Despite the wonderful peace of mind that comes with owning a home free and clear<\/a>, deciding to pay off a low-interest rate mortgage early is not always straightforward. If your mortgage rate is low compared to risk-free investment returns, keeping the mortgage and investing excess cash elsewhere often makes more financial sense.<\/p>\n I define a low-interest rate mortgage as one where the rate is at or below the risk-free rate of return. The risk-free rate can be equivalent to a Treasury bill or bond of your choice, or even the current money market rate you can earn on your cash.<\/p>\n For example, if your mortgage rate is 4% while money market accounts are offering 4.2%, then your mortgage qualifies as low-interest. Conversely, if you have a 2.5% mortgage but 10-year Treasury bonds are yielding only 1%, that mortgage isn’t considered low-interest because alternative risk-free investments are much lower. Additionally, if inflation is running at 7% while your mortgage rate is 5%, you effectively have a negative real mortgage rate<\/a>, making your debt cheaper over time.<\/p>\n When evaluating whether to pay off your mortgage early, you must always consider the opportunity cost of investing that money elsewhere. You must also compare the net returns after taxes<\/em>. Finance decisions should never be made in a vacuum.<\/p>\n The 10-year Treasury bond yield, in my opinion, is the most important financial figure to track because it serves as a benchmark for financial relativity. With this perspective in mind, let\u2019s go over the only good reasons to pay off a low-interest rate mortgage early.<\/p>\n Real estate is my favorite asset class to build wealth<\/a> and is the main investment that enabled me to retire early and live more free. I’ve paid off several low-interest rate mortgages since I started buying real estate in 2003. Here are the few legitimate reasons I\u2019ve found for doing so.<\/p>\n The simplest way to pay off a mortgage is by selling the property. If your home\u2019s value net of fees exceeds the loan balance, the mortgage gets paid off automatically in the transaction. There\u2019s no need to aggressively save to pay it down early over many years. The main challenge is going through the selling process, which can take 30\u201345 days on average.<\/p>\n There are many reasons you might want to sell: relocating for work, retiring, downsizing, upsizing, or simply wanting less responsibility.<\/p>\n For example, in 2017, after my son was born, I no longer wanted to be a landlord for a four-bedroom house that had turned into a party home. With four or five young guys living there, my neighbors occasionally complained about noise and reckless behavior. So, I sold the property<\/a> and eliminated my 4.25% mortgage. I then reinvested the home sale proceeds<\/a> into stocks, municipal bonds, and private real estate in roughly equal proportions.<\/p>\n The relief of no longer managing that rental alone was worth not making any additional returns from the proceeds. Fortunately, the stock and private real estate markets<\/a> continued to appreciate, making it a win-win situation.<\/p>\n Money is most powerful when it has a defined purpose. Setting clear goals for your savings and investments makes financial decisions easier and more disciplined.<\/p>\n As you pay down your mortgage and home values rise, your equity grows. While many homeowners sit on their equity for decades, some may find better uses for it.<\/p>\n Here are some valid reasons to use home equity elsewhere:<\/p>\n Using home equity strategically can unlock new financial opportunities, as long as the alternative investment or use of funds is well thought out.<\/p>\n Everyone should have a target asset allocation<\/a> for real estate relative to their total net worth. If property values surge, you may find yourself overexposed to real estate, prompting a need to rebalance.<\/p>\n Some common scenarios where this happens include:<\/p>\n Try to keep your real estate allocation within 10% of your target percentage. For example, if you aim for real estate to make up 50% of your net worth, maintain it between 40% and 60%. If it falls outside this range, consider selling a property and reallocating funds.<\/p>\n As property values rise, so do property taxes. At some point, you may feel that your tax burden is excessive, especially if you believe local government mismanages funds or fails to address key issues.<\/p>\n While property taxes fund essential services like schools and public safety, government inefficiencies and corruption<\/a> can erode trust. Some homeowners reach a breaking point and decide to sell rather than continue funding a government they don’t support.<\/p>\n For me, the maximum<\/em> amount I\u2019m\u00a0willing to pay in property taxes is $100,000 a year. Property taxes fund public schools, emergency services, and infrastructure\u2014things I fully support. But beyond that threshold, my willingness to pay more depends entirely on how well my city government actually serves its residents.<\/p>\n If the new mayor steps up\u2014tackling corruption, cracking down on drug dealers and violent criminals, and cleaning up the streets\u2014I\u2019m OK to pay more. But if the status quo remains\u2014wasteful spending, ineffective policies\u2014then I\u2019d rather put my money elsewhere.<\/p>\n Imagine this: You\u2019ve paid over $1 million in property taxes over the past 20 years. You take pride in maintaining your home and community. Then, one day, a San Francisco city official slaps a notice on your door saying your planter boxes\u2014on your\u00a0own<\/em>\u00a0property\u2014are too high. They give you 30 days to remove them or face a $3,000 fine, plus an additional $100 per day for noncompliance.