A home is typically your biggest asset, and a home loan your biggest debt. Should you even try to pay off your mortgage early?
Your financial priorities are different than your neighbor鈥檚 or your best friend鈥檚 or your parents鈥.
Take a home mortgage, for example. Plenty of people are happy with paying 15 or 30 years on a mortgage, while others are anxious to get rid of any debt鈥攊ncluding their home loan鈥攁s soon as possible.
Which is 鈥渞ight鈥? As with most things related to money, it鈥檚 complicated鈥攁nd more personal鈥攖han a single choice.
Here鈥檚 what to consider if you鈥檙e thinking about when to pay off your mortgage.
Good debt vs. bad debt
Some people think of all debt as 鈥渂ad,鈥 but that鈥檚 not really the case. Good debt and bad debt both exist. A mortgage lands squarely in the 鈥済ood debt鈥 column.
鈥淗ow a loan is secured determines whether it鈥檚 good or bad,鈥 says Stanley Poorman, a financial professional with 麻豆最新出品庐. 鈥淎 mortgage is secured by an asset鈥攜our house鈥攚hich gives it an advantage. Personal loans and credit cards are not.鈥
Think of good debt this way: Every payment you make increases your ownership in that asset, in this case your home. But bad debt like credit card payments? That debt is for things you鈥檝e already paid for and are probably using. You鈥檙e not going to 鈥渙wn鈥 any more of a pair of jeans, for example.
There鈥檚 another key difference between purchasing a home and buying most goods and services. Very often, people can pay cash for things like clothes or electronics. 鈥淭he vast majority of people couldn鈥檛 pay cash for a home,鈥 Poorman says. That makes a mortgage all but necessary to buy a house.
Potential disadvantages of paying off a mortgage
Your mortgage may not be worth paying off early if the factors below apply to you.
| If 鈥 | You don鈥檛 need to worry about paying off your mortgage because 鈥 |
|---|---|
| You have a good interest rate. | You got locked into a great rate before they spiked鈥攕ay 3%鈥攁nd you鈥檙e not paying a lot in interest. |
| You need to increase your emergency savings. | Paying off a mortgage requires you to deplete cash, or liquidity, which may leave you without a cushion. Focus first on saving for unexpected events. |
| You鈥檙e building retirement savings. | There may be better investments. 鈥淚f you invest the money you would've used to pay off your mortgage into a retirement account, your return over the long term may exceed the savings of paying down your mortgage,鈥 Poorman says. |
| You鈥檙e getting a decent tax deduction. | It鈥檚 deductible and the mortgage interest may make your effective tax rate even lower. |
| You have other high-interest debt. | Money that 鈥渃osts鈥 more than your mortgage should get higher priority for early pay off. |
| Your mortgage doesn鈥檛 worry you. | You aren鈥檛 stressed by mortgage debt and your budget isn鈥檛 stretched by the payment. |
Tip: If you鈥檙e in the fortunate position to be able to pay off a mortgage faster, and the idea works for your finances, consider moving to an every other week payment schedule, rounding up the total you pay, or making one extra payment per year.
When it may be a good idea to pay off your house
Eliminating mortgage debt could be a good idea if the factors below apply to you.
| If 鈥 | You might want to pay off your mortgage early because 鈥 |
|---|---|
| You have a high mortgage interest rate. | When you鈥檙e paying a high interest rate鈥攖hink 7% or more鈥攁 mortgage payoff may make sense. You could try to refinance when interest rates decrease, but there鈥檚 no certainty of when that will happen. |
| You have adequate emergency savings and insurance. | Paying off a mortgage can add another layer of cushion to your protection plans. |
| Your retirement is fully funded. | Those extra savings aren鈥檛 needed elsewhere. Use our to gauge your progress. |
| Your mortgage interest deduction doesn鈥檛 significantly affect your tax return. | When you have a low mortgage balance, you may not be receiving a tax benefit. |
| You have little or no other debt. | Lack of competition in interest rates and debt totals makes it easier to focus on faster mortgage repayment. |
| You dream about being mortgage free. | Debt can be emotional. 鈥淲hat do you want to achieve?鈥 Poorman says. 鈥淭hat鈥檚 the question to ask yourself. If a mortgage is a weight on your shoulders, you can prioritize it.鈥 |
| You鈥檙e close to retirement. | Eliminating a mortgage can help free up cash flow after you鈥檝e stopped working and may enable you to draw down retirement savings less quickly. Consider four key factors first. |
Ultimately, the decision to keep your mortgage or pay it off is personal and tied to how you feel about money and security.
鈥淵ou鈥檙e working hard,鈥 Poorman says. 鈥淚t鈥檚 about you and what you want.鈥
What's next?
Aim to balance saving and paying off debt. How are you progressing toward your retirement goals? 鈥痶o find out. Don鈥檛 have an employer-sponsored retirement account or want to save even more? We can help you鈥set up your retirement savings with an individual retirement account (IRA).
