With interest rates likely to increase, you may be in no hurry to pay off your mortgage. After all, you may not be able to get such a low interest rate again.
But let’s assume you are making good progress on your other financial goals. You’ve been saving for retirement, emergencies, and other goals; and you have no other debt.
Should paying off your mortgage become a high priority?
Here are some situations where you may want to consider aggressively paying down your mortgage:
1. You have a lousy rate but refinancing isn’t worth it.
Refinancing costs are high in my area. Depending on your building, there may be fees and taxes that are not be a factor in other parts of the country. With a relatively small mortgage (let’s say under $100,000), it may not make sense to refinance, even with a relatively high interest rate; if there will be thousands of dollars in closing costs.
A woman I worked with had a mortgage with an interest rate of 7.00%, but there was less than $80,000 left on her existing mortgage (which did not have any prepayment penalties). She got a quote to refinance at a much lower rate, but closing costs would be over $5,000. In the meantime, she could nearly pay off the mortgage with cash in her savings account (not touching her substantial retirement savings).
It didn’t make sense for her to refinance, but setting up a plan to pay off the mortgage quickly allowed her save on mortgage interest and look forward to many more years with no mortgage payment.
2. You have a low tolerance for risk.
In theory, you could consider your low-interest rate mortgage something of an arbitrage opportunity.
Instead of using a certain amount of cash to pay down your mortgage, you might be able to invest your money and get a higher rate of return on investments somewhere else. Of course, that is by no means guaranteed!
If you would rather have the “guarantee” of owing your home outright than the “possibility” of earning more on your investments; pay that baby down.
3. Your tax benefit is minimal or none.
There is often a tax advantage to having a mortgage. If you itemize your taxes, your mortgage interest may be a tax deduction. Deductions generally reduce your taxable income, which in turn reduces your taxes.
But the tax benefit may be less than you think. Let’s say you paid $10,000 in mortgage interest. That can’t save you $10,000 on your taxes; but it might reduce your taxable income by $10,000. If your marginal tax rate is 35%, that would potentially save you $3,500 on your taxes, not $10,000. If you have the means to pay it down, why would anyone want to spend $10,000 to save $3,500?
(Note: This is a simplified example to make a point. Always consult your tax advisor to discuss your financial situation.)
If you don’t itemize your taxes, it may be because your itemized deductions would be less than the standard deduction. If that is the case, there is probably no tax benefit (meaning $0!) to the mortgage interest you pay, so there may be no tax reason to continue paying it any longer than necessary.
4. Reducing your monthly “nut” sounds pretty awesome.
Low fixed monthly expenses can provide a lot of freedom and flexibility. Getting rid of that monthly mortgage payment sooner rather than later might mean more cash for other goals, less pressure to maintain a certain monthly income, or the ability to avoid spending savings in retirement.
In conclusion, paying off your mortgage is not an option for everyone. You need to consider your entire financial picture, but there are situations where it does make sense.
As for me, paying down the mortgage is a long term goal, but pretty low on my list of priorities right now. I pay a little extra on principal every month, but I save much more toward other goals, like retirement and college for our son.
What about you? Are you thinking about paying off your mortgage?
Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Be sure to contact a qualified professional regarding your particular situation before making any investment decision. Any opinions are those of Sara Stanich, CFP® and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.