July 7th, 2011
In the Zillow blog post, “Should You Pay Off Your Mortgage Early?,” Justin Mchood explores the issue of whether or not it makes sense for people to pay off their mortgage early. And what it comes down to, according to Mchood, is personal preference.
He says on one hand, as his CPA cousin points out, it makes more sense to continue to make monthly mortgage payments, as people who have mortgages receive a tax break for the interest deduction.
On the other hand, Mchood explains that his realtor neighbor told him it’s definitely better to pay off your house early if you can – as many people have been forced to go through short sales because homes are losing value.
Taking these differing opinions into consideration, Mchood emphasizes the importance of each individual situation when making the decision. He then offers six guidelines to use when deciding whether or not it makes sense to pay off your mortgage early if you can.
Does your employer match any retirement savings you save? As Mchood says, employer-matched contributions to a retirement plan are often the wisest investment you can make. It’s never too early to plan for retirement, so if you find yourself with money to spare, max out the amount you’re putting into the plan.
Do you have any other debt? If you have any other debt, it typically makes more sense to pay that off. A few extra mortgage payments won’t make a huge difference in the long run, but if you can eliminate one source of debt all together, you should definitely take that route.
Do you have at least 24 months of living expenses in liquid assets? Mchood explains that he used to suggest having 6-months worth of living expenses in your savings before rushing to make early payments. But, with the current economy and layoffs, he says it’s good to have 24 months of savings available.
Do you currently owe more on your mortgage than your home is worth? If this is the case, you’re currently underwater, which is a huge issue in the current housing market. If you love the house, make early payments. If you like it, but could live without it, consider a short sale.
Does the amount of your mortgage bother you? If you think that making early mortgage payments will give you peace of mind, then go for it.
Do you think you could get more out of your money in a different investment? Purchasing a home is an investment, but it’s not the only investment you can pursue. If you’re already on track with your mortgage, and that’s the only investment you currently have, consider your other investment options, like your 401k. It may make more sense to spread the wealth around, rather than placing all your eggs in one basket.
When it comes down to it, Mchood says,
I have listened to the experts for years debate this topic and in the end it all comes down to a very personal decision that is not solely based on dollars and cents and returns on investment. At the end of the day, I have seen very smart people choose both sides: some to pay off a mortgage and some to continue to pay “normally.”
At the end of the day, if you can afford to make early mortgage payments, and it makes sense for you to do that, then do it. In the long run you can save a lot of money on interest if make just two extra payments per year.