Don’t Pay Your Mortgage Off Early: Here’s Why
Conventional wisdom often focuses on the many benefits of paying off your consumer debts as quickly as possible. Couple that with the fact that owning a home outright is an important milestone for many Americans, and you have a generation of homeowners working hard to pay their mortgage loans off early. While a home is certainly a valuable financial asset, however, many experts now say that paying a mortgage off early could actually damage your long-term financial prospects. Here’s why:
Though mortgage interest rates have been climbing incrementally over the past year, they remain near historical lows. Buyers who lock in a fixed rate will enjoy the benefits of those low rates for decades. For the majority of homeowners, mortgage interest rates are considerably lower than average market earnings for retirement investment accounts. For this reason, financial gurus argue that homeowners with extra cash are much better off investing their money into Roth IRAs or similar retirement savings vehicles, than they are paying off their low-interest mortgage loans sooner.
Similarly, for those lucky homeowners with employers who match retirement contributions, the disadvantages of putting more cash toward a mortgage pay-off is even clearer. Homeowners should first maximize any matched contributions into an employer-sponsored 401(k) or 403(b) – otherwise, they’re simply missing out on free money. Once the employer-sponsored retirement account is covered, financial planners say it’s still more advantageous to invest extra earnings into the stock market for a better return on investment.
It’s not simply long-term ROI that is affected by an early mortgage pay-off either; homeowners with children applying to college will find that home equity counts against them when it comes to availability of need-based aid for students. Most financial institutions view home equity as money in the bank, so larger mortgage loans actually spell increased aid for college students.
It’s important to note that each homeowner’s financial situation is unique, and many may benefit from working ardently at chiseling away their mortgage debts. It’s always wise, however, to weigh the pros and cons before making any long-term financial decision.
Image via Flickr/cheeslongteh