The Key to Rentals

5 Reasons to not pay down your mortgage early

5 Reasons to not pay down your mortgage early

Mortgage debt is the largest single obligation for many households. Paying off that mortgage can feel like a weight has been lifted. There are many strategies people use to accelerate the rate they pay off their mortgage, including refinancing to a shorter term, paying extra each month, or periodically sending principal payments to reduce the balance. Refinancing to a lower rate is definitely worth consideration, as is paying your mortgage balance to a level where mortgage insurance is no longer required by the lender. Mortgage debt is only a piece of the puzzle though. Consider the following reasons to NOT pay down your mortgage before you take any action.

  1. Higher Interest Rate Debt – If your mortgage is at 4%, your car loan at 6% and your credit card at 15%, payoff your credit card FIRST! Paying down the mortgage may feel better, but the cost of interest on higher rate debts is more impactful. If you do the math, or even do a spreadsheet to show the net impact on your total debt, with all other things being equal, it is better to get rid of your higher interest rate debt first. If you adjust your goal to reducing the total amount of your debts, and track that, it will be easy to see that you definitely need to payoff higher rate debts first.
  2. Cash Flow – If you pay down your mortgage balance and leave yourself with a low amount of cash in reserve, you may need to borrow that money back on a new loan at a higher rate. Consider what you will do tomorrow if you lose your job, or have an unexpected major repair like a transmission or furnace. It is important to keep a safety net of funds available. If you find yourself in a bind for cash, you will wish you had your principal back.
  3. Principal Pay Down Does Not Mean Paid Ahead – If you make a payment equivalent to several mortgage payments, it does not mean you are free to skip payments. When you make a payment, your lender will charge you interest that is currently due. Paying extra goes towards your reducing your principal. This will not stop interest from being due in thirty days. Never assume you can skip upcoming payments. 
  4. Need for New Loans – Will you need to buy a car soon? Are you planning to finance an ATV or boat? If upcoming purchases will need cash, keep that in consideration and apply the higher rate debt analysis in planning for that.
  5. Can You Make More on Investments? – Please don’t interpret this as a statement to max out the mortgage on your house to put it in the stock market. This will require more in depth thought, consideration for your risk tolerance, and in many cases the advice of a seasoned financial advisor. With that in mind, if you are reasonably confident that you can earn a higher rate of return in the long term with investments, that may be a better place to make improvements to your net worth. Discuss with your financial planner investment options like increasing your 401k contribution, Roth IRA contributions, or taxable investments.

Is paying down your mortgage balance good? Yes, but not always best. Give consideration to your entire financial scenario, not just your mortgage. Define your goals and take steps to achieve them!

Your outlook is bright!


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