Matt Stead
There are a lot of uncertainties in modern adult life. It’s a relief when your questions have simple, definitive answers. When the mechanic can tell you exactly what’s wrong with your car, or your doctor can give you a conclusive diagnosis, it takes some of the burden off your shoulders. Unfortunately, determining when you should pay off your mortgage isn’t one of those questions.
There’s no one age or financial milestone you can reach that means it’s time to take this step. In fact, paying off your mortgage might not be the right choice in your immediate future – or now might actually be the perfect time. It all comes down to your specific circumstances and your financial priorities.
Factors Affecting Your Mortgage Payoff
How will you know when it makes the most fiscal sense to pay off your mortgage? Ask yourself several questions about the realities of your current financial picture, and your projected future financial status, before making this decision.
- Interest Rates How much interest are you paying on your mortgage? How much interest could you be earning on the money you’re thinking of using to pay off your mortgage? These are questions to ask if your primary goal is to maximize your assets. A homeowner who pays 3% on their mortgage and earns 5.5% on invested cash might be better off leaving that money where it is, instead of pulling it out to pay off the mortgage.
- Your Income and Available Assets If you pay off the mortgage in one or several large installments, will you have enough money in reserves – not only to pay your bills, but also in case of emergency? If you were injured and couldn’t work for several months right after paying off the mortgage, for example, would you still be able to cover your expenses? Be wary of becoming house-rich but cash-poor.
- Fees and Penalties Lenders want those interest payments, so paying off a mortgage early may come with a hefty penalty or other fees. Take those into account when making your calculations.
- Tax Implications How do your mortgage payments currently affect your tax liability? What ripple effect will paying off the mortgage have on your taxes over the next several years? Without consulting your CPA/tax accountant, you might not be able to imagine the tax implications of such a decision. It’s not just your personal tax strategy that matters. Current tax law may come into play, too; the way property owners can deduct mortgage interest on their taxes can change from one administration to another.
Is It the Right Time For You?
For many homeowners, now is not the right time to pay off their mortgage. Interest rates are currently low, falling on average between 3.5% and 4% for 30-year mortgages. Compare that to about a decade ago, when average interest rates for 30-year mortgages soared to above 6%. Those low rates are the reason many property owners are choosing to keep their mortgage payments for now. But there are a few scenarios in which it might make sense for you to pay it off in the near future.
One, you’re locked into a high interest rate and don’t have the option to refinance. For example, say a homeowner is stuck with a 5.5% interest rate on his mortgage. He’s retired and thus has no income, so his lender is unwilling to allow him to refinance to get a better rate. It might make more financial sense for him to pull money from savings to pay off the mortgage now instead of continuing to pay that high interest every month.
Emotional factors might also spur you to pay off your mortgage early. Maybe your financial plan is sound, and you’ve crunched the numbers and determined that you’re comfortable with either paying off the mortgage or continuing to carry it. Would erasing that debt give you much-needed peace of mind? For some people, the pride and relief that come with owning a home outright outweighs any of the downsides. Only you can say whether that’s important to you, too.
So is it time for you to pay off your mortgage? It’s not a decision you need to make on your own. Because the implications can touch so many parts of your life, it’s important to work with financial planners who take a 360-degree view of your financial picture. Sachetta is here to help you chart a course for your financial future. Contact us to talk about your options.