For many Americans, there is no greater financial security than having their homes completely paid for. And while this is obviously a worthwhile financial goal in a general sense, there are times when paying off your mortgage may not be a wise move. There are several factors that will determine whether or not you should do this.
Mortgage interest is one of the major deductions listed on Schedule A of the 1040. This expense is often what allows taxpayers to itemize deductions on their returns, and thus claim a litany of other deductions as well, such as charitable contributions, property taxes and other miscellaneous expenses. If you itemize your deductions now, consult your tax advisor to see what impact paying off your mortgage will have on your taxes. Also be certain not to take a distribution from a traditional retirement plan or IRA to pay off your mortgage, because the withdrawal will be counted as a taxable distribution. This will either greatly diminish or completely eliminate the benefit of paying off your loan.
If you have little in liquid savings, then you’re probably smarter to put your cash into a money market fund than to pay off your home. Everyone should ideally have at least three to six months’ worth of cash on hand in the bank for emergencies, so it’s not usually a good idea to forfeit that just to retire your mortgage a little sooner.
Paying off your mortgage is never a good idea if the value of your house has declined in recent years and you don’t plan on staying there for a long time to come. If you’re going to sell your house in the next few years, then you’ll need your cash to facilitate the purchase of your new home. However, when you pay off your mortgage, you are essentially “earning” the rate of interest that they are charging you on the loan, because you’re guaranteed not to have to pay that rate of interest anymore. This can improve your cash flow substantially, especially if you are earning much less on your savings that you’re paying on your mortgage. If your home loan is charging 6% and you’re getting 1% at the bank, then paying off your home loan will allow you to escape the spread on your respective rates. And paying off your loan can be a good idea in general if the value of your home is rising. For more information on whether you should pay off your mortgage, consult your financial advisor.