Rethink Paying Off your Mortgage Early- 5 Reasons
If you’ve recently come into some money, you may be tempted to pay off your mortgage early so you can finally be done with monthly payments and own your home outright. But while plenty of people choose this route for the security of owning their homes free and clear, it doesn’t always make sense, especially if you are near or in retirement. Although it may seem like peace of mind to finally own your own home, there are other financial factors you need to evaluate before making a final decision. The money you intend to use to prepay your mortgage may be better used for paying down debt with higher interest rates, for example, or for investing in the future. Here are five reasons why you shouldn’t pay off your mortgage early.
Hefty credit card bills
If you have outstanding credit card debt, or other debt with a high interest rate, you should pay that off first. Mortgage rates are still low: The average 30-year fixed loan is hovering around 4.2 percent. Additionally, credit card debt interest is not tax deductible, as your mortgage interest is.
Not Contributing the Maximum to your Retirement Plan
If you’re still working, you are better off adding extra dollars to a tax-favored retirement account such as an IRA or a 401(k). Once you’ve contributed the maximum to your retirement plan, only then should you consider whether it makes sense to prepay your mortgage.
Not Investing for the Future
Once you’ve paid off your credit card debt and have funded your retirement, you may want to invest extra cash in other types of tax-free vehicles, such as a 529 college-savings plan for your kids, or in the market by choosing index funds or stock-owning mutual funds. As with all important financial decisions, speak to a certified financial planner or other financial professional to help you make the best moves for your individual situation.
Need Extra Cash for Other Expenses
If you use all or most of your cash to pay off your mortgage, you may be house rich but cash poor, which is obviously not a good idea, especially if you’re retired and your income barely covers your monthly expenses. When you retire, you do want to make sure you’re liquid.
Don’t Want to Pay a Penalty
Although prepayment penalties are becoming rare with mortgages, you don’t want to have to pay one if you do decide to pay off your mortgage early. Read the fine print about any prepayment penalties in your mortgage agreement.