Not that long ago, people bought one house and stayed put in it. After 30 years, they owned it free and clear, and this was a good thing, so went the thinking. Some folks celebrated with a mortgage-burning party, where they took a match to their mortgage papers and rejoiced.
Then along came the housing boom years, and the thinking changed. Only fools stayed put in one loan, let alone in one house. The pressure was on to buy bigger houses and/or refinance into even lower-rate loans; who cared if those lower rates lasted 90 days, let alone 30 years? Anyone who couldn’t keep pace would find themselves priced out of the housing market forever, we were told.
Well, forever came and went pretty quick.
Today, as people look to trim expenses and reduce household debt, you may be wondering whether to remain in the 30-year club or pay off your mortgage early if you can. The answer depends on many factors, including your stage of life and how strong a tolerance you have for its uncertainties.
Broadly speaking, experts say you should consider paying off your mortgage if:
- You are nearing retirement.
- You expect to stay in your house for at least several more years.
- You have enough liquidity from other investments to handle emergencies.
Let’s take a closer look at each of those considerations.
Having a mortgage is a great tax deduction. But if you don’t have much taxable income — the largest taxable income is likely your paycheck — you may not need that deduction once you retire.
The other side of this coin is that if you won’t have income, it might be nice to not worry about paying for your shelter each month. Remember that you’ll still have property taxes, home upkeep and maintenance and, if you live in a condo, an HOA fee.
Deciding factor: Check with your accountant and determine the impact on your taxes of paying off your loan early.
Staying Put in Your House
This is a factor that depends on your age, health and family situation. Is your house suitable for you to age in place?
Things to consider are whether there are stairs, a bedroom on the ground floor, and room for a live-in caregiver should you need one. Is it near good health care and convenient for shopping? Close to family, friends and the activities you enjoy? If you anticipate limiting your driving, is the house in a location where you can get around by public transportation?
Deciding factor: The decision to move is one that can be made at any point; you don’t need to make it on the day of your retirement party. And as such, you also don’t need to rush to pay off your loan that day either.
You presumably have considerable cash reserves if you’re contemplating paying off your loan. Would investing that money elsewhere serve your interests better?
If you took the money you would use to pay off the mortgage and instead invested it in your 401(k) or IRA, would you get a better rate? “Use the money to build wealth,” said Wayne Bogosian, president of the PFE Group and the co-author of “The Complete Idiot’s Guide to 401(k) Plans.”
By paying off your mortgage, you are taking a highly liquid asset — your cash — and converting it into something far less liquid — home equity. Once your money is tied up in equity, the only way to get at it is through a home equity loan. In other words, the bank will charge you to use your money.
Deciding factor: Do you really have enough cash in your emergency fund and have fully funded your retirement? If not, save the match or find something besides your mortgage to burn with it.
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