We hear this question often:
“Should I pay off my mortgage early?”
As you’ll hear us say even more often, the answer is, “It depends.” It’s nice to no longer have that monthly mortgage payment, and there’s something satisfying about owning your home outright. That said, if you allocate dollars to paying off your mortgage, you’re essentially ruling out other ways you could be spending, saving or investing that same money. Here are some of the financial trade-offs to consider before you decide to pay off your mortgage.
Do you have enough cash set aside for emergencies?
If you allocate too much cash to paying off your mortgage, what will you do if a financial emergency arises? It’s possible to open a home equity line of credit, or HELOC, and borrow against it. But as many borrowers painfully discovered during the 2008–2009 financial crisis, these credit lines can be far more tricky and expensive than described during the sales pitch. Plus you’re then putting your home at risk if your HELOC heads south. We typically prefer having basic rainy-day reserves readily available in advance. How much to set aside for that rainy day fund? Three to six months of net take-home pay is a good rule of thumb but this is another example of, “It depends.”
Is your investment portfolio well-balanced?
One of the key ways to achieve your various long-term financial goals is to build and maintain an investment portfolio of globally diversified assets, with an appropriate balance of holdings between your taxable and tax-sheltered accounts. Before tying up extra cash in your home (which basically is a single, highly concentrated holding), you may prefer to direct it to fine-tuning the construction of your personalized investment portfolio.
Are you on track toward funding your other goals?
First funding other goals such as college or retirement also may take precedence over paying off your mortgage. It depends where you stand on each.
Are you on track to be debt-free by retirement?
As a general rule of thumb, we typically prioritize paying off any high-interest debt first (such as credit cards). Next, if you have the cash flow to support higher principal payments, you may want to develop a plan to pay off your mortgage by the time you stop working. At that point, the peace of mind of owning your home outright may outweigh other factors.
What is your current mortgage interest rate?
Speaking of high- versus low-interest rate loans, it’s possible that you’ll come out ahead by refinancing into a lower-rate mortgage when available, and allocating the rest of any cash reserves to stock market investments that can be expected (although not guaranteed) to earn higher rates of return.
Are you in the early or late stages of your mortgage?
In the early stages of your mortgage, most of your minimum monthly payment goes to mortgage interest, which is typically deductible on your income tax return. Especially if you’re in a high tax bracket, this may offer an incentive to keep that mortgage in place until the balance is no longer as tax-friendly.
So, should you pay off your mortgage early? Only if and when it’s the best use of your disposable income. If you ask me, that makes it an excellent question to consider in alliance with your financial planner. In my next post, I’ll share a resource to help you take the proper steps involved if you do decide to proceed.
SAGE Serendipity: If you are a multi-tasker, especially one who likes to write lists and use sticky notes, check out Quartz’s latest piece: “Personal kanban”: a life-changing time-management system that explodes the myth of multitasking. It a decades-old Japanese method developed at Toyota that prioritizes and visualizes the to-do list. Personal kanban has inspired some online apps but the purists rock it old school and go to the stationery store.