This was originally published on Monday, May 30 ,2016 in the Pacific Daily News. Click here to subscribe to the PDN.
Q: My husband and I purchased our first home 10 years ago. During this time my husband and I have been fortunate enough to advance in our careers and are making more than what we were when we bought our house. When we purchased our home, mortgage rates were much higher that what they are now. My husband and I want to take advantage of our current situation and are considering paying off our mortgage early. Can you help us decide if paying off our mortgage is beneficial?
A: A mortgage is a huge investment that takes a lot of dedication, especially if you purchased your home on a thirty-year plan. Whether you have a shorter fifteen year or a longer thirty-year plan, much can happen between now and paying off your mortgage. Like any large decision, you should weigh the pros and cons and consider where you are in life. Although it may be tempting to live mortgage free, you should consider your other financial goals and your tax situation.
Here are some reasons that you may want to hold off on paying your mortgage early.
- Other debt: If you have other loans or credit cards that charge a higher interest rate than your mortgage, you should consider paying those off first. Interest on debt other than a mortgage is not tax deductible.
- Maximize retirement: If you aren’t already maximizing your retirement contributions, use the money you would use to pay off your mortgage to increase your contributions. Do this especially if your employer matches a portion of your contributions. If you are close to retiring or if you started your plan later in life, you should take advantage of getting the most out of your plan. Also, your contributions are tax deferred.
- Emergency fund: Do you have enough money saved up for a rainy day? If not, create an emergency fund. Most experts suggest to save up at least three months of your current income. You do not want to pay off your mortgage only to put your house up for collateral when an unforeseen event happens.
- Life insurance: Do you currently have life insurance? If so, is it enough coverage to keep your family from undergoing financial hardships when you pass, especially if you are the primary bread winner.
- Interest deduction. Paying a mortgage has its benefits when it comes to your income taxes. You receive a tax break based on the amount of interest you pay on your mortgage. If you are in the 25-percent tax bracket and you paid $24,000 in mortgage interest this year, you will be giving up a $6,000 tax break if you pay off your mortgage.
- Limited liquidity. We all know that selling a home is a long process. If you decide to move or have a medical emergency you may want to have liquid assets, or money, that is easily available to you. You could take the excess money you would use to pay your mortgage and put it in a liquid investment. You can still make money on your investments and still be able to liquidate them much easier than you would a house.
- Saving habits: If you choose to pay off a mortgage early, what would you do with the money you would have used to pay your monthly mortgage? If you don’t invest or save it, and just spend it, you are not benefiting yourself financially.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at firstname.lastname@example.org and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.