Don’t Pay Down Your Mortgage

Don’t Pay Down Your Mortgage!

Earlier this year I was helping a potential seller who was looking to relocate. The seller had a ton of equity in their home because every extra cent went towards their mortgage. What they didn’t have to progress their move was any cash on hand for earnest money, closing costs, appraisals or inspections. We had to postpone things, so they had time to put some cash together since everything extra was tied up in their home.

At first thought, it may seem logical to take any extra money you might have (thank you work bonus!) and pay down your mortgage. Seems like a good idea on the surface, but let’s dive deeper and see if it’s right for YOU.

Tackling mortgage debt on the fast track is not highly recommended unless you are nearing retirement. According to financial experts, there are better things to do with your money.

Let’s put aside the emotional relief of paying off your mortgage and just look at the basic math or purely “financial” side of the situation. Here’s a rundown of five strategies that you should consider before you pay down your mortgage:

1) It won’t change your monthly payment unless you refinance.

Paying down your mortgage will not decrease your monthly housing costs unless you refinance or ask your lender to “recast” your loan, which they are not obligated to do.  All it will do is get your loan paid off earlier than 30 years … but if you aren’t interested in living in this home for 30 years, then don’t pay down your mortgage!

2) You won’t get “more” out of your home the “more” you pay down your mortgage.

Your home will be worth the same amount when you go to sell whether you pay down your mortgage or not. However, if you put the same money in another investment that you would otherwise have put into paying down your mortgage, THAT money could grow.

In other words, you don’t get “more” back when you pay down your mortgage when you sell your home, you just get your savings account back. And you’ll have many years ahead without access to that money you used to pay down the mortgage until you sell (or refinance) and both of those have additional costs involved.

3) Put your extra cash where you can touch it.

With so much uncertainty in the economy, having a steady cash flow is essential. Once you put any extra money toward your mortgage, you can’t get it back. Basically, equity in your house isn’t as easily liquidated as having it in your bank account!

You want to have a robust savings that you can turn to for emergencies that will hold you over just in case you lose your job or face an unexpected medical crisis. Most experts advise to have enough cash for at least 6 months’ worth of living expenses, and that should be your first priority.

4) Max out all other parts of your financial portfolio first.

Your home should be just one aspect of your entire financial portfolio. Make sure that you not only have an emergency savings account, but other investments as well so that you are diversified. One example of this is to make sure you are maxing out your retirement plans, especially so you can get that added bonus of a full match from your employer.

5) Pay off higher debt.

If you have the extra money to put toward your mortgage, than consider using it toward other debt first. Paying off higher interest debt, such as credit cards and car loans, rather than a lower-rate, longer term mortgage, can bring you more financial security.

6) Look for better returns with investments.

Given the prolonged period of historically low mortgage rates, it may be financially advantageous to explore alternative investment options that potentially offer higher returns, such as stocks or bonds. Historically, a well-balanced 50/50 portfolio consisting of stocks and bonds has shown the potential to generate moderate returns, averaging around 6% to 8.2% over the long term. If you find yourself in a 25% tax bracket, it’s worth noting that taking advantage of mortgage interest deductions, when applicable, could reduce the effective cost of a 5% mortgage interest rate to approximately 3.5%, potentially making mortgage financing more cost-effective.

You can easily get a better return than that with your money if you invest it wisely rather than paying down your mortgage. As always, check in with your tax and financial advisors to see what’s best for YOUR particular situation.

7) Don’t forget the tax break.

The benefit of deducting your mortgage interest is something to keep in mind. This tax break is an added perk that makes it well worth keeping your mortgage around. This is especially true if you’re only a few years into your mortgage and not near retirement age.

8) Determine your homeownership plans.

It doesn’t make sense to put extra money into your mortgage if you plan to move in a few years, whether you’re trading up or downsizing. You don’t know what the market will be like when it’s time to sell and it’s better to have that cash on hand to help purchase a new place. Having cash in your bank and not in your home when you want to move makes buying the new home so much easier!

When SHOULD you pay down your mortgage then?

There are situations where paying down a mortgage does make sense, such as when you’re approaching retirement and you want to be debt-free at that point in your life.

If this is more important to you and your family – to have no monthly mortgage payments entirely, than go ahead and pay down your mortgage earlier. It might not make as much sense financially but if it makes your sleep better at night, it’s worth it.