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Tuesday, August 17, 2010

Reasons Not to Pay off Your Mortgage Early

The reality of the recent global economic recession is that it’s no longer vogue to live beyond your income, consuming more than you earn and be in debt. I know, I know that's a “no duh” observation.

But not all debt is necessarily bad or created equal. While I would encourage everyone to pay off any outstanding consumer debt (e.g. bank credit card; retail credit accounts; auto loans…etc.) as quickly as possible there is one type of debt that I would not rush to reconcile completely. That’s your mortgage.

I know the housing market meltdown has been devastating and most of us took a double digit loss in our home valuations, but here’s why you shouldn’t necessarily pay off your mortgage right away if you happen to walk into a windfall of cash via an inheritance or other lump sum distribution.

While such hypothetical windfalls might be wishful thinking here are some considerations to keep in mind:

1. Tax Benefits – with all the bailouts and expanded government programs under the current administration, your home is one of the last and largest tax shelter opportunities at your disposal. The interest on your mortgage and certain home improvements can trigger favorable tax benefits that decrease once the home is paid off. Additionally, if you needed quick cash most lenders offer a line of credit up to a certain percentage (60-80%) of the equity you’ve paid into your home. The interest on such lines of credit is usually tax deductible where the interest you pay on your credit card is not. I’m not a tax attorney and this is not legal advice – it’s merely my opinion so ask a professional.

2. Opportunity Costs – this is a financial concept that’s often bandied about regarding the lost value of doing one thing with your money instead of something else. For instance, while you might enjoy an $8 mocha-frappel-dappel-latte-something from Starbucks, that coffee purchase will prevent you from using the same $8 for gas in your car. A potential opportunity cost might a revved up caffeinated high versus an empty gas tank. As far as your mortgage goes, there may be other investment options that offer a higher rate of return resulting in a lost opportunity cost. Again ask a professional financial counselor for guidance.

3. Liquidity – one of the first rules of finance is that “cash is king,” so avoid locking up too much of your cash in a long-term asset such as your home. A long-term asset is merely an investment or material product/good that can’t be converted to cash quickly if needed. For example, a 30-year Treasury bond ties up your money for a long stretch and cashing out early is almost always a losing proposition. In the same way, pouring too much money too soon to build up equity in your home might not be the best option. The trick is finding the proper balance and knowing the breadth of your available choices.

Again, I’m not offering legal or financial counsel merely a few observations that you might want to discuss with a licensed professional. I still support accelerated payment on your mortgage via bi-weekly or weekly payments; however, the key is finding the proper balance for you and your family’s needs when considering which debts to settle first. I think a home mortgage is way down on that list. What do you think?


  1. I'm sooooo grateful you know all about this. Thanks for making it easier to understand for the rest of us!