It’s no surprise that many consumers are concerned with paying off as much debt as they can. This includes paying off their mortgages as quickly as possible. However, tackling your mortgage might not be the best financial choice. Rob Russell, a contributor at Forbes.com, offers five questions to ask yourself before you decide to pay off your mortgage:
What other debts to you have? It doesn’t make sense to pay off your low-rate mortgage — plus its potential tax benefit — when you have higher-rate consumer debt. Tackle your credit cards and other loans with higher interest rates before you pay down your mortgage.
Do you know your “real” mortgage rate? Russell points out that someone in the 25% tax bracket with a 4% mortgage rate actually has a “true” rate of 3%, thanks to the tax deduction. That means your effective interest rate is lower than you thought, and you could do well with other investments.
What can you earn on your investments? Take a look at your other earnings. If you are earning more, on an annualized basis, with other investments, it makes more financial sense to put your money into growing your wealth, rather than paying down your low-rate, tax-deductible mortgage.
How much do you have in savings? Next, take a look at how much you have saved up. Russell says that your investments and savings should be double the value of your home before you think about paying it off. So, if your home’s market value is $200,000, you shouldn’t consider paying off the mortgage until you have $400,000 built up in retirement accounts and other savings-type accounts.
Is it possible for your investments to pay your mortgage for you? Instead of paying off your mortgage, Russell suggests using your investment earnings to make mortgage payments. If your nest egg is generating enough for you to make the mortgage payment without you touching your principle, it can make sense to do it that way, rather than try to pay off your balance at once.