Some years ago, you bought a house on a mortgage. You’ve been paying off on that mortgage ever since, but now you have reached a fulcrum in your life. You have the fortune of being in a well-paying job, and you have actually amassed enough money to pay your mortgage off outright. The big question is this: should you?
Nobody likes having debts. Owing someone money is a nasty feeling. It complicates your life, and it’s just one more thing to keep you up at night. Even if you know you are well-positioned to pay off the loan in a timely fashion, there is always that nagging uncertainty.
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What if something goes wrong? What if your circumstances change? Shouldn’t you take advantage of this opportunity while you have it? Wouldn’t it just be great to have one less thing to worry about?
Paying off your mortgage (super) early can be incredibly tempting. It offers you the following benefits:
• Save money on interest and closing costs. This can be a particularly attractive option if you are dealing with ballooning interest.
• Force yourself to set aside savings. A home is an investment. If you own it outright, you own all the equity in it. If you have a hard time saving money, that is one way to do it.
• Peace of mind. Some people have a difficult time dealing with the headaches and hassles of managing their money. There may be situations where paying off a mortgage early will make you less likely to panic and do something foolish with the rest of your money. If it helps you sleep at night and stops you from making costly errors, it could be worth it.
When deciding whether you should pay off your mortgage early, you also need to examine the possible drawbacks:
• You will no longer be able to claim the interest deduction on your taxes. Depending on how much money you make, this could be a big deal. In fact, in some cases it could push you into a higher tax bracket. You could end up losing a lot of money each year just in the form of taxes!
• If your home is your only major asset, you will not have a lot in the way of liquidity. You will also have less money available to you now to pay off other loans or deal with emergencies.
• You will not have the money to invest. For young homeowners, this is the biggie. If you pay off your mortgage, that is a huge chunk of cash that you will not be able to invest in stocks, bonds, or other assets. If you do the math, you will probably discover that investing potentially has a far greater value to you than paying off your mortgage.
The bottom line here is that you should do the math before you make any decision. For most young homeowners, paying off a mortgage super early just doesn’t make a whole lot of financial sense. For older homeowners, it may be a good decision. You will have to evaluate your financial and psychological needs and make the choice that best fits your circumstances.