Ever since the Mayflower arrived on the eastern shore of North America, Americans have pursued the dream of home ownership. But the mortgage that comes with home ownership in the modern era has become the source of a great deal of debate. While mortgages allow the vast majority of Americans to own their own homes, they have also become a millstone around the neck of many who end up purchasing more home than they can afford. Paying off your mortgage sounds like a great idea at first, but it may not always be the best move for you financially. There are many issues to consider in this equation and expert opinion varies widely on this subject. Some of the factors that can influence whether or not you should prepay your mortgage include:
- Tax Savings – If you are able to itemize deductions on your income tax return because of the mortgage interest that you are paying, then this takes a bite out of your total home ownership cost. In order to see just how much you are really saving from your interest, you can prepare your tax return both with and without declaring the interest and see what the difference is. In some cases, the difference will be quite substantial, because those who are able to itemize their deductions can then take a number of deductions that may not have added up to enough to itemize without their mortgage interest, such as charitable contributions, personal property tax and unreimbursed medical expenses. Therefore the difference can at times add up to considerably more than the amount that your mortgage interest exceeds the standard deduction. However, you may also discover that your interest is not making nearly as much of a difference as you think; those who will not be able to deduct their home mortgage interest are deprived of one of the key advantages of home ownership.
- Investment Return – If the rate of interest on your mortgage is relatively low, then you may want to consider focusing on long-term investments that pay higher returns over time. Most financial planners will tell you not to pay off your mortgage at the expense of saving for retirement, because if your mortgage rate is 5% and you are averaging a 10% return on investment in your IRA and company retirement plan, then you are probably smarter to keep your mortgage and play the spread than to pay it off. Of course, the zero net gain in the stock market from 2000 – 2010 further complicates this picture along with the abysmally low rates offered by fixed income instruments.
- Risk Tolerance – Proponents of mortgage prepayment use the above argument to justify doing exactly the opposite because of market uncertainty. After all, if your mortgage rate is 5% and you pay it off, then you have earned a 5% guaranteed rate of return. Furthermore, your house will remain paid off regardless of what the markets do in the future, and your monthly income will go considerably further without a mortgage payment.
The Subprime Mortgage Meltdown of 2008 has also left thousands of homeowners upside-down on their mortgages, thus further complicating the picture. But there is ultimately no absolute right or wrong answer to the question of whether or not you should pay off your mortgage early. The factors listed above will differ substantially from one person to another, thus making what is right for one wrong for another. A careful examination of your entire financial picture is necessary before deciding what to do here, and those who are not financially sophisticated would be wise to consult a financial planner on this matter.
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