Home ownership has always been seen as a huge milestone in adulthood and the feeling of pride it provides is pretty substantial. After all, owning a home is a status symbol but it also gives you stability because real estate is almost always a great investment. Even if you move into a different home at some point, your prior home can provide rental property or a huge down payment on your new residence.
Because having a mortgage means you still don’t fully own your home, however, the urge to pay it off faster can creep up on many homeowners. You might be inclined to throw several hundred extra dollars per month at it, or a large chunk of money from inheritance or an unexpected bonus at work. Here are 7 great reasons why you should avoid paying off your mortgage early, and the rationale behind them.
7 Reasons To Avoid Paying Off Your Mortgage Early
You’re still paying off credit cards
If you’ve got a lot of other debt, especially to the point you’re not really saving money each check then your mortgage should be your lowest priority. Typically mortgages are for 15 or 30 years, and have very low interest rates. Where your APR on your mortgage might be 3.5-7%, your credit cards will likely be much higher; 13-27%, based on your credit and the rates of the lender. Debt with interest rates over 10% need to be treated as if they were on fire, so pay them down first with all available extra money you have.
You can still pay a little bit extra towards your mortgage – just a small increase in payments can mean years off your loan without sinking a full extra mortgage payment every month. Just paying an extra 0.001% of your loan each month can potentially cut 2 years off your mortgage, depending on your interest rate.
You can get a better rate by investing
If your mortgage is 4% and you throw an extra few hundred at it per month, you’ll definitely be making headway on the principal. Is that wise, though, when you might be able to get 7% interest on that money in a basic, low-risk mutual fund? If your other finances are set up and you find yourself with “extra” money each month to allocate, your mortgage is probably the last place to sink it.
Assuming you’re all caught up on other bills, getting that extra money through investing is better than paying on a stable, secured debt like a mortgage. The only thing in that case that paying the mortgage off would provide would be the ability to say “I own my house entirely!” which, is that worth getting less money overall?
That was rhetorical; no it’s not.
You don’t have an emergency fund
Most financial experts will suggest the first place you should put money is into some kind of emergency fund. A good goal is $1,000 starting out, and then from there aiming for 3-months of your normal paychecks. After that, you want a year’s worth of money saved, as you never know what might come up.
Even if you’re a family struggling financially, living paycheck-to-paycheck, if you don’t have the emergency fund then you need to get it asap. Your mortgage won’t help you if your car explodes or you lose your job, so don’t give it extra money.
Mortgages come with a tax benefit
Whether you’re in a high tax bracket or you’re simply getting a percentage over the standard deduction, tax breaks are a big reason to not pay your mortgage off early. If you’re in the 25% federal bracket with a substantial amount of mortgage interest, you could be looking at a $5000 or more tax break. Many states also have homestead exemptions that lower property taxes, and other benefits if you’re paying on a mortgage you use as a primary residence.
A financial adviser can help you in this respect as finding out if itemized deductions from your mortgage are better than the standard deduction. This can also help you plan out how you want to allocate money on your mortgage so you can pay it off most quickly without penalizing yourself.
You’re planning on moving
Maybe the home you bought made sense for you, your partner and your cats but now you have kids (or more cats) and you need a bigger place. Sinking a ton of money into the mortgage to pay it off earlier is definitely not worth it. The money you’re putting towards the mortgage would be better spent on improvements on the home that could bring in a better selling price.
Fixed-rate mortgages are essentially inflation-proof
When you buy your first house, the mortgage payment might seem pretty huge in terms of your income. If you’re set up with a 30-year mortgage, the amount you pay each month will stay the same but the value of that payment will decrease. As you increase your earning power, a $1000 house payment will be less burdensome, and $1000 will have less buying power 30 years from now. What it means to your mortgage, however, will remain the same.
Liquidity is important
Tying up money in something like paying a mortgage off early makes you less flexible and less able to address emergencies or investing opportunities. One big reason to avoid paying off a mortgage early is that having liquid assets is almost always going to be a better use of your money.
Your mortgage is not your enemy
While paying off your mortgage earlier than expected isn’t always a bad thing, throwing a significant amount of money at it each month isn’t the best use of your cash. Having an emergency fund should be your first priority, followed immediately by paying off debt. After that, investment is almost always going to yield better results than paying significantly more on your mortgage. Finally, remember that your mortgage payment is a hedge against inflation, and that liquidity is king when it’s an option.