Should you pay down your mortgage as fast as you can?

A house is a big investment, to say the least. So, should you get that monkey off your back as soon as possible?
A house is a big investment, to say the least. So, should you get that monkey off your back as soon as possible?
Jon Schulte/Photographer's Choice RF/Getty Images

It's an old fact, but one that still holds true -- a home is the biggest investment that most people make in their lifetimes [source: Sun Sentinel]. And thanks to a cash-wrenching recession and widespread unemployment, many people are paying off debt as quickly as they can, for better financial security and peace of mind. So why not pay off the mortgage as fast as possible, too?

On the surface, it may seem smart to do away with debt entirely. If you're swimming in pools of extra cash, paying off the mortgage can be a great idea.

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However, most people aren't doing cannonballs into papery waves of Benjamins, so for the vast majority of homeowners, financial decisions are more complicated. You need to think analytically when considering where to put your money. Although you might save thousands upon thousands of dollars in accumulated interest by paying off mortgage interest, you're missing out on other opportunities that could ultimately help you stash away far more money in the long run.

For starters, your priority should always be to pay off high interest and consumer debt right away. So if you're carrying any sort of credit card debt, you need to finish paying your debts here first. The same goes for a car loan and any other lines of credit.

Then you'll want to make sure you're maximizing the power of easy money. Although generous 401(k) retirement funds are hard to find these days, some companies do still match around 50 percent of every dollar you invest, for up to 6 percent of your pay [source: MSN Money]. That matching is basically free money -- and when you put it away in a 401(k), it's not taxed as part of your income (although you will pay some taxes when you eventually withdraw funds).

You also have to balance retirement saving with emergency fund requirements. Old-school thinking says you need at least six months of savings to live in on case you lose your job. But as the Great Recession drags on, some experts advise having access to two full years' worth of liquid assets, just in case disaster of some kind strikes your family [source: Zillow].

If you're maxing out your retirement funds, have plenty of cushion for emergencies and you still have plenty of extra income, you have a wonderful challenge: deciding where to put all that delicious extra money. Keep reading and you'll see more about whether you should dispose of your mortgage, or whether you can cook up even tastier plans for your cash.

Gauge Your Mortgage Mentality

Not sure how fast you should pay your mortgage? A trustworthy financial adviser can help you decide what's best for you and your family.
Not sure how fast you should pay your mortgage? A trustworthy financial adviser can help you decide what's best for you and your family.
Jose Luis Pelaez/Iconica/Getty Images

There's no sense in downplaying the psychological factor of owning your home free and clear. In an era when foreclosures are common and many mortgages are underwater (when the house is worth less than what you owe on it), having sole ownership of your biggest investment is undoubtedly a good feeling. But other priorities might very well come first.

Sure, you could pay off your home and save on interest in the long term, but there's a good probability your money can do more. Consider this: The interest rate on your home mortgage is likely the lowest you'll pay on a loan -- ever. What's more, the interest you do pay is frequently tax deductible.

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There's also the significant matter of financial flexibility. Once you own a home and the bank is out of the picture, you're on the hook for the full value of that property. So if life circumstances demand a quick move during a time when house sales are ugly, you might actually wind up losing money on the deal.

You should also think about putting more money into insurance. Do you have enough life insurance to safeguard your family's future, sans your income?

The same goes for health and disability insurance. If you get hurt or sick and can't work, you can wind up with the kind of debt that only lottery winnings can save you from. Less than one-third of American workers invest in long-term disability insurance. But between the ages of 30 and 65, you have about a 50 percent chance of incurring health problems so disabling that you won't be able to work for three months or even longer [source: MSN Money].

If you're fortunate enough to ponder the idea of paying off your mortgage early, you still have to weigh the benefits and drawbacks of doing so. Perhaps the biggest benefit is peace of mind. With the bank off your back and your house officially on your own books, you'll never have to worry about making another mortgage payment.

Paying off a mortgage sometimes makes sense for those near retirement age. You'll certainly have to pull less from your investments each month for your living expenses, which can ease your mind in old age.

If you're still not sure whether to pay down your mortgage early, and you're clueless on where to best invest your cash, consider calling up a financial consultant or money manager. They can help you dissect your financial statements, pick priorities and guide you gently in a direction that's best suited for your life needs.

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Sources

  • Bischoff, Bill. "Should You Pay Down Your Mortgage Faster?" Smartmoney.com. Sep. 15, 2010. http://www.smartmoney.com/taxes/income/should-you-pay-down-your-mortgage-faster/
  • Brokamp, Robert. "Should You Pay off Your Mortgage Early?" Getrichslowly.org. Dec. 1, 2010. http://www.getrichslowly.org/blog/2010/12/01/should-you-pay-off-your-mortgage-early/
  • Haggerty, Maryann. "Paying off Your Mortgage Early." NYtimes.com. Jun. 16, 2011. http://www.nytimes.com/2011/06/19/realestate/paying-off-your-mortgage-early-mortgages.html
  • Lewis, Regina. "Ask the Expert: 'Should I Pay off my Mortgage Early?'" Dailyfinance.com. Jul. 12, 2011. http://www.dailyfinance.com/2011/07/12/ask-the-expert-should-i-pay-off-my-mortgage-early/
  • McHood, Justin. "Should You Pay off Your Mortgage Early?" Zillow.com. Jul. 6, 2011. http://www.zillow.com/blog/2011-07-06/should-you-pay-off-your-mortgage-early/
  • Waggoner, John. "Should You Pay off Your Mortgage? Maybe Not." Usatoday.com. Apr. 22, 2005. http://www.usatoday.com/money/perfi/columnist/waggon/2005-04-21-mortgage_x.htm
  • Weston, Liz Pulliam. "Don't Rush to Pay off that Mortgage." Money.MSN.com. Sept. 30, 2010. http://money.msn.com/home-loans/do-not-rush-to-pay-off-that-mortgage-weston.aspx?page=2