Benefits of Not Paying Off Your Mortgage Early

canstockphoto6625777You’ve probably heard a lot of advice saying to pay off debts as soon as possible. Yes, a mortgage is debt and it often comprises a large portion of a homeowner’s monthly expenses. While paying it off early definitely has some advantages, it also comes with significant drawbacks.

First, mortgage interest rates are currently at or near their lowest levels on record. If you recently borrowed money to buy a home, you probably got a much lower rate than somebody who bought their home five or ten years ago. The interest savings from making extra payments won’t be as significant. If you bought your home before the housing bubble burst and currently have a higher rate, you might be able to save a lot of money every month by refinancing at a much lower rate.

Second, the money you spend making extra mortgage payments is money you can’t use for other purposes. If you don’t have an emergency fund, you would probably be better off using the money to start building one instead of paying down your mortgage. This can be a huge help if you lose your job or have some other large financial setback. Sure, you’ll build up more equity in your home, but you’ll have a much more difficult time getting a home equity loan if you don’t have a job or are in some other form of financial distress. Aim to set aside enough money to cover six months of living expenses before you consider paying extra money toward your mortgage.

If you’re not contributing the maximum allowable amount to your 401(k) or other retirement accounts, you are missing out on compound interest. A little extra money invested in an interest-earning account now can add up to far more later than what you would save by paying off your mortgage early. You won’t see any advantages from compound interest by paying your mortgage early.

Also, consider your kids’ college educations. Are you saving enough for them? If not, paying extra money toward your mortgage probably doesn’t make sense. College costs are only going up, so if you save more now, your children will have more options when choosing a school and will graduate with less student loan debt.

Third, any extra money contributed to your mortgage is money you can’t use to pay off higher-interest debts. Credit cards generally have much higher interest rates than mortgages. If you pay the minimums every month, paying them off can take longer than paying off a 30-year mortgage! This is because a minimum credit card payment is mostly interest and very little principal. Any money paid in excess of the minimum payment goes toward principal. Simply put, you shouldn’t pay more money toward your mortgage if you have any outstanding debts with higher interest rates.

Not having a house payment every month can certainly provide a lot of extra money to use for other purposes. Getting to that point, however, is extremely time-consuming even if you make extra payments toward your mortgage every year. If you are well-set in all of the financial situations described in this article, making extra payments is certainly something to consider. If not, however, you will probably be better off using any extra money toward those purposes instead of trying to pay off your house early. For more information, go to