The conventional wisdom is that you should pay off your mortgage as soon as you are able. In most cases, that makes abundant sense. But not everyone’s situation – or preference – is conventional. If that describes you, then here are five reasons to not pay off your mortgage.
One of the downsides of real estate as an investment is that it is not liquid. The more money that you have tied up in your home, the less you will have available for other purposes, particularly for emergencies.
By building up cash reserves, rather than paying off your mortgage ahead of schedule, you maintain control of your cash. Should an emergency come along, such as a medical catastrophe or a prolonged job loss, the cash will serve you better sitting in a bank account, then it will be building up your home equity.
When you own a home, there are only two ways that you can convert your equity into cash. One is to sell the property, and the other is to borrow it out. Either maneuver will put you in a weakened state after the fact. And having substantial cash reserves could prevent you from having to take either course of action.
Investing Beyond Your Home
Another extremely important advantage of accumulating cash outside of your home is that you’ll have it available to invest in assets not related to the property. For example, the money that you might put into reducing your mortgage could be used to invest in stocks, mutual funds, or even retirement savings. Each asset will provide you with an additional return on your investment apart from your home. This will also enable you to grow financial assets while you are slowly building up equity in your home – and that’s a double win.
This also provides a form of investment diversity. For example, let’s say that the value of your home declines even as you are paying down the mortgage ahead of schedule. You may even find that your equity declines even if you are pouring more money into the mortgage. If however you invested extra money in financial assets, those assets may be growing even as your home equity shrinks.
If your financial portfolio grows rapidly enough, you may find yourself in a stronger position to pay off your mortgage completely at some point the future.
Your Mortgage is Probably the Lowest Rate Debt You Have
This is never more true than it is right now, since we have record low interest rates. A 30 year fixed rate mortgage represents a unique opportunity to lock-in historically low rates – 3.something or 4.something – for decades. And if you look at interest rates over the past 30 years, you can easily appreciate that we may ever see rates this low again.
This is especially important if you have other types of loans at higher interest rates, especially credit cards and student loans. If you pay off any debt at all, you would be best to pay those off rather than your mortgage, since they typically carry much higher interest rates.
Preserving an Important Tax Deduction
Over the past 20 years or so, Congress has been working to gradually eliminate as many income tax deductions as possible. The home mortgage interest and real estate tax deductions are among the few large deductions left anymore. Should you pay off your mortgage, you may find that you no longer have enough deductions to itemize on your taxes anymore.
You should also consider that the tax deductibility of your mortgage interest makes your effective interest rate even lower than what it seems on the surface. If you’re paying a combined federal and state marginal income tax rate of 25%, your 4% mortgage interest rate will be effectively reduced to just 3%.
Do you really want to give that up?
You’ll Pay off The Loan Eventually No Matter What
There’s a silver lining in choosing not to pay off your mortgage early – even if you don’t make any special effort, your mortgage will eventually be paid off anyway. This is because mortgages are set up to be self-amortizing – as you make your monthly payments, the principle is gradually reduced until the loan is completely extinguished at the end of the term.
The point is, even if you accumulate cash, invest in other assets, or pay off non-housing debts, your mortgage will still end up being paid off!
If you decide to invest extra savings in places other than your mortgage, just be sure that you don’t add to your mortgage indebtedness. That means avoiding second mortgages and home equity lines of credit. It also means not taking any additional cash out in the event that you refinance your first mortgage.
Paying off your mortgage early may be good for a lot of people, but not paying it off early can also work for a lot of people. You may be someone who will find that your financial interests be better served by not paying off your mortgage. Carefully consider the alternatives, no matter which way you decide to go.
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