Your mortgage payment is likely the biggest one you make each month. The thought of getting rid of that payment sooner and saving on some of the interest payments can be very attractive. However, there are plenty of trade-offs when you start diverting much of your disposable income toward extra mortgage payments. Here are several reasons why it may not be in your best interest to pay off your mortgage early.
Lost Investment Income
In order to pay off a mortgage earlier than the traditional 30- or 15-year terms, you will have to devote a significant part of your monthly income on the payments. That means you will not be able to put that part of your income toward things that could grow your money, like investments. Based on the growth of the stock market over the past several years, you could be earning anywhere from 7% to 15% on any money you invest. And if you let those investments continue to grow over time, you may be able to build wealth faster than you would if you simply pay off your home loan early and save on interest payments. In fact, most financial planners will encourage you to be contributing between 15% -20% of your income to retirement accounts before even thinking about paying off your home early.
Less Access to Cash
Most people have upcoming financial goals that require a substantial amount of cash. This could include everything from paying for kids’ college tuition, weddings, vacation, house remodeling and new car purchases. If your extra money goes to paying down your mortgage, it will be harder to save for these important goals.
Life is also full of unexpected emergencies. When a major medical crisis or serious car repair occurs, it would be easier to pay for it if you have a cash reserve than if you have been dumping all your spare change into your house. The only ways to get your hands back on that money is to sell the house, get a cash-out refinance loan or a home equity loan. All of those options require time and sometimes even money to complete. Even if you decide to pay off your mortgage early, it would be wise to first put aside a large cushion of cash reserves (six- to twelve-month’s worth of expenses) to handle all those expensive and unpredictable life events.
Fewer Tax Breaks
While the long-standing mortgage interest tax deduction was weakened in 2017, homeowners who still itemize their taxes can deduct interest on up to $750,000 of mortgage debt. For those whose mortgages began before 2018, the limit is $1 million. Even if you do not make enough to itemize at this time, your income will likely grow over time and that deduction may save you money in the future.
While paying off a mortgage early can provide true financial savings, it may not be the right choice for everyone. Financial priorities like building up an emergency reserve fund and saving for retirement and other large financial projects should come before paying down a mortgage.
If you have any questions, give us a call today at 805-582-9400 . We are always happy to hear from you and answer any mortgage or real estate questions that you have.