Depending on your financial goals, plans, and current age, the decision of whether to pay off your mortgage may be something that has crossed your mind. If you’re heading toward retirement, paying off your mortgage may certainly provide peace of mind. But, does eliminating the monthly payment actually improve your financial situation? When rates are as low as they are today, it’s worthwhile to carefully weigh the responsibility of a monthly payment against the rewards of having access to cash for investing and the pursuit of other goals. Living debt-free sounds great. But so does investing in your future. Here are some things to consider before deciding whether an early mortgage payoff is right for you.
Liabilities and Priorities
Before deciding to pay off a mortgage, evaluate and prioritize your most pressing financial obligations. Do you need to pay off debt that is costing you a lot in interest, such as student loans or credit card debt? Do you have an adequate emergency fund set aside? Are there big expenses coming up that you need to be prepared for? If you decide not to pay off your mortgage, what are your plans for the money you would have used to make that payment? Will you invest it wisely in your future or will you be too tempted to spend it frivolously?
Potential Tax Benefit
It’s best to consult a tax advisor to help you evaluate any tax implications before making a mortgage payoff decision. In some cases, the ability to deduct mortgage insurance may be an important component of your tax strategy as a homeowner. But in other cases, the deduction may not add up to much. An expert can help you calculate the value of any tax benefits associated with a mortgage, like the mortgage interest tax deduction.
Impact to Retirement Savings Plan
Carefully consider tax advantages and penalties before dipping into a retirement savings account to pay down a mortgage, especially if that account includes an employer match. Giving up the money from the matching funds could be a costly mistake. Additionally, the tax advantages associated with the retirement plan should be weighed against any penalties for withdrawing funds early. You could end up paying an exorbitant cost to free up your money.
If you have funds available to pay off a mortgage, you may be debating the potential benefits of investing those funds. What is your mortgage interest rate vs. what you could earn in the market? The idea is that while interest rates are low, you may be able to earn more in the markets than you are paying to borrow the money for your mortgage. But, investing in a portfolio of stocks and bonds is considered more risky than using the funds to pay down a mortgage. The market can be volatile and there are no guarantees of returns on those investments. Before committing to a strategy, discuss the options with a financial advisor and/or tax professional who will evaluate your financial situation, your timeline, and your goals to help you determine the amount of risk you can comfortably bear.
If you like the idea of paying off your mortgage early, but aren’t ready to go “all in” on paying it off, you still have the option to chip away at it more slowly and pay it down. Review your loan amortization schedule. If you can add an extra payment every month toward the principal without sacrificing your retirement savings, you can move up your payoff timeline without committing so much of your reserves at one time.
The decision to pay off a mortgage may be as much emotional and philosophical as it is financial, so take the time to consult an expert and carefully weigh your options against your goals and priorities.