Jan 2014

Is paying off your mortgage sooner the smartest use of your money?

By admin

The amount you owe on your mortgage is typically the largest of your debts.  And the inclination is to pay it off as quickly as possible so as to own your home free and clear.  You may have the urge to send in extra payments each month or whenever you find yourself with extra cash on hand.  In fact, a 2007 study co-authored by a Federal Reserve economist estimated that 16% of U.S. households pay extra on their mortgages each year. But is that really the best way to use that money?  It may not be!

There are situations where paying down a mortgage makes sense, such as when you’re approaching retirement or when reducing your principal will get you a much better deal on a mortgage refinance.

But most people still have better things to do with their money, even in this environment, than to pay down a low-rate debt that’s often tax-deductible to boot.

For one thing, mortgage financing tends to be the cheapest money you can obtain and the interest is usually deductible if you itemize on your taxes.  Compare the historically low levels of 6% or less with those that you’re paying on credit cards or auto loans.  But, you say, my bank’s saving account or certificates of deposit only pay me 1-2% on the balance so what should I do with that money if I don’t send it to the mortgage company?

If your employer offers a workplace retirement plan such as a 401(k) or 403(b), you’ll get a lot further ahead by investing your money there, for a variety of reasons:

  • Many workplace plans still offer matches, typically 50% of every dollar you put in up to 6% of your pay. If you’re not contributing enough to at least get the full company match, you’re leaving free money on the table (and missing out on an immediate 50% return)
  • You save taxes on the money going in because the amount you contribute reduces your overall pay for that period leading to less taxes being taken out.  When the money comes out, you’ll owe taxes, but most people’s tax rates fall in retirement compared with the period when they’re working.

Another possible option for that ‘extra’ money is to deposit it into a ROTH IRA Account.  You don’t get any tax benefits up front, but the money grows tax free and when you’re ready to withdraw it in retirement ideally you are in a lesser tax bracket.  You should also take a look at some of your other debt and consider paying it down instead.  Credit Cards in particular  have a significantly higher interest rate than your mortgage and the interest is not tax deductible.  (same goes for student loans and car loans)

Take a look at your rainy-day savings or emergency fund.  It’s all well and good to have your mortgage paid and own your house free and clear.  But what if you need money for increased living expenses or unexpected medical bills?  Or how will you pay the real estate taxes if you don’t have enough saved?   Unbelievably, you could own your home, but still lose it if you’re unable to pay the taxes!!

So is there any situation where it makes sense to actually pay down your mortgage?  Yes, if you’re nearing retirment age.  The reasons:

  • The tax benefits of a mortgage are typically minimized by the time you hit retirement age. Plus, trying to make mortgage payments in retirement often means having to take more tax-deferred account income than you otherwise might have, which decreases your monthly retirement income.
  • Further, paying off your loan tends to substantially reduce your living expenses, which is a great benefit on a fixed income.

Your home is ONE of, if not THE largest asset you’ll own, but it may also come with the largest debt you’ll owe.  Resist the urge to pay it off quickly and think more strategically about your future and you’ll reap the benefits long into the future. Granted we are a title insurance company so certainly seek out a professional financial advisor’s opinion when making major decisions like this.  However recently we have seen a lot of people pay off their low interest rate home mortgages and sometimes our take is that it just doesn’t make sense….




About World Wide Land Transfer:

World Wide Land Transfer is a full service Settlement and Escrow Company also providing comprehensive title insurance services for all forms of real estate transactions ranging from a home purchase or refinance to the most complex commercial transaction.  World Wide Land Transfer started predominantly as a PA Title Company in 2004 but grew quickly and started issuing NJ Title Insurance, NY Title Insurance, MD Title Insurance, VA Title Insurance and FL Title Insurance. World Wide now covers most counties throughout the nation.

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