You might think that paying off your mortgage early is always the best decision that you can make. But are there times when it might be financially feasible to hold back on paying off your mortgage earlier than scheduled.
For one thing, it is important to consider the difference between good debt and bad debt. If you are going to apply for a loan, the amount of bad debt that you have is going to negatively affect your chances of getting that loan. Credit cards and other credit accounts are considered bad loans so the more credit debt you have, the bigger risk you are to lenders. Some of the reasons why credit card debt is considered bad debt include the following:
- Depreciation – You probably don’t own anything that you paid for with a credit card that has actually increased in value. Nearly everything purchased with a credit card depreciates over time.
- High Interest Rates – Another reason credit cards are considered bad debt is because of the high interest rates charged by the companies. In some cases, you could be charged a 20 percent interest rate depending on your payment history and credit score.
- Not Tax Deductible – Credit card debt, unlike mortgage debt, is not tax deductible.
On the other hand, mortgage debt is considered good debt for the following reasons:
- Investment – When you have a mortgage, you are investing in a product that appreciates in value – your home. Although home prices have been on the decline, over a 20 or 30 year period, they almost always go up in value.
- Tax Deductible – If you have a mortgage loan balance, you can deduct it on your taxes. This means your taxable income is lower which can save the amount that you owe each year or increase the amount of your return.
- Achieving Long-Term Goals – There are circumstances in which having a mortgage debt can help you achieve long-term financial goals. Instead of paying off your loan balance in one lump sum, you could invest that money in a 401(k) or other tax-deferred account with a higher interest rate than you are paying on your mortgage. For instance, let’s say you have a fixed rate mortgage at 4 percent and you have $100,000 to pay off over a 30 year term. Instead of simply paying off your mortgage right away, you can invest that $100,000 in an account that has a 7 percent return. At the end of the 30 year term, you’d have more than $760,000 from your initial investment. If you paid off your mortgage early and put those payments into the same type of account, you’d only have about $580,000 at the end of the 30 years.
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So is it always best to pay off your mortgage early? Sometimes it’s simply an emotional issue. You might be willing to give up some money just to have the peace of mind of owning your home outright. But if you’d prefer to earn more over the term of your mortgage loan, it may be worth the time to crunch some numbers and see if how far you’d actually come out ahead.