxes fund public schools, emergency services and infrastructure, which I fully support. But, besides this threshold, my willingness to give more depends entirely on the service status of my city’s actual service to residents.
If the new mayor stands up – around corruption, combating drug dealers and violent criminals, clearing the streets – I would consider giving more. But if the status quo remains – spending, ineffective policy, then I would rather put my money elsewhere.
The frustration of paying huge taxes for broken governance
Imagine: Over the past 20 years, you have paid more than $1 million in property taxes. You are proud to maintain your home and community. Then, one day, a San Francisco city official opened a notice on your door saying your grower box – My own Property – Too high. They give you 30 days to remove them or face a $3,000 fine, and an extra $100 per day to violate the rules.
Meanwhile, rampant medication use can lead to overdose in spacious sunlight. Retail theft is very bad and the main stores are closing. Homeless camps grew, while city officials trembled. However, the government has not addressed these practical issues, but has focused on policing Planting box.
Paying property tax is one thing. Watching the money was wasted as the city deteriorated.
5) Your adjustable rate mortgage (ARM) is resetting higher interest rates
If you have an adjustable mortgage (ARM), your mortgage rate may increase dramatically once the fixed term is over.
For example, let’s say you took out 7/1 of your arm at 2.5%, and now, seven years later, it’s reset to 4.5%. Over the years, you have built up equity and increased your savings. Instead of letting the rate adjust, you can also repay the mortgage or pay back the majority of the loan for lower payments.
If you choose not to refinance your arm and stick with it, your interest rate may end up reaching its maximum allowable limit, higher than you’re satisfied with. For example, by year 9, the interest rate of 4.5% could jump to 6.5%, and by year 10, it could rise to 7.5%. Paying off the mortgage may be a smarter financial transfer with 10-year bond yields remaining below 4.5%.
6) You have achieved financial freedom and would rather be simple than maximizing profits
Once financial independence is achieved, you can prioritize higher returns. You may prefer the certainty of owning a home directly than chasing the gains of the stock market.
If you have enough wealth to comfortably fund your lifestyle with passive income, paying off your mortgage can be a reasonable decision. Even if stocks or private investments provide higher returns, debt-free psychological and emotional benefits may outweigh the financial position of retaining a mortgage.
For many, financial freedom means shifting the focus from capital accumulation to capital preservation and lifestyle enjoyment. After all, the first rule of financial independence is not to lose money.
Take mortgage debt to the advantage before you no longer need it
In my 20s and 30s, I embraced mortgage debt to increase my wealth. I refinanced as much as possible and invested elsewhere with low interest rates. I had no choice but to make my money work harder, because I didn’t have much to do in the first place.
Now, in my 40s, my perspective has changed. I focus on simplification. As my last mortgage is approaching the reset period for 2026, I plan to pay it off.
Ultimately, everyone’s goal should be to become unsecured when they are no longer willing or able to work. When that day comes, the peace of mind of owning your home directly will be far more than any financial mortgage.
Because in the end, inner peace is priceless.
Readers, what are the other compelling reasons for low interest rate mortgages that have not been mentioned yet? Have you ever regretted paying off your low-interest mortgage? If so, what is your biggest regret?
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The only good reason to pay off a low interest rate mortgage is the original post of the Financial Samurai. all rights reserved. Financial Samurai started in 2009 and is today the leading independent personal finance website. All content is based on first-hand experience and knowledge. Sign up for my free weekly newsletter here.
