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Should I pay off my mortgage early?

January 24th, 2021 7:54 PM by Sam Kader

Whether to carry mortgage debt into retirement really depends on a few things. The best approach depends on how you feel about debt in general and a handful of other factors such as your age, how much money you have put aside for retirement and how disciplined you are about saving and spending. 

Mortgage debt used to be far more attractive for many Americans but due to recent tax-law revisions the standard deduction for federal taxes has climbed to $24,400 for married couples filing jointly versus $12,700 just a few years ago. Now many homeowners use standard deductions and are loosing their mortgage interest deductions. 

One important benefit of paying off your mortgage is financial stability. What if you don't have cash available to pay off your loans? Then consider selling your pre-retirement homes, payoff your loans and downsize into something more affordable.  If you are looking for a good return on your money somewhere else for the next five to ten years, it has to at least double the rate you are paying on your mortgage.

Here are some other factors to consider whether to pay off your mortgage early. 

Can you pay off your mortgage early? Prepayment penalty is no longer a practice nowadays but do check with your lender if your mortgage has one. Knowing this information upfront can help you map out a payoff plan that works for you and your lender or servicer. 

Will other investments beat paying off a mortgage early? What if instead of paying off your mortgage early, you invested the cash elsewhere? Mortgage rates are at all-time lows compared to the annualized return for the S&P 500 at about 10% over the last 90 years. A potentially better use of the funds might to take the cash you'd use to pay off your mortgage and leverage it into buying a cash-flow positive property like multi-family real estate or single-family homes that have the potential to offer higher long- term returns.  

Will all your cash be tied up in the mortgage? Before taking a large chunk of cash and using it to pay off a mortgage early, consider its liquidity. A house is nonliquid asset and it can take months or longer to sell the property.  In addition, maintaining a cushion that protects you for at least six months before you consider using a large portion of y our liquidity to retire a mortgage early. 

How will you use the money if you don't pay off your mortgage early? It might make sense to pay off your mortgage if you lack the discipline to use it wisely. Your home can be a forced-savings tool and making extra mortgage payments can save thousands of dollars in interest over time and accelerate equity building in your home faster. 

How much do you value peace of mind? Sometimes it's less about the bottom line and more about peace of mind. If you own your home free and clear that can provide benefits that can't be measured in financial terms. For many eliminating a monthly mortgage payment ahead of retirement can provide mental relief when considering living on a fixed income. Another potential advantage is the ability to borrow against the equity  in your home through Home Equity Line of Credit (HELOC) - providing a source of emergency income as well as allowing you to make home improvements o make progress towards other financial goals. 

Here are some pros and cons to consider: 

Pros.

  • Eliminates your monthly mortgage payment and freeing up cash flow that can be useful during retirement. 
  • Saves you money on interest, potentially thousands of dollars over the live of a mortgage. 
  • Grants peace of mind knowing you own your home outright. 
  • Can tap equity in your home if you need money later. 

Cons. 

  • Ties up a good chunk of your liquidity and net worth in your home which might make it harder to access later. 
  • No longer eligible for the federal mortgage interest tax deduction. 
  • Could miss out on potential higher returns from other investments. 

Additional tips to pay off your mortgage early. 

  1. Pay off high-interest debt before making extra mortgage payments. Other debt like credit card balances, personal loans, and car loans usually carry a higher interest and aren't tax deductible. It might be wiser to get rid of these debt first. 
  2. Make sure you are investing for retirement such as 401(k) or IRA first. Having a good retirement account on top of having hour house paid off by the time you retire can be a good combination. 
  3. Build up an emergency fund. 
  4. Work on other goals such as saving for a child's education or purchase a car. 
  5. Refinance. Think about refinancing your mortgage to a shorter loan terms such as switching to a 15-year loan from a 30-year mortgage. You'll be making a higher payments each month but save on interest and be out of debt sooner. 
  6. Consider making biweekly mortgage payments. Starting a biweekly payments can help you get ahead while allowing you to keep working on other financial goals. 

In conclusion - when considering whether to pay off your mortgage early, it's important to figure out what works best for your situation and is more likely to help you reach your short and long-term financial goals. Sometimes, with financial planning, it's not a straight assessment of what's best by the numbers. People want to feel good about where their money is going no matter what the spreadsheet says. For some, owing money causes stress and paying off a mortgage early can bring peace of mind. For people nearing retirement, a paid off mortgage means they have that much more free cash flow from their fixed income when they stop working. 



Posted in:Mortgage RulesPosted in:Refinance and tagged: RefinanceMortgage Rules
Posted by Sam Kader on January 24th, 2021 7:54 PM

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