There are plenty of reasons to pay off your mortgage early — chief among them being the thousands of dollars in interest you stand to save.
At the same time, there also are benefits to not paying off a home loan ahead of schedule.
Which approach is better for you depends on your financial situation and goals. If any of the following situations applies to you, you may benefit from sticking to your mortgage payment schedule and using any extra cash for other purposes.
1. You lack emergency savings
Financial ups and downs are inevitable. The best way to ensure you can cover an unexpected expense or weather a job loss — without having to take on new debt — is to set aside some spare cash as an emergency fund.
“If you don’t have any emergency savings, work on that before paying off your mortgage, as the extra equity doesn’t benefit you like cash does,” says Pamela Horack, a certified financial planner with Pathfinder Planning in Lake Wylie, South Carolina. “If you need new tires on your car, you can only spend cash.”
For help fixing that issue, check out “9 Ways to Build an Emergency Fund When Money’s Tight.”
2. You want extra liquidity
Paying ahead on your mortgage locks your extra cash in one place. In other words, by using extra cash to pay down your mortgage faster, you effectively convert a liquid asset (cash) into an illiquid asset (home equity).
Once you do that, you have only two choices for getting money out of a home: Sell it or borrow against it.
During the housing bubble, Money Talks News founder Stacy Johnson found himself glad he had kept a good chunk of change in the bank. He was able to use it to buy the house next door cheaply and flip it for a big profit.
Theoretically, I could have borrowed against my house to raise the cash, but I probably wouldn’t have. Because I had the cash and it wasn’t earning much, I did something with it that earned a lot. In short, having money in the bank can really be an advantage if you’re planning to use that money.
3. You can earn a better rate by investing
If you have extra cash to pay off a mortgage with a low interest rate but know you could earn a higher rate of return by investing that cash, it is best to stick out your mortgage.
“If you make a higher yield from your investments than your mortgage interest rate, you will likely be much better off in the long haul,” says Abel Soares III of Hui Malama Advisors in Honolulu.