Should You Pay Down Your Mortgage?

At first thought, it may seem logical to take any extra money you might have (thank you work bonus!) and pay down your mortgage. Seems like a good idea on the surface, but let’s dive deeper and see if it’s right for YOU.

Let’s put aside the emotional relief of paying off your mortgage and just look at the basic math or purely “financial” side of the situation. Here’s a rundown of five strategies that you should consider before you pay down your mortgage:

1) It won’t change your monthly payment unless you refinance.

Paying down your mortgage will not decrease your monthly housing costs unless you refinance or ask your lender to “recast” your loan, which they are not obligated to do.  It will get your loan paid off earlier than 30 years … so over the life of the loan you will pay less interest, but ask yourself how long you will own the home?

2) You won’t get “more” out of your home the “more” you pay down your mortgage.

Your home will be worth the same amount when you go to sell whether you pay down your mortgage or not. However, if you put the same money in another investment that you would otherwise have put into paying down your mortgage, THAT money could grow.

In other words, you don’t get “more” back when you pay down your mortgage when you sell your home, you just get your savings account back. And you’ll have many years ahead without access to that money you used to pay down the mortgage until you sell (or refinance), which also include additional costs for those transactions.

3) Put your extra cash where you can touch it.

With so much uncertainty in the economy, having a steady cash flow is essential. Once you put any extra money toward your mortgage, you can’t get it back. Basically, equity in your house isn’t as easily liquidated as having it in your bank account!

You want to have a robust savings that you can turn to for emergencies that will hold you over just in case you lose your job or face an unexpected medical crisis. I always recommend having enough cash for at least 3-6 months’ worth of living expenses, and that should be your first priority.

4) Max out all other parts of your financial portfolio first.

Your home should be just one aspect of your entire financial portfolio. Make sure that you not only have an emergency savings account, but other investments as well so that you are diversified. One example of this is to make sure you are maxing out your retirement plans, especially so you can get that added bonus of a full match from your employer.

5) Pay off higher interest debt.

If you have the extra money to put toward your mortgage, than consider using it toward other debt first. Paying off higher interest debt, such as credit cards and car loans, rather than a low-rate mortgage, can bring you more financial security.

6) Look for better returns with investments.

Given today’s low mortgage rates, it can make more sense to invest your money elsewhere at perhaps a higher return, such as with stocks or bonds.

You may be able to get a better return than that with your money if you invest it wisely rather than paying down your mortgage. As always, check in with your tax and financial advisors to see what’s best for YOUR particular situation. This can be different for everyone…remember, there is a no one-size-fits all when it comes to finances!

7) Don’t forget the tax break.

The benefit of deducting your mortgage interest is something to keep in mind. This tax break is an added perk that makes it well worth keeping your mortgage around. This is especially true if you’re only a few years into your mortgage and not near retirement age.

8) Determine your homeownership plans.

It doesn’t make sense to put extra money into your mortgage if you plan to move in a few years, whether you’re trading up or downsizing. You don’t know what the market will be like when it’s time to sell and it’s better to have that cash on hand to help purchase a new place. Having cash in your bank and not in your home when you want to move makes buying the new home so much easier!

When SHOULD you pay down your mortgage then?

There are situations where paying down a mortgage does make sense, such as when you’re approaching retirement and you want to be debt-free at that point in your life.

If this is more important to you and your family – to have no monthly mortgage payments entirely, than go ahead and pay down your mortgage earlier. Remember, these are recommendations, but ultimately you should do what you feel is best for YOU and your family! If you need a CPA or financial advisor recommendation, please email me and I would be happy to make a connection!