By FPA member Richard Gotterer, CFP®
Last Updated: January 9, 2012
Most homeowners aspire to the day that they can tear-up or burn their mortgage and say they own their home scot-free. The two main reasons to pay off your home mortgage are to be debt free and to substantially save on the interest costs over the remaining life of the mortgage. Psychologically it feels good, but hold on, there are pros and cons to doing this. Let’s review them to see what’s right for you.
Don’t pay off your mortgage…
- If you don’t have a nine to 12 month cash reserve for emergencies.
- If you have other high-cost debt. Pay that down first.
- If you are not maxing out on the contributions to your 401(k), Individual Retirement Account (IRA) or other retirement plans.
- If you are unsure of your work situation or have the possibility of being laid off in the near future.
- If you need financial flexibility. Use excess cash flow to make extra principal payments.
- If you believe that you can earn more on a long-term investment portfolio than the after-tax cost of your mortgage. But you must be comfortable with the recent volatility in the markets and have a long-term perspective.
If you expect inflation to rise. The purchasing power of today’s dollar is reduced by the impact of inflation. If inflation rises by the historical average of three percent over the next 10-plus years, you will be paying less with the same amount of dollars.
Do pay off your mortgage…
- If you are uncomfortable with debt and it feels good to be debt-free.
- If you are close to or in retirement, have the financial flexibility and don’t want the burden of a mortgage.
- If, by eliminating your monthly mortgage payment, you are in-effect reducing your monthly expenses.
- If the tax deduction may not be as beneficial as you think. The longer you have been paying your mortgage, the larger the principal component of your monthly payment. As such, the interest deduction may not be meaningful.
- If it’s desirable for you to save on the cost of interest expense over the remaining life of the mortgage.
If you are inclined to pay off your mortgage, review your mortgage documents to make sure you don’t have a penalty for early termination or prepayment. If so, contact your mortgage servicer and try to negotiate that clause away. Go ahead and have a party and celebrate, just don’t burn your original deed and pay off letter. Put them in a safe place, as these are important financial documents that you may need one day.
FPA member Richard Gotterer, CFP®, is Managing Director Florida of Wescott Financial Advisory Group LLC headquartered in Philadelphia with offices in Miami and Boca Raton.