The peace of mind in owning a debt-free home can be very attractive. Tear up the mortgage statements, let go of the burden, and never worry about missing a payment again.
However, before you put your financial focus on paying off your mortgage, you may want to see what kind of trade-off you are making. Here are a couple questions to ask yourself first:
- Do I have enough money set aside in emergency savings, including enough to meet my annual health insurance deductible?
- Have I paid off other debt with higher interest rates than my mortgage?
- Am I on track to meet my retirement/education goals?
- Do I have any significant expenses in the next 5 years (home remodel, healthcare, business start-up, wedding, etc.)?
We generally don’t recommend paying off a mortgage early unless your answers are yes, yes, yes, and no. The next step is to evaluate your current mortgage situation. Here are a couple pros and cons to consider before paying off your mortgage early.
Pros
- For a borrower who feels burdened by the weight of debt and lies awake at night with fear of losing the home, there could be a strong emotional argument towards paying off the mortgage (and any other debt).
- If the interest is not tax-deductible, this could be a reason to pay off your mortgage early.
- If you have excess funds in savings to pay off your mortgage and you are averse to investing these excess funds, it could be put to better use by paying off your mortgage.
Cons
- The banks probably have more money than you. Why give them extra?
- Compared to a long-term investment portfolio, the potential gains from investing may outweigh the interest rate of the mortgage.
- If you have paid off your mortgage and your family has a financial emergency, there is no simple and cost-free way to go back to the bank and ask for your money back.
As you can see, there is not a “one size fits all” answer to this question and sometimes it’s about more than just the money. We suggest meeting with a fee-only Certified Financial Planner® to review your personal financial situation.
