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19 June, 2018

Should You Pay Down Your Mortgage Debt? Do the Math First

Posted in : Debt reduction on by : Dave Doe

Does the idea of being mortgage-free make you giddy with happiness? Yes, not having to pay a monthly mortgage would make many people feel incredibly free and stress-free. It can be possible to pay off a mortgage early; many people do it every year. However, paying off the mortgage early is not always the best idea in every situation.

If You Have High-Interest Debt

Paying off a mortgage early is not a good idea if you have other debts with higher interest rates than your mortgage. A credit card balance with a 20 percent interest rate should definitely get paid off before a mortgage with a 4 percent interest rate. The same goes for car loans, student loans, and other consumer debt with higher interest rates.

If You Don’t Have Enough of an Emergency Fund

The second situation where a mortgage should not be paid down early is when there is not sufficient liquid savings for an emergency fund. Emergencies always happen, and everyone should be prepared with anywhere from 3-8 months of living expenses saved in an accessible account. If you have to replace your home’s roof, it doesn’t help to have all your extra money going towards the mortgage with no money for the repairs.

If You Aren’t Saving Enough for Retirement

If you are not maxing out your 401(k) to your match, you should not pay off your mortgage early. For those without a 401(k) and those who want to save more, the recommended retirement savings amount is from 10 to 15 percent of your annual income. Yes, a fully paid for house would be an excellent asset in retirement, but you also need money for food and lights.

If You Aren’t Saving for Kids’ College

Another scenario where it is recommended to wait on paying down a mortgage is if you are not saving for your children’s college funds. If you as a parent expect to pay for your child’s college expenses, it is vital to begin saving now. Most likely, your children would need money for college sooner than you would pay off your mortgage.

If You Don’t Plan to Stay for Long

Additionally, if you plan on moving or trading up in house within five years or less, it is not necessarily a good idea to pay off the mortgage early. The real estate market is still difficult for sellers right now, and the last thing anyone wants is to pay off a mortgage early, but not be able to sell the house. You will also lose some tax savings by paying off the mortgage early. The further you go into mortgage loan payments, the less the interest tax deduction helps because you are paying more principal and less interest.

So When Do You Pay off the Mortgage Early?

Pay off your mortgage early when you have no other high interest debt, there is 3-8 months of expenses in an emergency fund, you are saving enough for retirement and your children’s college, and when you plan on staying in your home for five years or more. Many financial experts also suggest not paying off your mortgage early if other investments will earn a better interest rate than your mortgage payoff savings, but risk is a factor many experts do not consider. Yes, mathematically other investments might earn more than you would save by paying off a mortgage early; however, a burden will be lifted off of your shoulders as soon as you send the last mortgage payment in.As Dave Ramsey says, “the grass will feel different.” Additionally, when there is no monthly mortgage payment, you will have more money to spend as you wish, saving for big vacations, a new car, or giving more money to charity. Paying off your mortgage early is a huge jump to financial freedom.