Are you wrestling with the decision to pay off your mortgage early?
My husband and I decided to pay off our mortgage earlier rather than later, and now enjoy mortgage-free living. Looking back, though, I can see that an early payoff does have some disadvantages.
There are valid reasons not to pay off your mortgage early. Here are six for your consideration:
1. You will be more likely to have cash available for savings or current expenses.
Focusing on current needs allows you to build an emergency fund plus have more cash each month. Instead of paying extra on the mortgage to erase this debt for the future, you can more easily fund pressing concerns, such as a new set of tires for your car or a major heating system repair.
With the ability to draw from your savings account or surplus from your current income, you may be less likely to run up credit card bills, borrow to purchase a vehicle, or even take out a home equity line of credit (HELOC) or home equity loan.
2. You’ll have money to invest for retirement.
If you don’t accelerate your mortgage payoff, you should have money to fund your retirement accounts throughout your working life. Rather than delaying retirement savings, you can make contributions to a 401k, IRA, etc., over a longer time horizon. Using this approach, you will be more likely to invest during periodic market downturns, potentially allowing your investments to experience higher returns.
Waiting until you are in your 40s or 50s to invest means that there is less time for your money to grow until retirement. Further, a job layoff or personal setback during that time could prevent you from investing at all. So, it’s better to both steadily pay off your mortgage and invest when you are young.
3. You’ll have money to invest in your children’s education.
If you relentlessly pursue paying off the mortgage, you may not have much to deposit in your children’s college savings accounts. And, depending on the age of your children and your mortgage term, investments held in a 529 Plan or Coverdell Educational Savings Account may have little time to grow if you wait until your mortgage is paid in full to start funding them.
4. You have the opportunity to enjoy higher returns on your money.
When you invest in the stock market instead of paying extra on your mortgage, you may be able to earn higher returns. Historically, the S&P 500 has grown at about 6-8% annually (though these returns are not guaranteed). Your return on an early payoff is your mortgage interest rate, which may be less than 6%.
5. You’ll save on taxes.
If you keep your mortgage for many years and itemize your deductions, then your mortgage interest can lower your taxable income and your tax bill.
Just as significantly, though, if you have extra money to invest, then you can reduce your taxes by funding tax-advantaged retirement accounts, such as 401k plans and Traditional IRAs, as well as college-savings accounts.
6. You’ll be more aware of total housing costs.
You may think that paying off your mortgage means that housing expenses are eliminated. But mortgage principal and interest may be a small percentage of your these expenses. You’ll still be responsible for property taxes, homeowners’ insurance, and ongoing maintenance. Having a mortgage may keep you more mindful of the varied and continuing costs of owning a home.
Your unique personal situation should determine your course of action when making the decision to invest, save, and/or eliminate your mortgage. Just know that there are perfectly valid and financially sound reasons not to pay off your mortgage early.