You may as well ask me if I think it is a good idea if you paint your living room sage green.
For many years I believed that 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.
After resurveying 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, prepaying the mortgage isn’t a good idea after all — regardless of whether I owned a home in sunny California or one of the condos on this page.
Suddenly it just didn’t seem like it made much sense to pay down a 30-year $120,000 mortgage at 3.5% interest if I truly believed that high-inflation was inevitable down the road as a result of Fed’s relentlessly lax monetary policy.
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 retirement plan company match.
If you’re not contributing to a 401(k) retirement plan where your employer offers a dollar-for-dollar match on, say, the first 3% of your contributions, then you may want to reconsider — by not taking advantage of that matching contribution, you’re essentially leaving free money on the table.
2. You have debt at a higher rate than your mortgage.
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, then every dollar of debt you pay off earns you an instant 15% return.
3. You lack an adequate emergency fund.
It doesn’t make much sense to be making extra payments on your mortgage if you don’t have at least three months of savings in reserve to withstand a significant financial shock, such as a sudden loss of income due to unemployment or illness, or an unforeseen major expense.
4. You want more financial 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 more on your house than it’s 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 lack life, health and disability insurance.
If you’re 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 anticipate severe inflation.
Inflation is a debtor’s best friend. That’s because inflation erodes the value of money, and when inflation is rising the value of your mortgage debt falls over time.
8. You’re confident you can get better returns elsewhere.
Let’s say you have a mortgage with an interest rate of 5%. But in reality the 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% less than the original 5% — or only 3.75%. If the number is low enough, you may feel you can earn bigger returns elsewhere.
Good Reasons Why You SHOULD Pay Off Your Mortgage Early
1. You want peace of mind.
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 don’t want a mortgage payment during retirement.
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 risk averse.
As far as Suze Orman is concerned, it makes more sense to pay off your home before making investments anywhere else. As Orman notes, “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.
Photo Credit: MarkMoz12