As Americans struggle to manage their financial burdens, countless financial gurus scream, “Pay your debts ASAP!”
Not all debt is equal. Some types of debt are considered good debt, and you may have several debts far worse than your mortgage. This is just one of several factors to consider as you determine whether paying your mortgage off early is a good idea or potentially harmful.
Before you submit the next voluntary payment to your lender, consider these compelling reasons for second thoughts.
1. You Have Other Higher-Interest Debt
As a general rule, you pay off the highest-interest debt first. If you have thousands of dollars in credit card debt, a high-interest vehicle loan, or other high-cost financial obligations, those burdens demand your attention more than your mortgage.
It does not matter how appealing the thought of owning your home free and clear may be. Higher interest rate, higher priority!
2. You Have a Prepayment Penalty
Prepayment penalties can render your financial motives for eradicating your mortgage moot. You must determine if your mortgage comes with a prepayment penalty, what that penalty is, and if prepaying your mortgage could be far less productive than you assumed.
You may need to consult a professional to weigh the actual cost of a mortgage prepayment penalty, particularly when considering the upside of investments.
3. You Embrace the Snowball Debt Repayment Method
Dave Ramsey's snowball debt-reduction strategy involves paying off your smallest debt balances first. Ramsey posits this strategy will create momentum that propels you to pay off larger and larger debts one at a time.
The odds are that your mortgage is not your smallest debt. Therefore, if the snowball method appeals to you, paying your mortgage off early will likely be a down-the-road pursuit.
4. Investments Are Outpacing Interest on Your Mortgage
Mortgage-related decisions are always a numbers game. When it comes to dedicating more or less to your mortgage's principal, you must consider interest rates versus potential returns on investments.
If you stand to make more from a red-hot stock market than you stand to lose via mortgage interest, you should generally choose to invest.
5. You Don't Have an Emergency Fund
Any advisor worth their fee will tell you that emergency funds are essential. Having a few months' worth of living expenses readily accessible will spare you from going into further debt in case of an unexpected medical bill or other emergency.
If you haven't built up a robust emergency fund, paying more towards your mortgage than you have to is generally unwise.
6. You Anticipate Needing Liquidity Soon
The refrigerator you purchased in 1987 has performed admirably but won't last forever. The same goes for the 1996 Toyota Camry and the rusty water heater in the basement.
If you anticipate even modest expenses soon, ensure you have enough cash before paying extra money towards your mortgage.
9. You Have Not Tapped Out Your 401(k) or IRA
401(k) and IRA have allowed many millionaires to grow wealth and worry about the tax burden later. These tools are must-haves for savvy investors, and most success stories max these tools out.
You may be forfeiting free money if you divert your funds towards paying your mortgage off instead of taking full advantage of tax-protected investment opportunities.
10. You Need to Save for the Kid's College
You have a fixed period before Timmy or Tammy walks across the graduation stage and enrolls in university. If you have not put the necessary cash aside for their education, the college fund may take precedence over elective mortgage payments.
The average student loan debt per person ranges between $24,000 and $30,000, and many have enough student debt to prevent them from sleeping soundly. You can spare that burden for your child by saving now.
11. You Face an Uncertain Professional Future
Cash on hand is priceless when you get unexpectedly terminated, your workflow takes a downturn, or other professional circumstances diminish your income.
Once you hand money over to the lender, you can't get it back without going through hoops (such as refinancing). Carefully consider your professional security before traveling the path of early repayment.
12. You Want to Keep the Mortgage Interest Tax Deduction
The mortgage interest tax deduction is one of the tools hard-working Americans have to slide down a tax bracket or otherwise lower their tax burden. For those who itemize deductions, a mortgage may be a beloved source of savings they're hesitant to relinquish.
Talk with your accountant about the potential tax-specific ramifications of paying your mortgage off early.
13. You Don't Want Your Credit Score to Drop
If you trust the credit card bureaus, paying off your mortgage early won't substantially affect your credit score. However, it may have an effect, which will likely be a downward slip due to your less diverse credit mix.
You may be down to ride the credit score rollercoaster (as most of us are used to), but those planning to apply for credit soon might consider waiting to pay off their mortgage.
14. You Believe Interest Rates Are Going to Drop
When interest rates drop (hint hint, Fed), homeowners often seek a better deal through refinancing. Though refinancing always comes with terms and conditions (and potential downsides), there can be immense savings in the refinancing game.
If you read Wall Street Journal pundits or just have a gut feeling that interest rates will fall sooner rather than later, you might hold on to your current terms until better terms become available.
15. You Are Considering Refinancing
Refinancing can shorten or lengthen your payoff term, reduce your interest rate, and allow you to pull equity out of your residence. If you are considering refinancing for any reason, paying a large sum towards your existing mortgage could be premature and counterintuitive.
Identify your refi goals, explore terms, and decide whether to refinance before you make a sizeable financial commitment to your current mortgage terms.
16. You Are Behind the Eight Ball on Retirement Investing
Paying a mortgage off early is, for most, a luxury. Saving for retirement is a necessity.
Though the terms of your mortgage and the relative upside of potential investments are key considerations, heading into retirement with a paid-off (or nearly paid-off) home and nothing else is a risky bet. You don't want to sell your home and move into a dilapidated shoe box because you failed to save money for retirement.
17. You Don't Have a Clear Reason for Paying the Mortgage Off Early
Prepaying a mortgage is often a good idea, as it spares the homeowner interest payments and grants them the feeling of true ownership. That said, you should have a clear rationale for diverting a substantial sum towards your mortgage.
If you can't articulate why you are choosing to pay your mortgage off early, it may indicate you haven't evaluated the pros and cons as thoroughly as you should.
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