If you have the means, making extra payments on your mortgage before the end of its term seems like a no-brainer. After all, who wouldn’t want to reduce that substantial debt and be done with those monthly principal and interest payments? But paying off a mortgage early may not be the best choice for every household.
Before you start making extra payments, here are five questions to ask yourself.
1. Do you have high-interest credit card or loan debt?
Let’s say your credit card company is charging 15% on your outstanding balance. You can earn a guaranteed 15% by paying off that debt. It makes the most sense to pay off high-interest accounts before putting extra funds toward your low interest rate mortgage. This is especially important if you’re in a higher tax bracket, because home mortgage interest is tax deductible, whereas interest on consumer debt is not.
2. Have you established an emergency fund?
Life happens. If you haven’t set aside funds in an easy to access “rainy day” account, you could be forced to acquire additional debt if an emergency comes along. Your emergency account should cover at least a few months of living expenses. Before supplementing your mortgage payments, make sure that you’re financially protected in case of an emergency.
3. Are you contributing to a retirement plan at work?
Many companies will match a percentage of funds that you contribute to a 401(k) retirement account. For example, your employer might match 50% of the money you contribute, up to a maximum of 6% of your salary. Don’t pass up the opportunity to save for retirement. It’s easy and it earns a better return than dollars paid toward your mortgage principal.
4. Can you get a better return elsewhere?
Investing in stocks for a speedy windfall is tempting. But the stock market is notoriously unpredictable. Paying off your mortgage is very low risk, but if you can handle the uncertainty of stock based mutual funds or similar accounts, you could benefit with a much higher rate of return.
5. How’s your cash flow?
Starting your retirement without mortgage debt may be one of your financial goals. But it’s important to base your decisions on facts, not wishful thinking. Before you retire from full-time employment and paychecks are replaced by social security payments, pensions, and/or retirement account withdrawals, do the math. Your life on a fixed income could look very different from now, so make sure you have enough saved to maintain a comfortable lifestyle.
There are many implications to paying off your mortgage early, and they all depend on your unique circumstances. Contact us today to discuss which path is right for you.