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Paying Off Your Mortgage Early is Not Always the Best Choice

185010045If you figured out that you could pay your mortgage off early, your most natural reaction would most likely be “yes, I am absolutely going to do this”.  Many financial experts actually recommend paying off your mortgage early or at the very least rid yourself of it by retirement age.  People in charge of their finances want to have emergency funds, save and invest to prepare for retirement, and staying away from accumulating credit card debt.  It is very rational to want to get off of the debt treadmill, but there are some instances in which paying off your mortgage early is not the best course of action.

To state the obvious, money can be used for many different things, whether that be expendable cash, savings, to pay bills, or to explore different investment products.  There are many other uses for cash than simply paying off your mortgage early.  For example, if you have money tied up in investments, and those investments are long-term investments that have been performing well, it would be wise to take that extra money and funnel it into an investment account whose interest compounds over time versus paying down a mortgage.  The return on investments can prove much higher than that of equity on a home.  The more money flowed into an investment account in periodic payments, the more of a return can be made over time, even when that stock is shifting up and down.  Another use of that money can be to funnel it into a 401(k) or a Roth IRA, as that money will be withdrawn tax-free.  On top of that, funds can be matched by your employer.

Keeping a mortgage for the length of its term certainly does have its benefits as well.  Borrowers receive an annual tax deduction for the interest paid on a mortgage.  Paying off your mortgage can mean experiencing tax savings of thousands of dollars each year.  Also, a mortgage rate may not necessarily be the highest debt that you carry.  Credit card interest is typically much higher than the interest on a mortgage loan, so it would be financially savvy to direct extra money towards paying that down, or paying other higher interest-carrying debts first.  A helpful tip is to write down all of your debts as well as the interest rate on each.  Then organize them from greatest to least.  The greatest interest rate should be paid down first.  Then the next, and so on, until debts are gone.  Figure out how much you will return on investments, and how it compares to interest rate on debt.  The higher rate is really where the money should be directed, as a rule of thumb.  However, remember that not all mortgages allow for prepayments or extra payments.  Look into this before taking any action, because otherwise you might face penalty charges, which obviously would be seen as a loss on your assets.

 

 

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