Whether to pay off the mortgage early or enjoy life is not necessarily an either / or decision. But deciding how to balance financial and lifestyle decisions is something that many people struggle with. In Good Debt, Bad Debt we offer a framework for how to prioritize debt reduction, including which types to avoid all together. This blog addresses the specific question of whether it makes sense to pay off your mortgage sooner or on schedule, in light of living in the present.

Good Decisions

The best financial decisions are not always the best decisions. For example, suppose you decided to pay more for your house than you feel completely comfortable with because it’s in an excellent school district. Or, consider a family who chooses not to save more money because they want to be generous. In each of these cases we might say that the decision are questionable, financially speaking. But we could also agree that they’re wise personal decisions.

Financial Decisions, Lifestyle Decisions

The financial decision is straight forward. Begin by thinking of paying off a mortgage as a type of investment. Imagine that you just took out a 30 year, fixed-rate mortgage at 4.50% interest. Any extra payment you apply toward your mortgage balance is like “earning” a 4.50% annual return – though you actually just save that cost.

Then the question is: can you reasonably expect to earn more than 4.50%? The answer to that is almost always yes, if you’re willing to accept volatility. Investing in the S&P 500 may return 7.50% to 8.00% per year on average over many years. Thus, you’d be better off, over time, investing the dollars you had earmarked for mortgage prepayment, provided you can live with the short-term volatility that comes with an investment in stocks.

The question we’re grappling with isn’t a purely financial decision, because ‘enjoying life’ typically refers to spending the money now. Forget the virtue in delaying gratification – what about taking a memory-making trip with the kids before they leave the house? Clearly, this comes down to personal preference and deciding whether you (or you and your family) will enjoy paying down the mortgage more than taking the trip.

Factors to Consider

As you consider this choice, here are three aspects to aid your decision process:

Communicate. For those people making decisions with a spouse, relational sensitivity is an aspect worth considering. The best way for couples to make this decision is by discussing it. You know your spouse well, but you might be surprised by his or her preference in this case. Making the decision together – even if the result is not exactly what you want – is healthier.

You’ve probably already been paying the mortgage off. The nice part about an amortizing mortgage is each payment includes an amount that goes to paying down the principal. If you find yourself uncomfortable that you’re not applying extra toward the mortgage, take comfort in the fact that your mortgage payment is doing that partially for you. Note: the same is not true for rent expense or for interest-only mortgages.

Do both. Having a goal to pay off  your mortgage early doesn’t necessitate a commitment to paying a large sum of money every month for years on end. For example, you could choose to allocate irregular income (bonuses, stock grants, gifts, etc.) to debt reduction, and budget for travel and entertainment out of monthly income. Or, you might decide to budget $200 per month toward enjoying life now, and $100 per month toward mortgage repayment.