4 Reasons Not to Pay Off Your Mortgage Early
If you follow financial “gurus” such as Dave Ramsey, you’ve probably heard the advice that “all debt is bad debt,” and that you should pay off all of your debts as quickly as possible – even your low, fixed-rate mortgage.
However, this isn’t the best strategy in all cases, and more financial experts are now recommending that you take a good hard look at the benefits your mortgage provides, and what you’ll be giving up, before trying to do away with it as fast as you can.
Here are 4 reasons from Nerd Wallet on why you might want to reconsider trying to pay off your home early:
1.) You Will Be Sacrificing Monthly Cash Flow
Unless you earn a very high income in comparison to your monthly living expenses, putting a large chunk of your monthly cashflow towards your mortgage will mean sacrificing liquidity. If you have locked in a low rate on your mortgage in recent years, your mortgage is likely the cheapest debt that you have. Putting extra money towards that – especially when you may have other outstanding debt at a higher interest rate such as car payments, credit cards, etc. (either now or potentially in the future) just doesn’t make sense.
Ric Edelman, CEO of Edelman Financial Services and author of numerous financial books including bestseller The Truth About Money, says that no one should be in a hurry to pay off their home. “You lose liquidity when you take a dollar and give it to your lender to pay off a [mortgage] loan; you’ll never see that money again,” says Ric. After all, “You’ll never eliminate property taxes, homeowners insurance or maintenance costs, and you’ll always need money in the future to pay for all of these things.”
2.) You’ll Lose Access to the Money If You Really Need It
If you don’t have an emergency fund saved of AT LEAST 6-months worth of living expenses – including mortgage payments (we recommend 2 years’ worth), you have no business trying to pay off your home early.
What if you lose your job unexpectedly? No matter how much equity you have in your home, if you can’t make the monthly payment, you could lose your home anyway, which kind of defeats the purpose of trying to have it paid off sooner!
Remember that if you are unemployed, you won’t be able to take a loan out against your home, so that equity is now locked up, and you won’t be able to get to it at the time when you need it the most.
3.) It Will Reduce the Amount of Money You Can Save for Retirement or Other Financial Goals
As we all know, saving early is key to a comfortable retirement. The more you can save earlier in life, the more time your investments will have to grow. So if you’re socking away all your extra cash flow into your home, you’re almost certainly shortchanging your future retirement goals.
If you are absolutely set on paying off your home early, we recommend you save whatever you want to put towards your mortgage into a side account or a safe savings vehicle every month. In 20 years or so, you may have enough set aside to pay off your mortgage if you still really want to – and if you have plenty saved for your retirement years at that time. But in the meantime, you will have access to the money in case of emergency, and if you decide later that you’d rather use that money for retirement or other financial goals, you will have the option to do so, rather than having that money locked up in your home.
4.) You Will Lose the Tax Deduction
One of the greatest benefits of having a mortgage is the tax deduction that comes with it. It is one of the largest tax deductions available to most homeowners, and by paying off your home sooner, you’ll be losing that interest deduction sooner as well. However, this benefit will decrease with time, as you are typically paying the most interest (and receiving the greatest deduction) in the early years of your mortgage. So if you do want to pay off your home a little early, focusing on saving elsewhere in the earlier years may allow you to make larger payments later on and reduce your mortgage term by a few years at the end.
If you’re all set for retirement, planning to remain in your home, and have a solid emergency fund established, it’s fine to pay a little extra towards your mortgage. But as long as you are living within your means and can handle your current mortgage payments, we caution you not to sacrifice your financial future simply to pay off your home faster.
For more on learning to “master your mortgage,” register for this month’s free webinar “Mortgage Mastery: Is Your Home A Good Place to Park Your Money?“
Or contact us for a FREE financial evaluation to see how you can make your mortgage work more efficiently for you!