This financial planner doesn’t think you should rush to pay off your mortgage. For peace of mind, you could look at starting a house payoff fund, which will eventually give you the option to pay off your mortgage any time you want.
Looking at your overall wealth-building plan, you will likely find that investing your extra money will help you build wealth faster than paying down your mortgage. These additional investments can be in your house payoff fund (keep reading to learn more about this) or in your retirement accounts.
Why You Shouldn’t Payoff Your Mortgage Now
Interest rates have jumped substantially in 2022. You will not likely be able to borrow at your current mortgage rates if you were to move or need to tap into your home equity. Similarly, if you were to buy a car or need to take out another type of loan, you would likely be paying substantially higher interest rates.
What Is a House Payoff Fund
There is no specific house payoff fund account like an IRA or 401(k). This is just an investment account that you ideally contribute to automatically (Dollar Cost Average) each month. You may want to have an account specifically to eventually pay off your home, separate from another investment account. The goal is to accumulate enough assets to pay off your mortgage if you choose.
I’ll admit I look forward to the day my homes are paid off. In the meantime, I get much more joy in seeing the balance on House Payoff Fund above my current mortgage balances. I also expect that my investment account will have returns far more than the cost of the interest I am paying on my mortgages over the long term.
Who Absolutely Shouldn’t Start Making Extra Mortgage Payments Yet
A while back, I remember speaking with someone so proud of paying off their mortgage, which they had been scrimping and saving to do. A significant accomplishment, except this person racked up credit card debt at 24% while paying off the mortgage with a rate of 3%.
If you are carrying credit card debt, you should pay this off before making extra mortgage payments. Same goes with a high interest auto loan or even student loan.
Likewise, you should increase your contributions if you aren’t contributing at least 10% of your income to retirement accounts. The good news is that if you contribute to a 401(k), you will get tax deductions, allowing you to save even more money.
Who Should Make Extra Mortgage Payments
Every financial rule is meant to be broken. There are a few times when I think you should make extra mortgage payments.
For example, if you are nearing the end of term on an Adjustable-Rate Mortgage and need to pay down the mortgage to qualify for a refinance, you should consider making extra mortgage payments. Another time additional payments would be to your advantage is if rates drop again and you need to pay down the mortgage to qualify for a refinance.
Of course, with every rule, there are exceptions. People on track for retirement and other financial goals and with adequate emergency funds might want to consider making extra mortgage payments. Doing so is likely better than having that money in a checking account. Of course, you will still come out ahead over the long term by investing this money in your House Payoff Fund.
What Else to Do with This Money
Above, I mentioned saving 10% to your retirement accounts. Why not work towards maximizing your contributions to your 401(k) or other pre-tax retirement accounts? (Or, if you qualify, a Roth IRA). You will receive some great tax benefits. This may also help you retire earlier or increase your standard of living in retirement