With the recession still a reality for many, it seems as though getting out of any debt is a good option, including mortgage debt. And there are advantages to paying off a mortgage early. You can put a little extra toward your mortgage principal each month, and build equity faster. Plus, paying off your mortgage early means that you pay less overall in interest, possibly savings you thousands. Depending on your situation, the savings in interest can outweigh the tax deduction you miss out on when you pay off your mortgage. This is the conventional wisdom behind paying off the mortgage early. However, it may not actually always be your best bet.
Paying Down Other Debt First
Because your mortgage is probably low interest, and because it comes with a tax benefit, it is often a better idea to put extra payments toward your mortgage principal only after you have paid off other, higher interest debt. Paying 13% interest on a credit card will do far more damage than saving some interesting on a 6% home loan. Before you begin paying off your mortgage early, consider your other debts, and pay those off. These debts can include credit cards, personal loans, auto loans and even student loans (depending on your rate).
Could You Come Out Ahead by Investing?
Another consideration is your possible returns if, instead of paying an extra $100 or $200 toward your mortgage principal, you invested the money. Over the long term, investing in the stock market have the potential to more than offset the amount of money you are paying in interest for keeping your mortgage. (Of course, it is important to note that there is also the potential for loss, since investments can result in you losing money, and are undertaken at your own risk.) If you have a company retirement plan that comes with an employer match, it can also be a good idea to contribute to that plan, and get free money in the form of a match. If you haven’t maxed out your tax-advantaged retirement plans, it might be worth it to hold off paying extra on your mortgage until you have.
When You Should Pay Off Your Mortgage Early
One of the times when it makes sense to pay off a mortgage early is to that you can have your home paid off by the time you retire. If you are planning on staying in your home, having it paid off means one less expense you have to worry about — especially if you are on a fixed income. And, of course, by then less of your payment is going toward interest anyway, so the tax advantages of mortgage interest are minimized. You might consider a plan that will help you pay off your mortgage by the time you retire.
Editor’s note: Another item you may want to contemplate is whether you decide to do a 30 year mortgage rate or a 15 year mortgage. Choosing the 15 year would of course raise your payment, but also reduce the amount of interest that you’ll pay.
Of course, in the end, it depends on your situation, and what will best help you reach your retirement goals. A Certified Financial Planner can help you consider your options, and run the numbers to see what has the potential to best help you reach your goals related to wealth and financial security.
This is a guest post Miranda Marquit is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. Miranda is not affiliated or endorsed by LPL Financial. The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.