The mortgage is my family’s single biggest monthly expense and I can’t wait for the day when I no longer have to make that payment. Unfortunately, we only bought our house 3 years ago so we still have a long time to go (27 years to be exact) until I can get that mortgage monkey off my back.
I’d love to get it all paid off ahead of schedule but I haven’t even started throwing extra money at it because I think there are better things to do with my money right now.
If you’ve ever dreamed of paying off your mortgage early so you can enjoy the peace of mind that comes with owning your home outright, you’re going to want to read this entire article because I’m going to explain why that’s probably the last thing you should do.
Four Reasons Not To Pay Off Your Mortgage Early
You’ve got more important priorities. Many people want to make sure they pay off their house before they retire, but isn’t it more important to ensure that you have enough money to retire in the first place? Contributing to an IRA or 401(k) plan instead of making an extra mortgage payment is a smart move because retirement contributions will continue to grow tax free until you retire. By then they will have had a chance to take advantage of the power of compound interest to grow exponentially.
Even better, if your company offers a matching contribution your money will grow even faster. Many companies that offer a 401(k) plan will match a certain percentage of an employee’s contributions. For example, they might match 100 percent of the first four percent you contribute. In other words, if you contribute $150 of your own money the company will make an employer contribution of $150 so you really end up with $300 in your account. That’s free money folks.
There could be prepayment penalties. This isn’t overly common but some lenders will actually charge you a penalty for paying back your mortgage early. The fee varies pretty wildly but you could end up paying a penalty anywhere from a few hundred to several thousand dollars. Make sure you check your paperwork or give your lender a call to confirm there are no prepayment penalties so you don’t get a nasty surprise.
You can get a better return elsewhere. When you pay down the principal on your debt, you’re effectively earning a return equal to whatever interest rate is on that debt. If you pay off a $1,000 credit card balance that comes with an interest rate of 19 percent, you’re effectively earning 19 percent on that balance because you won’t have to pay that amount in interest.
But with mortgage interest rates still hovering around record lows (mine is only 3.625 percent) you’re not going to get much of a return. Odds are you can find a more profitable return if you put your money elsewhere. Plus, if you pay off your home loan you won’t be able to deduct the mortgage interest on your tax return so that extra tax will eat into your return even more. If you are looking to earn more, think about investing. Try out Motif Investing or Betterment.
Do you plan to pay off your mortgage early? What is the biggest benefit you expect by doing so?