Is Paying Off Your Mortgage Early Really A Good Idea?

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Inflation is first, says Icardo, who operates Philip Icardo and Associates. “If you take out a 30-year loan in 2004, that means in subsequent years you will be paying with dollars that are actually worth less because of inflation.” Here’s an example. “I take out a mortgage that has a year 2004 value on it, and each year the inflation rate is 3 percent, or 3.5 percent--pick any number. The dollars I am obligated to pay the loan with were established in 2004, so in the future I will be paying off that debt with dollars that are actually worth less in real purchasing power.”

Look at it this way. If you spent $100 for a fancy dinner five years ago, do you think that exact same dinner—from soup and salad to main course and dessert, plus wine—would still cost $100? Of course not. If you have a 30-year fixed-rate mortgage, however, your monthly payment today is the same as when you signed the papers one, five, 10, or even 29 years ago.

Then there’s the fact that your payment will be the same even though the value of your house is most likely increasing, Icardo adds. “How often do we hear of someone paying on a house they bought for $50,000 that is now worth $150,000, but their mortgage payment is still $500 a month?” The value of their investment is three times greater than it was when they bought it, but they are still paying it on a loan based on five-, 10-, or 20-year old house values. It’s like having a deal at a local restaurant promising you that you can get a weekly steak dinner and all the trimming there for $10, no matter how high the price of beef goes or the cost of living climbs.

The second point is how you want your money to work for you. “Outside of areas with greatly accelerating real estate markets, most homes do not appreciate as fast as other assets. If you get a 3 percent to 5 percent rate of return on the home, it equals the return that can be expected on a good CD or a government bond.” But both of those are fairly liquid, which brings us to the third point.

If you have money in the bank, or in stocks or bonds, or anywhere else where you have quick and easy access to it, your assets are liquid. If all your money is tied up in your home, however, how quickly can you get it? There are three ways to do it. One is to sell the house. Another option is to refinance and withdraw money from it. The other is to get a home equity loan or line of credit, which brings us to the last point--taxes.

Mortgage interest is probably the single biggest tax write-off any homeowner will ever have. When the loan is paid in full, you stop making payments, but you also stop getting a tax break on the interest. Some people just want to have a mortgage paid. They want to know that their house is theirs and theirs alone, he adds. This is especially true for people approaching retirement. They know their income will likely diminish, as will their need for tax deductions. Icardo says that many retirees or others living on fixed incomes feel that if they pay off their mortgages they can use the money for other purposes. Some plan to use it for projected prescription needs, supplemental medical insurance, or long-term care insurance, while others want to travel. Some might want to be able to help their children or grandchildren. People can always find a use for extra money.

Paying off a mortgage is a very personal decision, according to Icardo, and it should be made only after some serious study and planning. “It all depends on where you want to be in terms of comfort and security.” He suggests talking to someone, such as a financial advisor, or to anyone whose judgment you trust and respect.

In any case, paying off the mortgage is not a final decision. You can always refinance the home by getting a home equity loan or line of credit. With a home equity loan, you borrow a specific amount of money to be paid back at a specific rate—another mortgage payment. With a line of credit, however, the payment is pegged to the amount you owe at any one time so it can vary considerably. In either case, the interest you are paying will most likely be tax deductible. If you are in a position to pay off your mortgage, think about it first. Decide what your dreams are, and whether paying if off will help make them come true.