Is Now the Right Time to Pay Off Your Mortgage?

For many homeowners, the idea of paying off their mortgage is something they dream about. But when is the “right time” to do it? For me, the answer is simple: any time you have the cash and have your financial house in order. I’m not in the business of playing interest rate arbitrage. That said, there are several factors to consider before making that decision.

How Did You Come by This Liquidity?

It’s easy to talk about paying off your mortgage in theory. But let’s be real: that chunk of cash came from somewhere, and there’s definitely a story behind it. That story matters because it shapes what the money means and your willingness to deploy it towards your mortgage.

• Inheritance or gift: Using a windfall to reduce debt can bring stability and peace of mind, but you might be influenced by what you think the giver intended.

• Bonus or executive compensation (RSUs): These often come in lumps and are tied to the stock market. It can be tough to part with company stock, especially when it’s flying high.

• Equity event or business sale: If your liquidity comes from selling a business or the private company you work for going public, paying off your mortgage may sound boring compared to the prospect of that newfound wealth continuing to compound.

• Cash reserves you’ve built up over time: Sometimes the cash has accumulated simply because you’ve been a diligent saver. It could pile up there because of fear or indecision.

You’ll want to weave the story of where the money came from with the practical part of the decision.

Essential Factors

Here are four practical factors that shape whether prepaying your mortgage makes sense.

1.      Address Other Debt First

This one’s straightforward: don’t pay off your mortgage if you have consumer debt lingering, like credit cards, personal loans, student loans, or car loans. Knocking those out first will give you a better return on your money and increase your monthly cash flow. Once those debts are gone, it makes sense to start thinking about other goals.

2.      Liquidity Matters

Even if you’re itching to eliminate your mortgage, you need to maintain proper liquidity with the right cash cushion. A fully funded emergency fund (3-6 months of living expenses) is first on the list. You also need to account for large, predictable costs, like home repairs, planned vacations, vehicle replacement & maintenance, and tuition payments. If paying off your mortgage leaves you strapped for cash, it’s better to wait. You don’t need to rush to mortgage liberty.

3.      The Mortgage Interest Angle

Mortgage interest deductions aren’t as impactful as they used to be, especially after the standard deduction increase in 2018 led to only 10% of filers itemizing. However, if you're in a higher tax bracket, it’s worth factoring into your calculus because deductions are relatively valuable to high-income earners. That said, I never recommend taking out or keeping a mortgage solely for obtaining a tax deduction.

4.      Understand Interest Rates & Inflation

Mortgage rates shape the payoff decision. If you locked in a loan near 3% before 2021, the case for investing instead is stronger since long-term market returns can reasonably outpace that cost. At today’s 6%+ mortgage rates, the guaranteed savings from prepaying are harder to beat. One other consideration is that with a fixed-rate loan, the “real” cost of the mortgage debt shrinks over time as your income and living costs rise, making low-rate mortgages somewhat of a hidden benefit in combating inflation.

Running the Numbers: Payoff vs. Invest

Let’s run some numbers to illustrate the math. Let’s say Sarah has a $300,000 mortgage with 20 years left. At 3%, her payment is about $1,670; at 6.5%, it jumps to $2,240. She also has $300,000 in cash set aside. What are her options?

• Pay it off: She saves about $100,000 in interest at 3% or about $237,000 at 6.5%. That is a guaranteed, tax-free return.

• Keep it in cash (2% HYSA*): After 20 years, she nets about $115,000. Compared to the $100,000 in interest savings at 3%, it is only about $15,000 better. Against the $237,000 in savings at 6.5%, it leaves her more than $120,000 worse off.

*We use 2% as a conservative, long-term, realistic rate.

• Invest in equities (8%): Over 20 years, $300,000 could grow to nearly $1.4 million. After a 22% tax hit, the net is about $1.16 million. That is a huge edge over either payoff scenario, but it comes with significant volatility. Markets can swing 20 to 50 percent in the short run, which makes sticking to the plan difficult.

So, what is the bottom line?

• With a low-rate mortgage, investing looks best on paper.

• With a higher-rate mortgage, paying it off is the less risky path.

And here’s another thought: if you’re sitting on enough cash to pay off your mortgage, the “just invest it instead” argument is more theory than reality. Prepaying the mortgage is probably your most productive move in that case.

What to Do With Freed-Up Cash Flow

It may be obvious, but paying off your mortgage frees up your monthly payment. Imagine your mortgage payment is $1,670 or $2,240 a month. That’s $20k to $27k in annual cash flow you can redirect toward other goals.

Here’s what you could do with it:

• Lifestyle upgrade: Allocate some toward travel, home improvements, or hobbies.

• Boost your tax-advantaged investing: With less required for life, you can raise your long-term investing at work or direct more into a Roth IRA.

• Giving: If you’ve been waiting to give until you have more available, now is the time.

• Start a business or change careers: With less required to fund your life, you might finally have the margin to take a chance.

Peace of Mind and Financial Stability

There’s also a psychological benefit I’ve experienced firsthand: no mortgage payment means you make different decisions. Less debt means less risk, which can make you willing to say yes to things you wouldn’t have before, like changing from an unfulfilling job to a career that hits the sweet spot. Plus, lowering your future monthly expenses can reduce the amount you need to save now and the required withdrawals from your portfolio later. Having the biggest fixed expense in your life behind you provides immense security now and in retirement.

Balancing the Decision

(TL;DR) Deciding whether to pay off your mortgage isn’t a one-size-fits-all calculation. It’s a balance of numbers, lifestyle goals, and risk appetite. For some, the guaranteed return and stability of being debt-free is worth more than the possibility of higher investment returns. For others, keeping the mortgage and investing the difference feels smarter.

Here’s the framework to help decide:

• Eliminate consumer & student debt first.

• Ensure liquidity: 6+ months of expenses, vacations, repairs, tuition, etc.

• Compare mortgage rate vs. after-tax investment returns. Low mortgage rates favor investing; high rates favor prepayment.

• Consider cash flow benefits: What would you do with the extra payment if the mortgage is gone?

• Evaluate peace of mind and financial stability: The psychological benefit of no payment can be compelling.

Or keep the framework simple: pay it off and be done with it.

At The Dala Group, we help clients think beyond spreadsheets and focus on what matters most to them. If you are wrestling with whether to use your newfound liquidity to pay off your mortgage or something else, we can coach you through the decision that’s best for you, taking into account not just math but also your beliefs, emotions, and long-term goals.