Most bills should be paid as soon as possible to ensure financial wellness, but is this true when you are looking to pay off your mortgage? Maybe. The question is complicated by the government’s plans to increase the size of the entitlement programs. I’ve laid out some of the arguments both for and against an early plan to pay off your mortgage below to help you draw your own conclusion.
The Cons of Paying Off Your Mortgage Early
- You have not yet taken advantage of your employer’s workplace retirement matching plan.
Instead of using money to pay off your mortgage early you could be putting that money to work for you. If you have a 401(K) plan that your employer will match dollar for dollar up to a given percent, or even a percentage of that, take advantage. Why not let you employer basically pay you more than they are now?
- You have other, higher interest debt
Always pay off your higher interest debts first. Putting off high interest debt will result in overpaying.
- Do not pay off your mortgage early if you do not already have an emergency fund in savings that equal three months of expenses.
Be prepared for unforeseen emergencies before you pay off any debt early. You need to think about what would happen if you had a medical emergency, lost your employment or incurred a major financial debt like a car or home repair. Plan for these things first, then if you have expendable income you can pay debt early.
- If you like to stay liquid don’t tie up your available funds.
Some people prefer to have more flexibility with their money in order to react to business or other opportunities. If you fit this description you may not want to pay your mortgage off early.
- If your house is worth less than you owe
If you are upside down on your mortgage you are more likely to be foreclosed on if you have some hardship that makes it impossible to pay your monthly payments.
- If you do not have enough insurance to keep your family safe.
When you have a family it is more important, particularly if you are the sole provider, to have health, life and disability insurance in place. If something should happen to you insurance will take care of your family.
- If you have a fixed rate mortgage and it looks like high inflation rates are on the horizon now is not the time to pay off your mortgage.
Inflation makes money less valuable, so when inflation goes up the value of your mortgage debt goes down, if you have a fixed rate mortgage the higher it goes the faster the value of your debt declines. In other words, if the dollar is worth a dollar today and next week it will be worth 60 cents, why use the one dollar now to pay the same debt you can use to pay with the 60 cent dollar down the road.
- If you can get a bigger return on your money somewhere else.
If you have a rate of interest at 5% but you are paying 25% of you total income to taxes then your effective interest rate is 25% minus the 5%, so really only 3.75%. Take the time to figure out whether your effective interest rate is low enough that you might get a bigger return by using your money elsewhere.
The Pros to Paying Your Mortgage off Early
- If paying off your mortgage is going to help you feel better.
Peace of mind can be the most important thing to some people and having the mortgage paid off can ease a lot of pressure.
- If you are getting ready to retire and want to have the mortgage settled to plan your living expenses.
It might be a good idea to pay off your mortgage early to have more money for day to day life once you retire.
- You prefer certain return to possible risk even if that risk could mean more money down the road.
If you listen to money expert Suze Orman she will tell you to pay off your mortgage before making any other type of investment because you will need a place to live regardless of how much money it is possible to make.
- Interest is money you just don’t need to spend.
Most people who are very good with their money hate paying interest because it is always an overpayment for what you get. Why pay more if you can pay just the principle?
Those are the best arguments for and against paying off your mortgage before it is due. As you can see there is not real correct answer, it depends on you and how you feel. Only you, and your family can decide what financial plan best suits your needs and comfort level.