After the Great Recession, many homeowners lost a lot of equity in their homes. Even with government attempts to bail out homeowners, many found themselves underwater and unable to move. In many cases, homeowners found it hard to even make their monthly mortgage payment.
Fear is a great motivator and fear has led many homeowners to ask me the question “does paying off mortgage make sense”? By asking if paying off your mortgage, many see the goal of not having to make a mortgage payment anymore and freeing up hundreds or potentially thousands of dollars each month.
While the idea of getting rid of your mortgage sounds like a great idea, it is not for everyone. In fact, if you pay off your mortgage you could very easily find yourself in worse financial shape than had you kept the mortgage. Here are a few things you need to consider when asking the question if paying off mortgage early make sense.
Paying Off Mortgage Early? No!
Sacrifice Your Future
It’s a known fact that few Americans save enough for retirement or even save at all. When you focus on paying your mortgage off early, you sacrifice the savings you need to retire. What many will argue is that once the house is paid off, they can save a lot more than they ever could before for retirement. [For those of you that are interested in retiring early, read The Ultimate Guide To Retiring Early.]
While this is true in theory, it rarely plays out to be this way in real life. First, you aren’t going to pay off your mortgage overnight. It is going to take years to pay off your mortgage. During this time, you are sacrificing the power of compound interest. The sooner you start saving for retirement, the less you actually need to save because of compound interest. The later you start, the more you have to save because you can’t compound your money for as many years.
Therefore, when you finish paying off mortgage early you are going to have to save all of the money that was your mortgage payment. Chances are this won’t happen. You will find other uses for the money – a car, a vacation, college expenses, etc. Something most always comes up.
Put Yourself In Danger of Incurring More Debt
Another issue when wondering should you pay off your mortgage is that people get overly focused on getting rid of it. As a result, they put every last cent they have available into paying off the mortgage. While this will help them payoff the mortgage quicker, they run the risk of incurring more debt as a result.
This is because most people never have adequate savings in place. All of their money is tied up in their house. If you’ve never tried to get money out of your house, it isn’t easy. Plus, it goes against the entire idea of paying off your mortgage in the first place! Why pay it off when you are going to need to take a loan out on your house if an emergency arises? You are right back at square one!
Being Smart With Paying Off Your Mortgage
The smartest thing you can do when paying off your mortgage is to keep saving for retirement and to make sure you have an emergency fund in place. If you can do both of these while paying off your mortgage, then doing so makes sense for you.
It might not seem like a big deal to skip on saving for retirement to pay off the mortgage, but it is. All of the money you have earmarked for retirement once the house is paid off will be used for other things. Trust me. I’ve seen it many, many times. In fact, my guess is it has happened to you as well.
You probably have plans for your tax refund and after you get it, you look back and ask “where did that money go?” Life happens. Plans don’t always work out as planned. Continue to save for retirement and have a healthy emergency fund so that paying off your mortgage makes sense for you and you don’t put yourself into a worse financial situation than before.