You probably have an image in your head of someone with a mortgage who is also eager to pay it off as fast as possible. Maybe you envision them as a sort of financial superhero, putting all their energy into making sacrifices and getting the job done with alacrity. After all, paying off your mortgage early just makes sense — that’s why so many people do it, right? Well, yes and no. There are several common arguments for doing it, but there are also several compelling reasons NOT to do it. So before you rush to pay off your mortgage early… read on. Whether you know it or not (and whether you agree with them or not), there are plenty of good reasons why most financial advisors don’t recommend paying off your mortgage early unless there is some sort of urgent need to do so. Here are four of them:
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You’ll miss out on the time value of your money.
The amount of money you owe on your mortgage is the sum of several components — principal, interest, and time. The principal and interest are easy to calculate, but the time is not. Time is money, though, and the longer you have to pay off your mortgage, the more time you’ll have to earn additional money. Paying off your mortgage early means you’ll have less time to earn that money. Let’s say you have a $200,000 mortgage at 4% interest. With a 20-year mortgage, you’d be making $852 per month in payments. If you instead make the minimum payment and pay off your mortgage in 10 years, you’ll pay an extra $154 a month. That’s $2,418 per year. If you invest that in something that earns 8%, you’d have an extra $36,384 in 10 years.
You may need that cash later.
If you use your mortgage payment money for something else, there is always a chance you’ll need the money later. Maybe you have a child who decides to go to college in a few years and you want to save up a big financial aid fund. Or maybe you’re considering starting a business and you want to create a cash fund for that purpose. Whatever the reason, you might find it handy to have a nice big stash of cash just in case. If you’ve already paid off your mortgage and you need money, you’ll have to sell your house. That adds lots of extra hassle and expense to your life.
Your investments will have more time to grow.
If you’re putting extra money towards your mortgage, you’re not putting it into your investments. Those investments are the best way to create real long-term wealth. You can pay off your mortgage at any time, but if you miss out on several years of investing, you’ll have to make up for it in the long run. Let’s say you take $154 a month and invest it for 10 years at 8% interest. At the end of those 10 years, you’ll have an extra $36,384. If you’d instead put that money towards your mortgage and pay it off in 10 years, you’d have a lot less to show for it.
You’ll Lose Your Greatest Tax Advantage
One of the best advantages of having a mortgage is that it is tax deductible. You may not be getting a big fat check each year from the government, but you are getting a real and substantial benefit. The less you owe on your mortgage, the less you get to write off on your taxes. Let’s say you’ve been making the minimum payments on your mortgage for 15 years. You still have another decade to go before you’re finished, but you’ve been thinking about paying it off early. You’re wondering if it would be a good idea. It turns out that you’ve been getting a nice tax break every year for all that time.
Paying off your mortgage early is a great goal and something a lot of people want to do. But there are several compelling reasons why you shouldn’t do it — you’ll miss out on the time value of your money, you may need that cash later, and your investments will have more time to grow. You’ll also lose your greatest tax advantage if you pay off your mortgage early. There are other arguments for and against paying off your mortgage early, so before you rush to do it, make sure you consider both sides.
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