If you're exploring options for paying off debt, you may wonder where your mortgage should fall in the list of priorities. The idea of completely owning your home is certainly tempting; however, is it the right move to make?
Unfortunately, the answer is not a simple yes or no for everyone. It depends on a variety of factors. Consider all the pros and cons below and weigh your decision carefully.
- Peace of mind. There’s no denying the relief you will feel knowing that your home is secure for the future.
- Interest savings. Depending on the price of your home and the interest rate you are paying on your loan, you can save a substantial chunk of change by paying off your mortgage five or 10 years early.
- More money to invest in other pursuits. If saving for the future is your goal, an early payoff of your mortgage allows you to free up those funds each month to make investments or to put toward your retirement.
- Extra money to live on each month. If you are like many people, your mortgage accounts for a relatively large portion of your monthly expenses. By eliminating that payment, you could have more breathing room and extra spending money between paychecks.
- Potential penalties. Some mortgages have penalties for early repayment. Read the fine print or talk to your mortgage loan officer before you decide to pay off yours – the costs could be higher than you anticipate.
- Better uses of your money. Your mortgage, while it may be the biggest loan you have, may not be the most significant financial liability you owe. If you have credit cards, car loans and similar unsecured debt, it may be a better use of your resources to repay those debts before paying off your mortgage. Even with accounts that have smaller balances, higher interest rates on outstanding balances can cost you considerably more over time. Eliminate these debts before considering removing your mortgage from the equation.
- Tax benefits. When you pay off your mortgage, you eliminate a rather substantial tax benefit in the mortgage interest deduction. While that may not be important today, if you will continue to have a mortgage once you retire, it may become significant.
Alternative uses of funds
Do you have a specific purpose for paying off your mortgage and diverting funds toward another use? Perhaps you want to pay off your mortgage and focus on other goals, such as:
- Paying for a child's college education
- Starting or investing in a business
- Saving for retirement
- Buying an investment property or vacation home
Again, you will want to weigh the pros and cons. For example, it may make sense to keep your mortgage for the tax benefits it provides and finance your child's college tuition in another way.
Your stage in life can also impact whether to pay off your mortgage early. If you are young when you purchase your home, it may be a little easier to pay extra each month to pay off your mortgage early. If you are nearing retirement, your decision can depend on how much you still owe and how long you intend to remain in the home.
The key is to make the decision that makes the most financial sense for your situation, your stage in life and for helping you achieve your financial goals for the future.
Because there are some compelling pros and cons to consider when deciding how and when to pay off your mortgage, you might want to work with a financial adviser. An adviser can help you determine the most sensible use of your resources for delivering a better return on investment for your financial outlook.
Looking for financial advice?
As life changes, so can your financial goals. At Old National, our associates will take the time to listen and help you explore your financial options in every phase of life. Call us at 1-800-731-2265 or submit a request for an Old National banker to contact you.
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