Here is a list of questions to ask yourself when considering to pay off your mortgage early. (They have been gathered from a number of websites discussing this topic.)
- Do you have other debts?
– Obviously you should pay off all credit card debts before attempting to pay off your mortgage. - Do you have an emergency fund?
– Create a 6 to 12 month emergency fund. In times of crisis you do not want to turn to a home equity loan for money. - Are you afraid of the stock market?
– If you are afraid of the stock market consider paying off your home early. Stock market investments rise and fall. Paying off your home is a sure bet. - Are you saving 15% of your income for retirement?
– Financial advisors recommend that you invest at least 15% of your income in tax-advantaged retirement accounts. Most advisors recommend paying off your mortgage only after your retirement obligations are met. - What is the interest rate on the mortgage?
– If the interest rate is low and your risk level is tolerable you may consider investing the money in the stock market. But realize that the stock market is risky and a solid return is not guaranteed. - How large is the mortgage?
– The larger the loan the larger the total amount of interest you’ll owe. It may make sense to pay down an extremely large loan. - How many years are left on the mortgage?
– If you have less than 10 years remaining it may make sense to pay off your loan. At that point your payments are going more to the principal of the loan and less to interest. Thus your tax deductions are naturally dwindling. - Do you plan on living in your home after retirement?
– One of the benefits of paying a house off early is the peace of mind that you will no longer have house payments. If you plan to upgrade to a larger home this benefit will not apply to you. If you plan on downgrading to a smaller home this may be a benefit to you. - How long until you plan to retire?
– If retirement is far away your investment may grow larger due to the laws of compounding interest. If your retirement is near, you may be better off paying off the loan so you have one less monetary obligation during retirement. - Have you paid for your children’s college education?
– Some financial advisors recommend saving for your child’s education, before paying off your home. In my opinion this is up for debate. Most financial advisors suggest saving for retirement, before saving for your children’s education. Children can get student loans to help them pay for school, or scholarships, so I’m not certain whether I agree with this point. Also, once your house is paid off, you can use the money you would have spent on the mortgage each month to pay for their education.
Are any of you paying off your mortgage early? My husband and I have a 15 year mortgage. So we are naturally paying off our mortgage early. But since the interest rate is unbelievably low we are not adding any additional payments each month.
Behind the argument for not paying off your mortgage is the reasoning that you could invest the extra money and earn a higher return, while keeping your money more liquid. That may have been a good reason in the past but the rate of return on investing now is more questionable, compared to the fact that every dollar paid to reduce a mortgage balance provides a guaranteed return equal to the interest rate on the mortgage.