Even with today’s low interest rates, the total amount of interest you may pay over
the life of your mortgage can seem like a staggering amount. It’s one of the reasons many people set a goal to pay down their mortgages early. But pre-paying a mortgage may not be for everyone. Here are some reasons to consider it:
the life of your mortgage can seem like a staggering amount. It’s one of the reasons many people set a goal to pay down their mortgages early. But pre-paying a mortgage may not be for everyone. Here are some reasons to consider it:
- Currently, you do not receive a tax break on your mortgage interest. If your mortgage is small, your interest may not exceed the standard deduction the IRS gives non-itemizing taxpayers. Without the tax break, the actual cost of your mortgage is higher.
- You want to reduce expenses as much as possible so you can put more money into your retirement fund.
- You pay private mortgage insurance (PMI). If you have less than 20% equity in your home, making extra payments will build more equity sooner, allowing you to cancel your PMI. And eliminating PMI will reduce your monthly payments.
- Paying your mortgage will make you completely debt free.
- You plan to move in a few years and will need cash for your next home – for closing costs or for a down payment. Applying more money towards your mortgage balance will increase equity, which can be converted to cash if needed.
- You live in a country, such as Canada, where you do not receive a tax break because you carry a mortgage.
But for some people, paying your mortgage off early can hurt you more than help
you. Here are reasons to forego pre-paying your mortgage:
you. Here are reasons to forego pre-paying your mortgage:
- You have other high-cost debts. Credit card interest rates are often more than twice that of most home mortgages. Any extra cash should go toward paying off
the balance of those first. - You are in a high tax bracket and this additional deduction would lower your income
tax bracket as well as your taxes. - Your mortgage contract includes prepayment penalties.
- You want more money in your pocket now.
- You want to put money into another investment such as the stock market or real estate.
