So you’ve got some extra money and have begun to wonder what every homeowner wonders about at some point: should I make an extra mortgage payment? Paying off your mortgage, like most financial decisions, can be a good decision or a bad decision, depending on your situation and what makes you worry-free.
Once your mortgage is all paid off, you won’t have a mortgage payment anymore! It sounds so obvious, but imagine not having to pay your monthly mortgage payment anymore. Although you’d still have taxes and insurance, imagine what you could do with that extra money.
Guaranteed rate of return
With housing declining, the stock market bouncing all around, it’s nice to be able to get a safe, predictable rate of return on your money. When you pay your mortgage early, you’re getting a return equal to whatever your mortgage rate is. Got a mortgage at 6%? Paying it off early earns you a guaranteed rate of 6%, much better than you’d have done year-to-date in stocks, CDs, bonds, or many other financial vehicles.
Peace of mind
Having a fully paid-off house means that as long as you keep current on your property taxes, you don’t have to worry about a place to live. No one can foreclose on you. This security is worth a lot, especially as you are approaching retirement.
You can potentially save a LOT of money
One extra mortgage payment per year can save you thousands and thousands of dollars, because you then pay less interest. Since it’s interest on such a large amount of money, you’re saving tons.
Your house is an illiquid investment
If you have hundreds of thousands of dollars tied up into your home and something happens, it might be very difficult to access that money quickly. Getting a new mortgage or HELOC could take months, and selling even longer. Not paying off that mortgage keeps your funds liquid for easy access.
You could earn more
If your mortgage rate is low, you are paying off low interest debt when you could potentially invest that money somewhere else. If your rate is high, you get a guaranteed rate of return that’s good. But if your mortgage rate is low, paying it off early guarantees you a low return on your money.
You lose a tax deduction
Paying mortgage interest isn’t as bad as you think, because the interest is tax-deductable. You’re still paying more than you’re saving, but it may cost you less than you think, and paying off your mortgage before other debts that are not tax-deductable isn’t a good idea. You would have to test whether it was tax deductable based on tax calculators and estimators.
You might have better uses for that money
If you have credit card debt, it is almost certainly at a higher interest rate than your mortgage. Or perhaps there are other expenses you are saving for, like college tuition costs for your children. Putting your spare money into a 529 college savings plan is tax-deductable based on tax calculators and estimators, and likely a better way to invest your money than paying off the mortgage early, if you have both these expenses.
So, should you pay off that mortgage early? That’s a decision every family must make for themselves. Some may rest easier at night knowing they own their home free and clear, while others may want to take advantage of other investment opportunities with the cash that would have gone into paying off the mortgage. Hopefully an honest assessment of your own situation and desires, combined with the above thoughts, can help you decide whether or not paying off your mortgage is right for you.
Photo credit: House by James Thompson/flickr
A financial and career advisor, Jenny Masterson also contributes content to thebestcolleges.org, an informational site featuring the best colleges as well as specialty institutions such online Christian colleges