While it may go against your natural instincts, it is not always a good idea to pay off your mortgage as quickly as possible. This may seem like a major contradiction to anything you have been taught in the past about debt. We are trained to be responsible and that means paying off your debt. Nevertheless, before you start making extra mortgage payments, it is important for you to evaluate your immediate financial situation. There may be better actions to take with your money at this period so that you can clear up other debt or increase your savings. Six reasons to hold off making that extra mortgage payment include:
Credit Cards
Many people have credit cards and the media is full of credit card debt horror stories. Even though you may not be swimming in this type of debt, it is important to remember that your credit cards often have a higher interest rate than your mortgage. This means that if you are not careful, you will end up paying more to your credit card company when you could have caught up and nipped the debt in the bud. Think about it: Why would a person consider paying down a 5% mortgage loan when they are sitting with a 16% credit card interest rate? If you have a bit of credit card debt, consider putting your extra cash towards lowering it.
No Emergency Funds
If you have extra money, you might consider starting a savings fund, which can be used for unforeseen emergencies. Not having emergency funds is dangerous, as many things could happen. For instance, you could lose your job, get into an accident, or become disabled. All of these things can result in a dramatic loss of income, as well as an increase in bills. Everyone should aim to have a minimum savings account amount equal to about three months' worth of salary. Instead of paying off your mortgage early, take the time to cover your bases for the future.
A Bare Retirement Fund
Many people may feel that a 401K is enough to retire on successfully. This is not always the case especially with the economic changes affecting the country. There are many other options to help supplement your retirement fund like using an IRA. Consider talking to an accountant about your current investing situation, so that you know whether you need to consider setting up other accounts.
Your Children have no College Fund
It can be very tempting to pay off your family home early. Unfortunately, there are always things to pay for in life. While owning a home is a top priority, it is important to make sure that your other financial obligations are handled. College expenses are quickly on the rise and unless you want you and your child to accrue a large amount of student loans, you should consider starting a college fund if you have not already. There are college fund options out there that earn tax-free interest. Your money can safely grow and your child's future can be secure.
Mortgage Earns no Interest
One reason that you may want to pay off your mortgage early is that you may be close to retiring and would rather not have an extra bill every month. Unless you are in this category, your money would be better off invested. Paying your mortgage early is the same thing as throwing your money away. You make no money on your mortgage payments and you are passing over interest earning opportunities. Even a normal savings account will make you more money than putting an extra payment towards your mortgage.
Are You Moving Soon?
We all want to own a home, but many people do not actually stay within the same residence for more than ten years. Therefore, you need to ask yourself if you plan to stay within that house for the next thirty years. If you do not plan to stay for the full duration of your mortgage, then trying to pay it off quickly is a waste of time. While you will get this money back at the time of the sale, it will have not have gotten any interest and you are in essence getting back the same money you put in. To make it worse, inflation can be a serious problem and can result in you actually losing money when you take into consideration how much that money was worth at the time you made the payment and how much it is worth at the time it is returned. If you know, there is a chance you may be moving, put your money to better use.
The fact of the matter is that many people are not in a situation where paying off a mortgage quickly is the most financially sound option. If you are unsure as to how you should proceed with your finances, consider talking to a professional. They will be able to put all your options on the table in front of you so that you can at least make an educated decision as to whether you should make that early mortgage payment.
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