Should You Pay Off Your Mortgage?

While owning a home free and clear is a major financial goal for many, paying off your home mortgage is not always the wisest financial decision. If you have come into a lump sum of money or find that you have excess funds available on a monthly basis, you might be tempted to wipe out your mortgage balance. Let's take a few moments to discuss the question in a practical way. Should you pay off your mortgage?

First, let us consider the question in light of the cost of funds. In recent years, mortgage rates have hovered around record lows. If you have purchased a home in the last 5 years or refinanced an existing mortgage during that time, you may well have a 30 year fixed mortgage rate that is less than 5%. Prior generations could only imagine being able to access funds so cheaply.

When you consider current mortgage rates in light of historical and expected rates of return on savings, it may well be that you can earn more on your long term savings than you are paying in mortgage interest.

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Since this is true, you could be better off fully funding savings and retirement accounts prior to directing discretionary income toward the reduction of your mortgage balance.

Tax implications are another factor to consider. If you are able to deduct the interest you pay on your mortgage from your taxable income, this can be a real difference maker in terms of tax liability. The attractiveness of this depends much on your circumstances. For some, the mortgage interest deduction will actually place them in a lower tax bracket. If you are already in a low tax bracket or your mortgage is so small that you pay only a nominal amount in interest, this potential deduction will be of less value. Take the time to calculate the effect that not having a mortgage interest deduction would have on your tax liability before you pay off your mortgage.

How you go about purchasing and financing your home may well be the largest financial decision that you ever make. Because this is true, you would do well to work with a trusted financial advisor that is intimately familiar with your financial circumstances and goals when making decisions regarding your mortgage. Be sure not to make the mistake of paying off your mortgage simply because you can. When you carefully calculate the cost and consider the factors involved, you might decide that there is value in having a home mortgage.