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In hard economic times, we’re all looking for ways to reduce our debt. But should you pay off your home loan? Everyone’s situation is unique—find out if paying off your mortgage makes sense for you.
Americans are saving more today than they have in years. With economic uncertainty all around us, we’re buying less and pocketing more. We’re also paying down our debt. While a home loan is far and away that largest percentage of a person’s debt load, does it make sense to pay it off completely? Following is a look at when you shouldn’t pay off your mortgage—and when you should.
Don’t pay off your mortgage if…
You’re not maxing out your workplace 401(k) retirement plan. Sure, having your home paid off when you reach retirement is important, but so is having money in the bank for when that time arrives. Before you put that extra money towards paying down your home loan, be sure you’re contributing the maximum amount you can to your work’s 401(k) plan. Many employers offer a match of up to 50 percent for every dollar you contribute (usually up to 6 percent of your pay). And the money you put in is pre-tax, which helps you save even more!
You have credit card debt. The interest you’re paying on your home loan is likely the cheapest debt you have. The average credit card interest rate is near 17 percent. If you’re carrying any credit card debt, it makes much more sense to pay it off first—the interest is likely nearly triple what your home loan interest rate is, and it’s not tax-deductible.
You don’t have enough savings for at least three months of living. Currently, over 75 percent of Americans are living paycheck to paycheck, and in these economic conditions, nearly all of us know at least one person who is unemployed. What would you do if suddenly you were unable to work? Conventional wisdom says you need to save at least three- to six-months’ worth of living expenses.
You are uninsured. At a minimum, you need health insurance. Without it, an unexpected medical issue could send you into financial difficulty—and put at risk the house you’re trying to secure. If you have a family who relies on your paycheck, you should also purchase life insurance.
Your home is less worth than the amount you owe on it. By now we’re all familiar with this scenario. If you’re “underwater,” it doesn’t make sense to pay off a mortgage that is more than your home’s value. Put that extra money into your emergency fund or retirement account instead.
You think you may lose your job. While you may think that paying off your mortgage will secure you a free place to live if you end up losing your job, think again. Consider this: you pay off your mortgage and then lose your job. Since you used all your savings to pay off your mortgage, you have little left to cover living expenses. Things start to slide, including your property tax bill. As a result, your county treasurer puts your property in “forfeiture”—the first steps towards foreclosure. Instead of paying off your mortgage, put that extra cash into savings.
Pay off your mortgage if…
Your financial house is in order. If you have a sizable emergency fund, are maxing out your retirement accounts, have your other debt paid down, don’t owe more than your house is worth, and are feeling financially secure, then go ahead and pay off your mortgage. Some will still argue against this, saying it’s better to invest and that you’re foregoing the mortgage interest deduction. But often the peace of mind of knowing you own the walls around you trumps all else.
You’re nearing retirement. Usually, as you near retirement you’ve been paying your home mortgage for a while. This means you’re paying less in interest on your loan, making the tax benefit of your mortgage less appealing. And, by paying off your mortgage you won’t need to dip into your tax-deferred accounts more than you had anticipated. Not to mention that reducing your living expenses can be especially helpful for those now facing a fixed income.
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.
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