Why Paying Off A Mortgage Early Isn’t Always The Right Move

house-backyard-1Do I think it’s wise for you to pay off your mortgage early?

You may as well ask me if I think it is a good idea if you paint your living room sage green.

I used to think paying off your mortgage was an absolute no-brainer.

Then I did a complete 180, changing direction like one of those day-glo orange heliport windsocks. Oh yes, I did.

After re-surveying the macroeconomic condition of the United States and trying to interpret the future direction of its fiscal policy, I was ready to declare that maybe, just maybe, pre-paying the mortgage isn’t a good idea after all.

Suddenly it just didn’t seem like it made much sense to pay down a 30-year, $120,000 mortgage at 4.5% interest if I truly believed that high inflation was inevitable down the road as a result of Fed’s relentlessly lax monetary policy and the current administration’s plans to greatly expand the size of the Federal government and its entitlement programs.

The question of whether or not I think you should pay off your mortgage is not as cut-and-dried as, say, whether or not I think you should pay off your credit card balances in full each month. Of course you should pay off your credit cards in full each month; but when it comes to paying off the mortgage early, there are solid arguments that can be made either way.

Here are 12 good reasons why you should — and should not — pay off your mortgage early. Which ones resonate most with you?

Good reasons why you SHOULDN’T pay off your mortgage early

1. You haven’t capitalized on your employer’s company match to your workplace retirement plan.

If, for example, your employer matches you dollar-for-dollar on the first 3% of your contributions to your 401(k) plan, then you’re throwing away free money. If he matches even half that amount, then you’re still passing on a surefire 50% return on your money. Opportunities like that don’t come up too often. Take advantage of them when you can.

2. You have other debt that accrues at a higher interest rate than your home loan.

It makes no sense to pay off a mortgage if you’re carrying credit card debt at a higher interest rate. When you pay off a credit card with a 15% interest rate, for example, then every dollar of debt you pay off earns you an instant 15% return. Not too shabby.

3. You have yet to establish an emergency fund equal to at least three months of living expenses.

It doesn’t make much sense to be making extra payments on your mortgage if you can’t withstand a sudden loss of income due to unemployment, or suffer a major financial expense that forces you to choose between paying the mortgage or, for example, having a major car repair made.

4. You want to maintain more liquidity/flexibility.

Many people like to have a ready source of funds that can be easily converted to cash in order to quickly react to business opportunities, for example.

5. You owe significantly more on your house than it is currently worth.

If your mortgage is upside down, the fact is you are more susceptible to foreclosure if you lose your job or suffer some other hardship that prevents you from making your payments.

6. You have a family but haven’t yet established life, health, and disability insurance.

If you are the lone bread-winner in the household, how will the mortgage be paid if you die, suffer a catastrophic health problem, or become severely disabled?

7. You have a low fixed-rate loan and anticipate a bout of severe inflation.

Inflation is a debtor’s best friend. If you have a fixed rate mortgage with a very high balance, you might even want to root for high inflation. That’s because inflation erodes the value of money, and when inflation is on the rise the value of your mortgage debt becomes less over time. For those who have fixed rate mortgages, the higher the inflation, the faster the value of that debt is reduced. Many people ask why they should pay off a fixed rate loan with more expensive dollars today if they strongly suspect those dollars will be worth significantly less within, say, the next five years or so.

8. You are confident you can get better returns elsewhere.

Let’s say you have a mortgage with an interest rate of 5%. But in reality your effective, after-tax interest rate on your loan is less than that. If you’re paying, say, 25% of your household income to federal and state tax collectors, then your effective interest rate is 25% (your tax rate) less than the original 5% — or only 3.75%. After determining your effective interest rate, you may decide the bar is low enough that you’d rather try earning a bigger return elsewhere.

Good reasons why you SHOULD pay off your mortgage early

1. You’re the type that believes peace of mind is priceless.

How do you sleep at night? I know more than a few people with paid-off mortgages that swear they sleep like a baby every single time their head hits the pillow.

2. You want to remove the cost of your mortgage from your future living expenses before you retire.

What better way to temper the impacts of living on a fixed income than by making sure your mortgage is paid off before you retire?

3. You’re more concerned with getting a steady guaranteed return than risking a bigger payday through the stock market or other investment opportunities.

As far as Suze Orman is concerned, it makes more sense to pay off your home before making investments anywhere else:

You cannot live in a tax return. You cannot live in a stock certificate. You live in your home.

4. You simply hate the idea of paying interest.

People who have the best grip on their personal finances naturally abhor paying interest. Personally, I hate paying interest. To anybody. For anything. But that’s just me.

So is paying off your mortgage early a good idea?

Well, that depends. In the end, the “correct” answer really comes down to which reasons are most important to you.

Don’t let anybody tell you otherwise.

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  1. August 6, 2014

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