If you’re like most Americans, you probably made a big down payment on your home and are making extra principal payments from time to time in order to pay off your mortgage faster. After all – owning your home outright is the smart thing to do, right?
The answer to this question – and to most money management questions, for that matter – isn’t quite that straightforward. In some cases, paying down the mortgage as quickly as possible makes perfect sense. But sometimes, the opposite is true.
While the benefits of paying your mortgage off quickly are well documented, the benefits of taking your time aren’t as prevalent. We’ve put together some examples of taking your time below:
1. You could save more by investing your money elsewhere.
Before you start making those extra principal payments on your mortgage, determine if you can get a higher return on investments somewhere else. Your money may be put to better use by making only your minimum mortgage payment so you can invest in higher-yielding opportunities. Think of it this way: while paying off the mortgage will save you interest, it also denies you the opportunity to earn interest with that money.
Bear in mind that investing in other financial tools does carry some risk. Make sure you do your homework and choose wise investments so you don’t end up having to carry unnecessary debt instead.
2. You could be contributing more to your retirement fund.
If you are accelerating your mortgage payments by contributing less to your retirement account then you are probably not making the right financial decision.
In a University of Texas McCombs School of Business study, economists examined whether extra money for savings should go towards retirement or paying down the mortgage. After analyzing tax advantages of itemizing deductions, mortgage rates and savings interest rates on retirement accounts they concluded that about 4 out of 10 homeowners would be doing better by their pocketbooks by funneling extra cash into a tax-deferred retirement account (TDA) instead of their mortgages.
Instead of rushing to pay off your mortgage, utilize those extra funds towards your retirement instead!
3. You could be paying off higher-interest loans instead.
With today’s reasonably low interest rates, it’s possible you have higher-interest debt, such as credit card debt, that is eating away at your savings. If that’s the case, it probably makes more financial sense to pay down that debt versus putting all of your savings into a lower interest mortgage payment. This is especially relevant when it comes to credit card debt, since the interest isn’t tax deductible.