Early mortgage payoff - Is it wise

The notion of paying off a mortgage

seems rather quaint these days. With housing prices at record highs and people taking out home equity loans to pay for other homes, vacations or whatnot, it seems that the very idea of actually completing mortgage payments and owning a home outright has fallen by the wayside. That’s quite a change from years past, when retiring a mortgage was regarded as one of life’s great achievements.

Nevertheless, some people still look forward to the day when they can own their house free and clear. Some really aggressive types even attempt to pay it off early, usually by adding additional principal to each month’s payment. By adding just a small amount to the payment each month, you can often shave years off of the typical 30 year mortgage’s pay cycle.

But should you pay off early? Often the peace of mind that comes from retiring a home loan is reason enough, but does it make financial sense?

It may or may not, depending on a variety of factors:

• How cheap is the loan? If you borrowed in the early 1990’s and have never refinanced, your mortgage may be in the 9% range. In that case, you would almost certainly be saving a bunch of money by retiring your loan. By current standards, that’s quite high and you could find a number of better ways to spend your money besides paying off a high interest house note. On the other hand, if you refinanced your home two or three years ago, you may find your interest rate down near 5%. That rate is near historic lows; you’d likely be better off investing your extra money somewhere than paying off your house. The stock market has been doing pretty well as of late; many investments today can return more than 5%. Of course, they aren’t guaranteed and your mortgage rate is, so you have to do what works best with your own personal comfort zone.
• Tax benefits. The benefit of the mortgage interest deduction from your Federal income taxes has largely been overstated. It’s nice for some people, but it’s not a reason to keep the payment if you don’t have to. Most people derive no benefit at all from the tax break. But if you live in California and have a half million dollar house, the benefits may be substantial. On the whole, paying no interest by retiring your mortgage is always better than taking the tax break.
• Do you have other debt? Paying off a five or six percent house note doesn’t make any sense if you owe $10,000 in credit card debt at 17%. Pay that debt off before you pay off your mortgage. As a rule, you should probably pay off just about any other debt before paying off your home loan.

Everyone’s circumstances are different, and everyone’s needs will vary. Most younger buyers will probably never pay off a house completely; that mindset is slowly going away. Others, particularly aging baby boomers, may feel more secure by living in a house that’s completely paid for. Your own needs and desires will be a big component of the decision to retire your loan early.