Cash is not returning much more than 1% these days and financial markets are volatile and overvalued, portending lower future returns. Many homeowners wonder if they should use their surplus cash to more aggressive pay down their home mortgage. There are qualitative and quantitative factors to consider and the answer really depends on each person’s unique situation and attitudes.
Reasons you would want to consider paying off your mortgage
- You want the sense of freedom obtained from not having a mortgage payment.
- You want to pay off their home mortgage prior to retirement to reduce your fixed living expenses.
- You think the stock market will have a lower return than your mortgage interest rate over the balance of your mortgage.
- You have excess cash sitting in low-yielding money markets or savings accounts. Paying off a mortgage with a 4.5% interest rate, for example, will be a guaranteed higher rate of return than the cash and may even exceed what you could get on your investment portfolio over the next few years.
- You are already maximizing your savings to your retirement accounts and have paid off other high-interest debt.
- You have a relatively small balance and few remaining years on your mortgage.
- You have a hard time saving extra money and adding extra principal payments to your mortgage will be a ‘forced’ savings program.
- Your payment and or interest rate are high.
- You anticipate a declining income.
Reasons you may not want to accelerate you mortgage payoff.
- You have low cash reserves.
- You have other loans with high-interest rates than need to be paid off.
- You have a low-interest rate are young and plan on living in the home for the foreseeable future. Over time, your inflation-adjusted mortgage payment will seem extremely affordable.
- You want to leverage your money. By taking on debt for your home, you can free up money to be invested in the stock market.
- You expect stock market returns to exceed the interest rate of your mortgage over the remaining term of your mortgage.
- You need to maximize your liquid assets. Don’t be house rich and cash poor. Those with a high home value relative to their other liquid investments don’t want to pour all of their extra funds into the home as they will have minimal liquid assets to live off of. This is particularly an issue during retirement.
- Your payment is low and affordable.
- You plan on moving to another residence in the next few years.
Taxes are also a consideration. But I don’t normally encourage that clients make major debt decisions based solely on taxes. If you are in a higher tax bracket, the mortgage deduction has more value, but note that there is a good chance that future Congressional action may completely eliminate this deduction or limit it to lower income levels.