While it’s great to be debt-free, there might be better uses for your extra money rather than paying off your mortgage early. When you consider your overall financial picture, you probably don’t like seeing all of that mortgage debt there. It can be tempting to try to pay off your loan early, but that might not be the best idea. Here are three solid reasons why you might not want to pay off your mortgage early from The Motley Fool.
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It’s not your highest-interest-rate debt
When you make a payment against debt, you’re essentially getting a guaranteed return on that money of whatever the interest rate is. So, if you pay off $10,000 on which you were being charged 8 percent interest, that’s like earning an 8 percent return (because you no longer will have to pay 8 percent on that sum). If you have different debt obligations—such as a mortgage, student loan, credit cards or car loan—your smartest move is to pay off the highest-interest-rate debt first to get the best bang for your bucks. Credit card debt often will be your highest-interest-rate debt, with some cards charging close to 30 percent in interest. So, pay off your debts with the highest interest rates first before putting any extra money toward your mortgage, which tends to have a lower interest rate.
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You’re still building an emergency fund
If you don’t have a fully funded emergency fund, building one should be your priority over paying off any debts early. According to a Bankrate survey, 28 percent of Americans are only one financial emergency away from disaster, with no emergency savings at all, while close to half of survey respondents hadn’t saved enough to keep themselves afloat for three months. That’s why you should have an emergency fund ready and waiting—ideally funded with six months to a year’s worth of living expenses, including food, mortgage payments, utilities, taxes, insurance, and transportation. You might not expect to lose your job anytime soon or to need a new engine for your car, but lots of people who are laid off or experience an automotive catastrophe don’t see it coming, either. A costly medical issue also can derail you financially.
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You can get better returns for your money elsewhere
If your mortgage is carrying a 5 percent interest rate, you’d be earning a guaranteed 5 percent return on any extra payments you make. But you might be able to do better with the stock market. Even if you average 7 percent or 8 percent during your investment period, that can serve you better than making extra mortgage payments. You might do even better than that if you’re willing to spend the time studying stocks and choose some individual stocks that perform well. Of course, you’re not guaranteed to choose stocks that will deliver outstanding returns over long periods. For most people, it’s best to just invest in a low-fee broad-market index fund, such as one based on the S&P 500, which will get you roughly the same returns as the overall stock market.
