Should you pay off
your mortgage early?

pay off your mortgage early

I recently read an article from AOL regarding the decision to pay off your mortgage early. It's a popular decision because most feel it's the best way to invest money. It talked about the emotional aspects of having this looming debt over your head.

Of course, once people "own their homes" it's considered a victory...more like an end to a war.

Some folks celebrated with a mortgage-burning party, where they took a match to their mortgage papers and rejoiced.

Keep reading if you should you be planning a party soon.

So when should you pay off your mortgage early? Well, this particular article cited 3 important questions:

  • Are you nearing retirement?
  • Do you expect to stay in your house for at least several more years?
  • Do you have enough liquidity from other investments to handle emergencies?

Retirement

On the surface, this seems like a good idea. As you get closer to retirement, beef up those payments. You won't need that tax deduction anymore because your largest taxable income, your paycheck, will soon be gone.

What I urge you to question is, "Will I be able to retire?" If not, then keeping that note may be in your best interest since you can take that tax deduction.

What the article fails to mention is how you should pay off your mortgage. Do you start sending more money to your lender when you only have 15 more years to go? What if you've been promoted and earned a raise? Maybe when you start receiving other cash benefits?

Once you have made your decision, how should you follow through? You'll see the best way to pay off your mortgage early...if you so choose.

Moving on up?

Your decision on staying put depends on your age, health and family situation. The article doesn't flat out say it, but context of this question leans towards a retirement scenario.

Are you healthy? Are you close to family? Are you in a one story? Do you have room for a care-giver?

So, let's say that you are healthy, close to family, in a one story, and have room for a care-giver. According to the article, this would be a great situation to pay off your home.

However, what if later you want to move? What if you are too close to family?...if you know what I mean. Things change, even in your golden years. Once you pay off your mortgage early, you lose your liquid position.

Liquidity, liquidity, liquidity

At least I agree with the article's argument to consider keeping your money liquid.

By paying off your mortgage, you are taking a highly liquid asset -- your cash -- and converting it into something far less liquid -- home equity.

However, I disagree with their advice to invest in your 401k retirement plan. So, their suggestion is to not put your cash into something less liquid (home equity), but it is to invest it into something less liquid (a 401k).

That doesn't make sense to me. It's not even close to wealth without risk. Instead of putting your money in this risky basket, put it into this risky basket.

Why not implement the infinite banking concept and have your money filter through this wealth vehicle? Transfer risk...and earn interest while doing it.

Say when.

If you ask me, you should not pay off your mortgage early. It's too risky, especially if your strategy is to send extra payments to the bank.

The Banks Love It...

...when you send them extra mortgage payments. Banks typically get their make their money back in 7 years from a mortgage. Sending them more checks gives them the opportunity to lend it out and earn more interest.

Here's a thought, you are sending the bank more money so they can earn more interest while you earn none on the money you sent them. How do banks make money? Man, those guys are smart!

It's not liquid, home equity earns no rate of return, and it's not protected from value loss or even creditors.

OK, here's the secret. If you so choose to pay off your mortgage early, do so in one payment (stroke one large check).

Just promise me you'll be careful when you burn those mortgage papers.

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