Chances are, if you own a home, you’ve thought about it. “In general, obviously, everyone wants to not have a mortgage,” says Gordy Bright, the Dallas-based senior vice president of business development for Standard Mortgage Corporation. So the question is: Should you pay off your mortgage early if you can?
“I get this [question] all the time,” says Melissa Brennan, a certified financial planner with ARS Private Wealth in Dallas. Lots of people just don’t like debt, so they’re driven to knock out all of theirs as fast possible. Others have had an influx of cash – an inheritance or a gift or a bonus, for example – and want to use the money wisely. Or people are facing a life change, such as retirement or a health issue, and want to ease anxiety by simplifying the things they can control.
In every case, the primary advice is to talk with a professional. That person “is going to help [you] turn that emotional decision into a mathematical one,” Brennan says. If you don’t have a certified financial planner, you can find one at letsmakeaplan.org. But before you even get to a professional consultation, you can start to sift through some of the questions on your own.
What are the terms of my mortgage?
Brennan says it’s common for people who have recently retired to wonder about paying off their house immediately now that they can access their retirement savings. But whether this makes financial sense depends in part on the terms of your mortgage.
With an interest rate of 7% to 8% and 15 or 20 years left to pay, it could be a smart decision. (An advisor can also help you take tax liability into account.) But with an interest rate in the 2% to 4% range, Brennan may advise against it. That’s a low hurdle to get over through investing those same retirement funds.
Bright agrees. A mortgage rate that low in today’s market “in itself is an asset,” he says. Still, “I’m not going to talk someone out of doing that if it helps them sleep better at night.”
Am I considering my mortgage in the context of my total financial picture?
Your mortgage is a single piece of your financial situation, but it’s connected to every other dollar you earn and spend. “We definitely like to look at the big picture,” Bright says.
For example, if you’re a person who doesn’t like the feeling of debt and you’ve been aggressively working to repay it, it’s possible you’ve neglected other aspects of your financial health. “Maybe you haven’t accumulated a lot for the future because you’ve been so debt focused,” Brennan says.
If you have unsecured debt, especially credit card debt, that should almost always be top priority for unexpected extra cash, she says. Your mortgage is only one place extra cash can go.
Have I considered other “defensive” financial strategies?
Owning your home free and clear is a defensive move in the financial world. But it’s not the only defensive move. Someone whose job doesn’t offer great benefits might be better off spending extra cash on insurance. “Can I assume this risk without financial devastation, or do I need to transfer this risk to an insurance company and pay a premium for that?” Brennan says.
How long will I own this home?
Considering how long you’ll be in your current home is part of the math when deciding about a mortgage payoff. Any answer that’s not long-term leans against an early payoff, Brennan says. You’d be using an influx of cash to increase your equity, when you could instead invest that same cash and build wealth with it directly.
The housing market and the investment market are both unknowns. While the metroplex has seen significant appreciation in housing over the last five years, that trend might be cooling. Brennan says homeowners can’t assume their home values will grow 10% or 20% a year in the future as they might have recently. The housing market at least offers a more liquid way to employ your extra cash.
What do I really hope to accomplish?
Are you after a sense of security? Lower monthly expenses? Dig deeper into your family and financial situation and think about what you hope to accomplish by paying off your mortgage. Is this the best option for reaching your goal? Think through the possibilities and talk to a financial professional to reach an ultimate answer.
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