Should You Pay Your Mortgage Down?
Not many enjoy having a large mortgage looming over their heads and racking up interest for up to 30 years. As a result many with extra cash look to pay off their mortgage as soon as possible. However paying your mortgage off early may not always be the best decision.
There are two types of debt, good debt and bad debt. While some may think no debt is good debt, a mortgage is considered good debt since it grows in value or income over time. Here are three things to consider if you are tempted to pay down your mortgage early.
- Your home doesn’t provide income. Purchasing a home used to be the pinnacle of The American Dream. The 2008 financial crisis proved otherwise when many were left underwater with their mortgage worth more than the home itself. When you put all of your money into your home, it may increase your equity, but unless rented out won’t provide income and could take years to grow in value. When you invest in the stock or bond market, you have the potential to gain an income stream through dividends, interest payments, and capital gains. The main goal for investing is to provide enough income so you don’t have to work! If you have a high interest rate, then it may make sense to pay your home mortgage down, however even with the recent interest rate hike, we still are at historic lows in terms of interest rate. If you have a low interest rate, you can take advantage of it by generating higher returns elsewhere and keeping the difference. Also if you have a fixed interest rate over 30 years, inflation will act in your favor. On top of this, you also can reap the tax benefits.
- You won’t be able to use the interest deduction. The one benefit of mortgage interest is the sizable tax deduction. If you are in a high tax bracket, losing this deduction could mean paying more taxes and potentially push you into a higher tax bracket, resulting paying more taxes. For example, if you are in the 25% tax bracket pay $24,000 mortgage interest per year, that’s a $6,000 tax break that you will be giving up by paying off your mortgage.
- You may have limited liquidity. As we saw in the 2008 financial crisis, the housing market isn’t very liquid. It takes a lot of time to buy and sell a home that could last up to months. If all of your liquid cash is in your home, then you may have difficulty paying any big expenses that may come up. Life events like medical emergencies, college, and marriage require liquid assets and you don’t want to sell your home in order to get it. If you instead take the money you'd use off your mortgage earlier and instead invest in diverse investment portfolio, you'll have more options should the need for cash arise.
Everyone’s circumstances are different, so before making any decision, it is best to look at the numbers, your financial goals, as well as your personal preferences. If any type of debt, good or bad, gives you ulcers, or you are close to retirement, than paying it off sooner may be the answer. But if retirement is still some time away and are comfortable putting your spare cash to work in the market, you may end up growing your wealth faster. For more information, visit artofthinkingsmart.com/smart-mortgage