6 reasons not to pay off your mortgage early

Life without a mortgage is the dream of those who have achieved the “American Dream” of home ownership.  Maybe you’ve dreamed of having a mortgage-burning party and incinerating the mortgage documents in your patio barbeque grill while hoisting a glass of champagne.  No mortgage means freedom and peace of mind, right?

But is paying off your mortgage early a good idea?  In today’s environment of low interest rates, it might make sense to keep your mortgage, since the cost of borrowing is so low.

Here are six reasons why NOT paying off your mortgage may be a good financial strategy.

1  Don’t pay off your mortgage if you have a low interest rate.  If your interest rate is less than 4 percent, it doesn’t make sense to make extra mortgage payments while maintaining a balance on credit cards with a higher rate of interest.  Pay off all higher interest rate debt first.

2  Don’t make extra payments on your mortgage if you have not maxed out your retirement saving contribution.  Instead, increase your contribution to your IRA or 401(k) plan — especially if you have a plan which is matched by your employer.

3  Don’t give up the tax break on mortgage interest.  Depending upon your tax bracket (and especially if you’re in a high tax bracket), you may want to keep the mortgage rather than pay it off.  A taxpayer in the 25 percent federal tax bracket who has $20,000 in mortgage interest can expect a $5,000 break on their federal income tax for interest.

4  Don’t take money from your retirement account to pay off the mortgage.  If you are planning to withdraw money from your retirement account to pay off the mortgage, you may get a surprise from the IRS when tax time rolls around. Unless your funds are in a Roth IRA that you’ve held more than 5 years, and you are older than 59 1/2, you may end up paying income tax on your lump sum withdrawal from your retirement account. Withdrawing funds from your retirement savings may end up putting you in a higher tax bracket, which could penalize you.

5  Don’t forsake a potential rainy day fund for medical or other expenses. According to Fidelity.com, it’s estimated that retirees will need more than $220,00 for medical expenses in retirement. You should carefully evaluate your assets to make sure you have enough cash available for medical expenses and other unforeseen expenses in retirement. (You can always access the equity in your home by a home equity line of credit or a reverse mortgage, but you may face higher loan rates for these financial products)

6  Don’t pay off your mortgage if your investments are producing a better return. If you’re earning dividends in excess of 4 percent, then it makes sense to keep your money invested, generating a higher rate of return.

The most important factor in deciding whether to pay off your mortgage early is the interest rate. If your interest rate is high and you have a surplus of cash, then go ahead and pay off your mortgage. But, if your interest rate is low, look at ways you can use your cash to generate higher returns elsewhere.

Typically, paying off your mortgage has less to do with smart financial planning and more to do with peace of mind. While it may feel great to have no mortgage, there are other ways to achieve peace of mind through better allocation of your cash assets.  

Depleting your cash assets to pay off your mortgage could actually leave you with fewer financial options in the future. The good news is this is one decision that won’t be hurt by procrastination. Take your time and talk to a CPA or financial planner before you pay off your mortgage early.

Ray Akers is a licensed Realtor for Lake & Co. Real Estate in Seattle. Send your questions to ray@akerscargill.com or call 206-722-4444.