If you’ve bought a home, you might be tempted to tackle what in many cases is that looming six-figure mortgage and pay it off in less than three decades.
But retiring your mortgage early doesn’t always make the best financial sense, experts say. Especially when mortgage rates are at near-record lows.
“From a logical and pure financial standpoint, it would make the most sense to get yourself into a 30-year, fixed-interest rate mortgage and pay the minimum due each month,” said Michael Hardy, a certified financial planner and partner at Mollot and Hardy in Amherst.
That same message is echoed during home buyer workshops at Belmont Housing Resources for Western New York.
“It’s really not advantageous to pay it off early,” said Sandy Becker, senior housing program manager for Belmont. “If I had extra money, the mortgage would be the last thing I’d hit.”
If you’ve got extra cash, use it to pay off higher-rate credit card debt or other more costly borrowing. If your debt is under control, think about using the extra cash for investments that could give you a better return than the savings you’ll reap from paying off your mortgage early.
After all, with mortgage rates historically low, borrowing money is cheaper than ever. The ixed-rate for a 30-year mortgage now averages 3.63 percent.
“If you are paying more than the minimum amount due, then you are giving the bank your money to hold,” he said.
He added your house will appreciate in value whether you pay the minimum, or $100,000.
“Therefore, the idea is to pay the minimum mortgage payment due, keep as much of your money as you can, and put it into your retirement or other savings account where you would have the potential to earn some kind of return on your capital,” he said.
Additionally, mortgage interest rates are tax deductible, so an early payoff means missing out on the tax break. When you factor in the value of the mortgage tax deduction, today’s average mortgage rate of 3.63 percent effectively is reduced to an after-tax rate of 2.5 percent.
While the loan amount for a home is usually significantly higher than for a vehicle or a credit card, mortgage interest rates tend to be lower than other debts, Becker said.
“Paying it off early sounds enticing, but your mortgage is the least of your debt worth,” she said. “It’s only wise if your other debts are paid off.”
If they are not, she suggests paying off your higher interest rate debts first before accelerating payments on your mortgage.
Even then, the mortgage can wait because retirement and emergency savings should also be intact, she said.
“You want to make sure you are putting away, so you have money to fall back on in case of job loss or illness; you’ll need that savings more than ever,” Becker said. You shouldn’t become destitute in order to make extra mortgage payments, she said.
While the math and facts support paying the minimum, financial decisions are sometimes more emotional than rational, said Amy Jo Lauber, a certified financial planner and president of Lauber Financial Planning in West Seneca.
“There are the financial factors which are clear, such as saving money because you’re paying less interest, but there are emotional factors that most people don’t know how to navigate,” Lauber said. “For example, some people simply hate having debt and, for them, I try to find a way for them to pay it off so they can be at peace.”
Hardy said he also doesn’t discourage clients who are eager to pay off their mortgages. He tries to explain how it might make more financial sense to pay it off over time, while encouraging them to put away for their retirement.
“In my experience, the biggest mistake people can make is putting off saving for their future in an effort to pay off debt,” he said. “It seems that for many people the debt doesn’t always go away as expected, and then they are faced with another problem, trying to save enough to retire when they are very late in the game.
“So for many clients, we might commit to a combination of paying over the minimum mortgage payment due, plus increasing retirement savings.”
An early payoff?
How paying an extra $50 a month
affects the cost of a 30-year mortgage
for $100,000 at 4 percent interest 30-year loan
Regular monthly payment: $456.33
Time until paid off: 30 years
Total interest paid: $52,531
30-year loan with $50 monthly prepayment
Monthly payment: $506.33
Time until paid off: 25 years, 2 months
Total interest paid: $40,782
Interest savings: $11,749