Should You Pay Off your Mortgage?
If you have mortgage that you are paying, you may be faced with situations that will make you think whether you should pay off the entire mortgage once and for all. Anybody that has a mortgage running will tell you that it is really a commitment and obligation that needs to be met every month. You need to keep making your monthly payment otherwise the loan may go into default. What this means is that, the lender may take over your home or property which serves as the collateral for the mortgage. The lender can sell the property in order for him to recover his money. If you ask anybody who has lost his home to foreclosure, he will tell you that it is not a good experience at all. Besides the pain of losing your home, your credit score can also be affected. Furthermore, it will be difficult getting a new loan. In a bit to prevent all these ugly scenarios, you may want to consider paying off your mortgage. While this looks like a good idea, you still need to take other things into consideration.
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What to consider before paying off your mortgage
- Interest rates on other debts: If you have other debts you are paying such as auto loan, student loan and credit card debts, you will definitely be paying higher interest rates on them. While mortgage interest rate can be as low as below 4%, the interest rate on your credit card can be around 17%. Instead of paying off the loan with the interest rate of 4%, it makes sense to first ensure you pay off debts with higher interest rates. Paying off your credit card debts for instance does not mean that you should abandon your mortgage loan. You still need to keep servicing the mortgage loan. After you have finished paying the loans with highest interest rates, you can do the same for other loans until you get off their hooks. Thereafter, you can then decide to pay off your mortgage.
- Liquidity: Even though you have the money to pay off your mortgage, you should bear it in mind that you still need to keep enough cash in your emergency fund. During emergency, you will not end up borrowing another loan at a very high interest rate. Short term loan such as payday loan or car title loan can be very expensive. The APR on the loan can be as high as 300%. Meanwhile the money that you have invested in your property is already tied down. This means that the money is not readily available. Even, if you want to borrow against your equity, the application still has to go through some processes.
- Other investment opportunities: One of the reasons for holding cash is for investing purposes. If you can identify an investment opportunity that can give you a return that is higher than the interest rate that you currently pay on your mortgage, you may like to consider such opportunity. Perhaps there is no immediate investment opportunity, you can still hold the cash in anticipation of possible investment opportunities. Opportunity can come at any time. If you don’t have cash, you may not be able to seize it.
- Tax Incentives: Don’t forget that the interest that you pay on mortgage is tax deductible. Paying off the mortgage while you still pay interest on loans that don’t enjoy such tax incentive cannot be described as good tax and financial planning.
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- Prepayment penalty: What are the terms and conditions of your mortgage? Can you pay off the mortgage without you paying hefty prepayment penalty? Charging prepayment penalty is a tactic that lenders use to keep the borrowers in debt throughout the loan term. This ensures that the lenders keep enjoying interest income as long as the loan remains.