<\/p>\n Meanwhile, rampant drug use leads to overdoses in broad daylight. Retail theft is so bad that major stores are closing their doors. Homeless encampments grow while city officials dither. And yet, instead of addressing these real issues, the government focuses on policing\u00a0planter boxes.<\/em><\/p>\n Paying property taxes is one thing. Watching that money get squandered while the city deteriorates is another.<\/p>\n If you have an adjustable-rate mortgage (ARM)<\/a>, you might face a sharp increase in your mortgage rate once the fixed period ends. Although, for most ARMs, 2% is the maximum increase for the first year of a reset.<\/p>\n For example, suppose you took out a 7\/1 ARM at 2.5%, and now, after seven years, it\u2019s resetting to 4.5%. Over those years, you\u2019ve built equity and increased your savings. Instead of letting the rate adjust, you could pay off the mortgage or pay down a large portion and recast the loan for lower payments<\/a>.<\/p>\n If you choose not to refinance your ARM and stick with it, your interest rate could eventually reach its maximum allowable limit\u2014potentially higher than you’re comfortable with. For example, by the ninth year, a 4.5% rate could jump to 6.5%, and by the tenth year, it might rise to its contract maximum of 7.5%. In a scenario where the 10-year Treasury bond yield remains below 4.5%, paying off the mortgage is likely the smarter financial move.<\/p>\n Once you’ve achieved financial independence, you may prioritize peace of mind over higher returns. Instead of chasing stock market gains, you might prefer the certainty of owning your home outright.<\/p>\n If you have enough wealth to comfortably fund your lifestyle with passive income<\/a>, paying off your mortgage can be a rational decision. Even if stocks or private investments offer higher potential returns, the mental and emotional benefits of being debt-free may outweigh the financial upside of keeping a mortgage.<\/p>\n For many, financial freedom means shifting focus from capital accumulation to capital preservation and lifestyle enjoyment. After all, the first rule of financial independence is to not lose money. <\/p>\n In my 20s and 30s, I embraced mortgage debt to grow my wealth. I refinanced whenever possible, leveraging low rates to invest in real estate and elsewhere. I had no choice but to make my money work harder since I didn\u2019t have much to begin with. It was maximum risk on and I\u2019m thankful for the money lent to me.<\/p>\n Now, in my late 40s, my focus has shifted to simplification. With my last remaining mortgage set to reset in 2026, I plan to pay it off. The bull market since I left work in 2012 has exceeded my expectations, and I\u2019m grateful. At this point, I feel like half of my net worth is house money.<\/p>\n Ultimately, everyone\u2019s goal should be to become mortgage-free by the time they no longer want to or can work. When that day comes, the peace of mind from owning your home outright will outweigh any financial argument for keeping a mortgage.<\/p>\n Personally, I recognize the existential threat AI poses<\/a> to Financial Samurai. I\u2019m not sure if this site will exist in its current form three years from now, which makes becoming completely debt-free by then a worthwhile goal. While the situation may seem bittersweet, the site has already lasted six years beyond my original 10-year target. For that, I\u2019m incredibly grateful.<\/p>\n May we keep fighting and achieve complete financial security when our time comes!<\/p>\n Readers, what are some other compelling reasons for paying off a low-interest-rate mortgage that I haven’t mentioned? Have you ever regretted paying off a low-interest mortgage? If so, what was your biggest regret?<\/em><\/p>\n Invest in real estate without the burden of a mortgage, tenants, or maintenance with\u00a0Fundrise<\/a><\/strong>. With almost $3 billion in assets under management and 350,000+ investors, Fundrise specializes in residential and industrial real estate. During times of turmoil, real estate tends to outperform.\u00a0<\/p>\n I\u2019ve personally invested $300,000 with Fundrise to generate more passive income. The investment minimum is only $10,\u00a0so it’s easy for anybody to dollar-cost average in and build exposure.\u00a0During times of chaos and uncertainty, I am very appreciative of my real estate holdings that tend to keep chugging along. <\/p>\n If you want to invest in private AI companies, you can also check out their venture capital product<\/a><\/strong>. It invests in some of the most promising AI companies today, which most people cannot gain access to. Fundrise is a long-time sponsor of FS.\u00a0<\/p>\nWhat Is Considered a Low-Interest Rate Mortgage?<\/h2>\n
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<\/figure>\nGood Reasons to Pay Off a Low-Interest Rate Mortgage<\/h2>\n
1) You No Longer Want to Own Your Home or Investment Property<\/h3>\n
2) You Have a Specific and Better Use for Your Home Equity<\/h3>\n
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3) Your Real Estate Exposure Has Grown Too Large<\/h3>\n
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4) You Are Fed Up with Local Government And Property Taxes<\/h3>\n
The Most I\u2019m Willing to Pay in Property Taxes<\/h3>\n
The Frustration of Paying Huge Taxes for Broken Governance<\/h3>\n
5) Your Adjustable-Rate Mortgage (ARM) Is Resetting to a Higher Rate<\/h3>\n
6) You’ve Achieved Financial Freedom And Prefer Simplicity Over Profit Maximization<\/h3>\n
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<\/figure>\nUse Mortgage Debt to Your Advantage Until You No Longer Need It<\/h2>\n
Paying Off My Final Mortgage Within Three Years<\/h2>\n
Invest In Real Estate Passively To Grow Your Wealth<\/h2>\n
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