7 Times When You’re Smart Not to Pay Off a Mortgage Early

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There are plenty of reasons to pay off your mortgage early — chief among them being the many 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 the better one depends on your financial situation and goals. If one or more of the following situations applies to you, you may benefit from sticking to your mortgage payment schedule and using 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 Tips for Starting an Emergency Fund Today.”

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.

He explains:

“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 you know you could earn a higher rate of return by investing that cash, it is best not to pay off 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,” Abel Soares III of Hui Malama Advisors in Honolulu tells Money Talks News.

4. You want lower taxes

If you invest extra cash in a tax-advantaged account such as a 401(k) or individual retirement account (IRA), you have another reason not to funnel the funds into your home loan: lowering your current tax bill.

“Paying off a mortgage early competes with priorities that can help lower taxes, such as funding a 401(k) plan up to the maximum amount,” says Patrick Whalen, a certified financial planner at Whalen Financial Planning in Los Angeles.

A mortgage payment can also lower your taxes because mortgage interest payments are tax-deductible. But due to the significantly higher standard deductible that took effect in 2018 — a result of tax reform — fewer homeowners are likely to benefit from deducting interest.

5. Your mortgage is a hedge against inflation

A mortgage with a fixed interest rate can be a hedge against inflation, Whalen tells Money Talks News. This is because the amount of the mortgage payment is the same every month, but the value of the payment decreases over time due to inflation.

Andy Tilp, a certified financial planner at Trillium Valley Financial Planning in Sherwood, Oregon, explains it this way:

“As all your homeowner costs — such as maintenance, utilities, repairs, property tax, etc. — rise each year with inflation, the mortgage payment stays flat, assuming a 30-year fixed rate. Thus, in 30 years, what seems like a large payment now will seem relatively much smaller.”

6. Your job is uncertain

If you think you will be leaving a job and it may take some time to find another one, hold off on paying ahead on your mortgage. You might need that money to get by until your job situation settles out.

7. You have high-interest debt

If you are also paying off debt that has a higher interest rate than your mortgage — such as credit-card debt or student loans — it is technically better to put any extra funds toward that debt instead of your mortgage.

The debt with the higher interest rate is costlier. The sooner you pay it off, the more money you will save on interest over time.

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