You’re thinking about paying off your mortgage, making that home really yours. It’s an exciting thought for many.
But Money magazine says actually paying it off is something you should examine carefully beforehand, and even consult a financial advisor for their opinion. In fact, Money offers four scenarios in which it may make more sense to stick to your current repayment plan.
Money acknowledges the peace of mind — and interest you’ll save — from paying off your mortgage, but it cautions you should take into account the downsides of making early mortgage payments, too.
Here are four scenarios in which Money said it may make more sense to keep your current repayment plan.
Potential missed investment returns: Sometimes, your money can go further in the stock market, Monday said. The average annual stock market return per the S&P 500 index is roughly 10% over the long run. Consider your mortgage interest rate, and whether making extra mortgage payments means missing out on high potential returns, Money said.
Higher taxable income: Homeowners can deduct mortgage interest payments from their taxes, as long as they itemize your deductions. Paying off your home could increase your taxable income, depending on your situation, according to Money .
Reduced liquidity for emergencies: Making multiple or higher mortgage payments every month lowers your available cash on hand. Should an emergency arise and you’ve used excess cash to pay off your home, you increase the chances of having to sell stocks or take out a personal loan to cover the cost.
Pre-payment penalties: Some lenders charge a fee for paying off some or all of your mortgage early.
Paying Off a Mortgage Early Can Make Sense, However
Here’s when paying your mortgage off early makes sense, according to Money;
As with most financial decisions, Money said homeowners need to weigh the pros and cons. For some, Money said the peace of mind is worth paying off their mortgage early. Plus, Money said that not everyone has a high enough risk tolerance to park their money in the stock market and let it stay the course during market corrections. It might be better to pay off a mortgage early than it is to store money in a bank account with little to no interest, Money said.
Also, you’ll save on interest if you pay off your mortgage early, and you will be able to build up equity in your home faster. That equity will come in handy, Money said, if you want to borrow against your home later in life.
Money said that homeowners who are approaching retirement also may want to get rid of their mortgage, especially if it’s their largest expense.
According to Money, some people take a hybrid approach instead of putting all of their extra cash into the mortgage or stocks. Homeowners can split excess funds between paying down their mortgage principal and investing in stocks so that their money is growing for their future while they continue to try to pay down their debt.
You might not want to pursue zero debt at the cost of financial flexibility, Money warned. It said that financial advisors recommend having some money on the sidelines for emergencies, while also investing in assets that can produce long-term wealth.
It’s about diversification.
