Some people debate whether it is a good idea to pay off your mortgage early. I don’t see why it is a debate at all. Sure, we can conjure up some numbers that make it look smart to stay in debt, but staying in debt is never a good idea.
Benefits of Keeping a Mortgage
Before I go off on my anti-debt tangent, let’s look at the benefits of having a mortgage. There are a few reasons to keep a mortgage that can make the “pro-debt” camp look smart.
Investing Your Money Elsewhere
Right now, we have historically low mortgage rates. If you have a good credit score, you can find a 15 year fixed rate mortgage loan for less than 3%. If you are paying for money at 3% and you can invest for more than 3%, you are making money by having a mortgage.
Beating the spread is easily possible, but not guaranteed and without risk. Current savings account rates are less than 1%. To beat the 3% threshold, you need to invest in riskier places like peer-to-peer lending, stocks, or bonds.
If you have a high mortgage payment every month, you probably qualify for itemized deductions. The standard deduction in 2012 is $5,950 for a single adult or $11,900 for a married family filing jointly. If you pay more than a few thousand a year for your mortgage and you file single, you probably qualify for an interest deduction.
When you get your year end 1098 from your bank, you can deduct the interest paid from your income, which results in a tax deduction at your tax rate. For most single people, that is 15%-25% of you interest back in tax savings.
If you have a long term installment loan that you pay on time, you are doing a lot to build your credit score. Having a great credit score is very valuable if you are going to be applying for any new credit in the near future. If you are going to buy a new home with a mortgage, car with a loan, or apply for a new credit card, your credit score helps determine your interest rate, or if you get the loan at all.
However, as long as you have a high credit score, over about 720, you will always get the best rates. There is no reason to have a “perfect” credit score. You only need a good one, and that is only if you want new credit. If you own your home outright, you probably don’t need any new loans anyway.
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Benefits of Paying Off Your Mortgage
The benefits of paying off your mortgage far outweigh the potential upsides of staying in debt. Here are a few of my favorite reasons to pay off the mortgage early.
Is there any better feeling that being debt free? Most of us don’t know that feeling. Many people never will. However, it is completely possible. Imagine not owing anything? No credit card payments, no car payments, no student loan payments, and no mortgage.
Investments may provide bigger returns than your mortgage costs, but your financial health, just like a business, is most reliant on your cash flow.
Your ability to save and invest is a factor of your cash in and out the door each month. If you don’t have to pay rent or a mortgage, you can save hundreds or thousands of dollars each month for better uses, like saving for retirement or new investments.
While you can’t put a dollar value on this, not having to worry about paying a mortgage every month takes a huge load off of your shoulders. Ever since you left your parent’s house, you have had to pay for rent or a mortgage. Now you don’t. You own your home outright. That is pretty cool.
What do you think? Is it better to keep the mortgage or pay it off as fast as possible? Please share your thoughts and strategy in the comments.
Image by Tax Credits / flickr