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Why You Shouldn't Pay Off Your
Mortgage
Let’s say you just inherited a large sum of
money. Thinking responsibly, what would you use that money for? If
you’re a homeowner, you’d probably consider paying off the balance of
your mortgage. That would be a good move, right?
Maybe not.
Although paying off a mortgage may be the right thing to do in some
instances, keeping your mortgage is often a better financial decision.
Not only will you lose your tax deduction if you pay the balance of your
mortgage, but you may have to make other financial concessions as well.
In the end, you may be better off if you invest the money elsewhere.
First and foremost, if you pay off your mortgage you’ll lose the annual
tax deduction from the interest you pay on your mortgage. For many
people, mortgage interest is the single largest deduction claimed and it
allows most people to itemize their deductions rather than take the
standard deduction. Also, if you’re in an above-average or high tax
bracket, this tax deduction may lower your income tax bracket and your
taxes significantly. Keep this in mind as well: If you pay off your
mortgage and later decide to refinance your home, you’ll be limited to a
$100,000 tax deduction on the new loan.
Other financial considerations in paying off your mortgage include
pre-payment penalties and general housing expenses. Many loans have
provisions for early payment and if you pay off your mortgage before the
end of the loan’s term, you may have to pay a fee. Also, you should
consider your housing expenses going forward. You’ll still have to pay
taxes and insurance—plus general upkeep—on your house even without a
mortgage payment. If you use all of your capital to pay off your
mortgage, you may not have enough left in your budget for these
reoccurring expenses.
Finally, you should ask yourself an important question: Will I get a
better return on my money if I keep my mortgage and invest elsewhere? As
a general rule, if a return on a potential investment will yield more
than what you’re currently paying in mortgage interest, then it wouldn’t
be wise to pay off your mortgage. For example, if the interest rate on
your home loan is 5.5% and you can invest in another venture (stock
market, bonds, etc.) that will bring a higher rate of return, you should
keep your mortgage and take that investment opportunity. Of course,
rates of return are difficult to predict since almost all investments
are risky, but if you can make more than your interest payment, you
shouldn’t pay off your mortgage.
It may be a nice feeling not to have a mortgage payment every month, but
in the long run, paying off your mortgage may not make sense. As always,
consult with your mortgage professional before you make any decision
that impacts your financial future. ∆ |
