The ability to pay off your mortgage is the quintessential American dream. But when a mortgage is entirely eliminated, many homeowners lose out on advantages like tax savings and other incentives associated with maintaining an active mortgage. When it comes to paying off your mortgage, it may be a better idea to hold off in favor of tax benefits and peace of mind in the face of a rainy day. On the other hand, you can eliminate debt and own your house free and clear.
Most homeowners with an active mortgage can capitalize on tax advantages for interest paid. This can translate to thousands of tax dollars saved, depending on your financial situation. Most homeowners reconsider paying off a mortgage in favor of the tax savings. Consult with a financial adviser if you’re unsure about your personal tax benefits or whether you can claim mortgage interest paid on tax returns.
Rainy Day Fund
If you pay off your mortgage in one lump sum, you will own your home free and clear. It’s hard to put a price on peace of mind, but in the case of a proverbial rainy day, your money reserves can likely be tapped. There are options for recouping money in emergencies: a reverse mortgage, refinancing or selling your home can get you cash when needed. But these considerations take time, so if you need money within a short period of time, you will be hard-pressed to obtain it.
Eliminate High Interest First
Most likely, your mortgage rate is significantly lower than your auto loan or any credit card with an outstanding balance. It may be a good idea to pay off debt with the highest interest first. You may be able to consolidate your debt including any revolving credit into a lower payment and faster pay-off terms. By reducing or eliminating high-interest debt first, you can avoid paying more money over time on smaller debts. Check with a financial adviser as your personal situation may differ.
When you pay your mortgage payment each month, you are showing credit-worthiness. Many homeowners choose to keep a mortgage based on the positive impact it can have on a credit profile. But if you pay off your mortgage early, you will eliminate an important creditor profile from your credit report, especially if you don't have any other debt. Homeowners may also face a temporarily lower credit score due to the loss of a long-term credit profile.
If you ever face the need to file for bankruptcy, you will most likely lose your house in the proceedings if your mortgage is paid off. Federal bankruptcy law may not protect your home if it is free and clear since it has an enormous amount of equity by nature. Your home may be resold to recoup money for other financial considerations claimed in the bankruptcy filing. If you’ve taken a new job recently or have experienced another life-changing event such as divorce, hold off on eliminating your mortgage until you are in a more stable state.
Ruth Altman writes on business, lifestyle and careers. She holds a Master of Arts degree from Pepperdine University in addition to a bachelor's degree from Harvard University.