It makes sense to pay off debt early, right?
It seems everyone is preaching that you should pay down credit cards, loans and anything else hanging over your head as quickly as possible to gain financial freedom and security. That is generally a solid plan, especially when it comes to credit card debt, but should that same principle apply to mortgages as well?
Paying off your home loan early can have its advantages, like stress reduction and interest savings, but letting your mortgage run its course can sometimes prove to be the smarter financial move.
Interest Rates and Other Loans
Before you pull the trigger on closing out your mortgage, look at what other debt you are carrying. Money owed on a credit card or auto loan will cost you more in the end because of higher interest rates. Debt on something with a faster depreciating value, like a vehicle, should be paid off before a mortgage.
If you pay off your mortgage early, the money that you have taken from other accounts to pay the balance is now tied up in the house. Meaning if something unexpected arises and you need cash, it will be more difficult to draw together funds. Keeping more in your bank accounts and investments while paying your mortgage as scheduled can give you greater flexibility to meet whatever comes up.
Investing Your Pay Off
Especially if you have an employer matched 401k, putting the money you would plan to use to pay down your mortgage early into your 401k can get you a larger return on your money. In addition, if you suddenly need to move, your 401k will move with you, your house won’t.
Mortgages have tax incentives
You certainly do not want to keep a mortgage just for the tax deduction on the interest, but it is still a big advantage over other lines of credit. Mortgages are a cheap form of debt, comparatively, so you may as well leverage it for as long as possible.
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