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…Should you pay off your mortgage early either by paying extra dollars
toward your loan’s principal balance or by paying off the rest of your mortgage in one giant payment if you had the opportunity to do so or are there times when not paying off your mortgage early actually makes sense?
The original article, written by Dan Rafter, is presented here by munKNEE.com – “ The internet’s most unique site for financial articles! (Here’s why)” – in an edited ([ ]) and revised (…) format to provide a fast & easy read.
Are there times when not paying off your mortgage early actually makes sense? Not surprisingly, it depends on a host of factors. Here is what you should look at when determining whether paying off your mortgage early is the best choice.
Tax Benefits
When arguing against paying off your mortgage early, most people point to the mortgage interest deduction. This allows most homeowners to deduct annual mortgage payments.
There is a catch here, though: You can only claim the mortgage interest deduction if you itemize your taxes and you should only itemize if your deductions are higher than the IRS’ standard deduction, which as of 2016 stood at $12,600 for married couples filing jointly and $6,300 for singles and married people who file separately. This means that those homeowners most likely to benefit from the deduction are those who:
- have purchased higher-priced homes,
- have a high interest rate on their mortgage,
- or are in the very early stages of paying off that mortgage.
For other homeowners, the deduction will either be less than, or barely more than, their standard deduction. This means that you’ll need to determine — perhaps with the help of your accountant or financial adviser — whether the mortgage interest deduction is really helping you at your current stage of paying off your mortgage. If it is, then factor this benefit in when determining whether you should pay off your mortgage early but, if it’s not, then don’t let the promise of a yearly tax deduction influence your choice.
Other Debt
According to Freddie Mac’s Primary Mortgage Market Survey, the average interest rate
- on a 30-year fixed-rate mortgage stood at 3.54% as of Nov. 3 and
- a 15-year fixed-rate mortgage was an even lower 2.84%.
According to the financial website Bankrate, the average variable interest rate for credit cards stood at 16.28% as of Nov. 2. The message here is clear: If you are burdened with high-interest credit card debt, and you have enough money to spend extra on your mortgage loan or pay it off entirely, it makes more sense to put those extra dollars toward your credit cards…
Before deciding to pay extra on your mortgage or pay it off entirely, look at your other debt first: Use your extra money to eliminate the debt that is costing you the most each month.
Are You Staying Put or Moving?
How long do you plan on staying in your home? Do you plan on living out the rest of your days there or are you already planning a move in five to seven years?
It makes more sense to pay extra on your mortgage loan if you plan on staying in your home for a longer period of time. By paying extra each month, you can shave thousands of dollars off the amount you’ll pay in interest during the life of your mortgage but, if you plan on moving in five years, paying extra doesn’t make as much sense. You’ll sell your home long before you come close to paying it off so, if you’re not going to be a long-term resident of your current home, put that extra money to better use.
Are You an Investor?
Those who argue against spending extra on your mortgage say that most homeowners would be better off taking those extra dollars and investing them. This goes back to the low interest rates attached to mortgages today. If you are only paying an interest rate of 3.5% on your home loan, why wouldn’t you keep that debt and instead invest in the stock market, where you could make a return of 7% or more on that money? This assumes, though, that you’ll actually invest the money that you won’t spend on your mortgage loan. If you’re more likely to spend it instead, you’re better off paying down your mortgage or even paying it off early.
Retirement
Are you close to retirement? You might want to pay off that mortgage early. It’s best to enter retirement with as few monthly payments as possible. If you plan to stay in your home after retiring, paying off that mortgage early makes sense. You are then free to use that money that you would have sent to your lender each month however you choose.
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Related Articles from the munKNEE Vault:
1. Mortgage Interest Deductibility Should Be Eliminated! Here’s Why
“Buy as much house as you can,” real estate agents urged clients. “The more you buy, the bigger your tax break” is their advice using the mortgage interest deduction (MID) to explicitly promote over-investment in housing. Unfortunately, such advice fueled the previous housing boom and exacerbated its bust and could do so again.
2. Home “Owners”: Here Are 10 Advantages to Paying Off Your Mortgage Early
Paying off the mortgage early is an idea with obvious appeal, but not one that many middle-class home “owners” pursue. If your interest rate is so good that the bank just made a bad bet in giving you that low rate, you might want to continue enjoying the benefits as long as possible. In many other circumstances, however, paying off the mortgage can be a fine money management move indeed. [Below are 10 sound reasons to do so.]
3. 3.1 Million Homes Owe More On Their Mortgage Than Their Home Is Worth
The number of homes with negative equity in the U.S. is still high, but the numbers are improving. At the end of the first quarter in 2017, 3.1 million homes owed more on their mortgage than the home was worth. This number improved from the previous quarter, with 91,000 homes regaining equity. The total number of mortgages underwater in the U.S. still stands at 6.1%.
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