At a recent program, someone asked me whether she should make it a priority to pay off her mortgage. I said that it depends, and then went over some of the pros and cons of payoff. This question is common, so let’s look at when and if you should throw all your excess money at the mortgage.
Our parents were quick to put all their money toward this one major expenditure. However, times are different. Interest rates are at historic lows. The circumstances are far different when you are paying 3 percent on a note instead of the 9 percent or even 13 percent rates of a couple decades ago.
There are priorities when it comes to finances. Consider these expenditures before you work on that mortgage:
• Do you have credit card debt? Pay this before you worry about paying off your mortgage. A 15 percent credit card interest rate will cost you far more than a 4 percent mortgage rate.
• Do you have an emergency fund? The experts tell us that you should have enough money in reserve to cover three to six months of your expenditures.
• Do you have enough in retirement? Think about how much money you will need to support yourself in retirement. Many of us will live 25 to 30 years in retirement. It will take a chunk of change to meet those needs.
If you have enough to meet those obligations, then it might be time for you to consider paying down that mortgage. There’s no doubt that there is comfort in not having that once-a-month payment. But is it a financially sound move? There are still some questions you should ask yourself before putting your money on the line.
How long do you intend to live in your house? If you plan to retire in this house, work to pay it off before retirement. If you aren’t going to live there forever, it might not be a good move. The hard fact is that with fluctuating home prices, an extra $50 paid on the principal may not mean $50 extra when you sell that home. It was easy in our parent’s time when we could count on the house gaining 3 to 5 percent in value each year. Extra money paid on the principal plus the gain on the house meant a bigger check when the house was sold. I’ve seen the value of my home go up, down and stay even over the past few years. You can’t always count on rising prices to net you a larger check when you sell.
How old are you? If you are moving toward retirement age, count backward. If you want to retire at 65 and be mortgage-free, count how many years until that date. Then go online and use one of the mortgage calculators to see how much extra you’ll need to pay each month. Bankrate.com has an excellent calculator to see how much should be added to your monthly payment to be mortgage-free by retirement.
All these considerations aside, paying off your mortgage early can result in a savings throughout the life of your loan. A $200,000 mortgage at 4 percent paid for in 23 years instead of 30 can save you almost $40,000.
There is one more consideration in this puzzle. The mortgage deduction on our income tax has been an advantage to middle-income taxpayers for many years. If you pay off your note early while interest rates are low, you may find yourself without this tax deduction. You can still take the standard deduction, but you may not have enough expenses to itemize. Although that happened at my household this year, I think it was a pretty good tradeoff to save money at the end of my loan.
When it comes to paying off your house early, it depends on many factors. Not the least consideration is your attitude when it comes to having a mortgage. Do you want to be debt-free? Or are you comfortable with that payment?
Roxie Rodgers Dinstel is a professor of extension on the Tanana District Extension Faculty. Questions or column requests can be e-mailed to her at email@example.com or by calling 907-474-2426. The Cooperative Extension Service is part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture.