As the local economy and homeowner finances continue to improve, many homeowners are wondering if they should pay off their mortgage faster. Below, we explain why some homeowners may benefit from accelerating their payments while others might be better off investing or saving elsewhere.
Remember, every home, homeowner and mortgage is different. It’s important that you speak with your lender or personal financial planner before making any decisions about your loans and long-term finances.
Considering excess cash
If you’re even considering paying off your mortgage faster, it’s because you have excess cash after you pay your bills and save for retirement. That’s a great thing!
Before you consider accelerating your payments, take an honest look at your finances. Do you have an emergency reserve you can pull from in case you get laid off or your furnace goes out? Is this only the second month you’ve had the excess cash, or is this an ongoing trend? By checking to ensure that you aren’t making rash decisions, you can make a mature choice about making faster loan payments.
Assessing the risk
Most homeowners wonder if they’d be better off investing their money than in paying off their existing debt. Because everyone’s finances and financial futures vary, there’s no simple answer to this question. Some believe that if their average stock return in the long-term is higher than their mortgage rate, they should pay their loan on schedule and invest their excess cash.
Of course, this strategy doesn’t take into account any risk. Both the stock market and housing market can be volatile, and home equity or a robust portfolio can be lost or damaged in a distressed market. Conservative investors may choose to pay off their mortgage because their interest rate cannot change. By accelerating their payments, they would still be investing in their future and a place to live.
Preparing for retirement
As you prepare for retirement, you may find yourself stressed about the amount of money you’ve saved. In some cases, homeowners who are still earning an income choose to pay down their mortgage so they have fewer bills to worry about in retirement. Of course, the downside to this is that they’ll also have less money in their long-term retirement savings.
Experts agree that choosing between lower liabilities and higher assets often comes down to personal preference. To ensure they’re making the smartest move, retirees should consult with a financial planner who can explain both sides.
Considering the tax deductions
For many property owners, their annual homeowner tax deduction earns them back a significant amount of money. If you rely on this annual tax deduction, you may want to allocate your excess cash toward an emergency fund.
Common financial logic is that everyone should save for up to six months of expenses in case they are laid off or unexpectedly unable to work. Once your emergency fund is full, you can use your homeowner tax deduction to fund home improvement projects, make accelerated mortgage payments or invest in your long-term savings.
The key to success? Invest it somewhere
In the end, there’s only one tried-and-true rule of having excess cash: Don’t squander it. Once you’ve decided to accelerate your payments, set up automated transfers each month to ensure that your money is being used responsibly. (If you choose to invest in the stock market, you can do the same).
When it comes to investing excess cash, the best way to avoid temptation is to “forget” that it’s there at all.
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