Things to Consider Before Paying Off Your Mortgage
If you own a home, chances are you have a mortgage. And if you have a mortgage, chances are you have thought about paying it off early. While this may seem like an attractive option, is it truly the best decision for your financial future? The answer may not be as simple as you think. Before deciding whether to pay off your mortgage, there are a number of things you should consider.
Do you have other high-interest consumer debt?
Debt can take a variety of forms. Personal loans and credit card debt are typically unsecured. On the other hand, your mortgage debt is secured by your home. Lenders incur more risk when a loan is unsecured. This heightened level of risk is typically passed on to the borrower in the form of higher interest rates. Before paying off your mortgage, you should first consider paying off your high-interest loans.
What are the tax consequences of your mortgage?
The Tax Cuts and Jobs Act of 2017 drastically changed the income tax landscape. Due to the increased standard deduction, many individuals who had itemized deductions in the past will no longer benefit from doing so. These individuals will not enjoy the tax benefits of making regular mortgage interest payments. Alternatively, individuals who still plan on itemizing deductions may rely on the mortgage interest deduction. You should discuss the tax impact of your mortgage with a qualified tax professional.
Will making a large mortgage payment create financial stress?
Your budget helps you organize your finances so that you are prepared to handle unexpected expenses. If you have not budgeted for a large mortgage payment, you should first consider whether such a payment would deplete your emergency fund and create stress when unexpected expenses arise. You should then consider whether a large mortgage payment would negatively impact your ability to achieve your short-term and long-term goals.
Would you be better suited to invest the funds you would put toward your mortgage?
For some, investing is an exciting opportunity. For others, investing seems quite risky. Your personal risk tolerance will impact your proclivity to invest. Aggressive investors should consider the opportunity cost of paying off their mortgage. Every dollar put toward your mortgage is a dollar not participating in the potential gains of the market. On the other hand, conservative investors may be averse to the potential volatility of the market. They are better suited for conservative investments with lower risk and more modest growth. As a result, conservative investors may benefit from paying off their mortgage and increasing equity in their homes.
What is your current mortgage interest rate?
Mortgages can take a variety of forms. Some offer fixed interest rates, while others offer variable interest rates. In a rising interest rate environment, fixed rates may offer stability and an incentive to maintain the mortgage while participating in other investments. On the other hand, variable rates may lead to increased monthly mortgage payments and decreased savings. This may create an incentive to pay off the mortgage.
The best way to ensure that you are making the proper decision for you and your family is to conduct a comprehensive review of your finances with your Stifel Financial Advisor.