Should you pay off your home loan?

There are good and bad points to paying off your mortgage

The normal way of buying a house used to be that a buyer would save money, make a down payment, and take out a 30 year loan at a fixed interest rate. The buyer would make regular payments and at the end of 30 years, he or she owned the home. Times have changed a bit; the 30 year mortgage is not the only home loan, some people make no down payments at all and others have no interest in ever paying off their home loans. The days of the “mortgage burning party” may be over. Does it make sense to pay off a home loan? Should you pay it off early?

There is no right or wrong answer to that question; it’s strictly a matter of personal preference and dictated by your own personal finances. There are still many homeowners who have been in their houses for decades with 30 year, fixed-rate loans. For them, the final payment remains a goal. Paying it off means that the money spent each month on the house note is now free to be spent on other things - luxuries, vacations, investments, whatever. Still others work to make extra payments in order to pay their loans off even sooner than the amortization schedule would suggest. And that’s where the questions really come into play, as paying off a loan early may or may not be the smart thing to do.

The questions there are:

Will it break you to do so? - You want to be financially comfortable and you also want to have some extra money for emergencies. The last thing you want to do is spend that emergency money to retire the house payment. You may or may not be able to rebuild your emergency fund quickly and what do you do if something goes wrong? Sometimes, even the best-intentioned savers end up spending the money elsewhere and the nest egg never gets rebuilt.

Could the money be better spent elsewhere? - Some people just want the loan out from under them, and that is understandable. On the other hand, if you took out a loan or refinanced in the last three or four years, you have a loan at very low interest rates. The Fed has raised rates some sixteen times since they bottomed out a few years ago. Loans will cost more today, and investments will yield more. If you have a loan at 5%, you may be able to do better with your money by investing it instead of putting it into your house, where it isn’t all that liquid. Granted, you could borrow against it with a home equity loan, but that’s still not as liquid as having the money in a mutual fund or stocks.

Ultimately, each homeowner will have to decide what works best for them. For some, the importance of getting rid of that loan is paramount. For others, it’s most important to make sure they are financially secure. For them, paying off the loan can wait. And don’t forget that even if you do retire your mortgage, you still have property taxes, community association fees, homeowner’s insurance, and maintenance to keep up with. Paid off or not, owning a home still costs money.