Should I pay off my mortgage as fast as possible?
The easy answer is yes; however, for most people this may not be the correct one. There are several things you should consider before putting all of your financial resources towards paying down your mortgage.
Investment Diversification and Lowering Your Financial Risk
Paying off your mortgage does have it’s advantages. You will decrease your interest costs and increase the equity in your home much faster than if you paid the minimum payments on your mortgage. Ultimately you will own your home free and clear without the burden of a mortgage, but at what expense?
Savvy investors and most financial planners will tell you that you decrease financial risk by investing in various asset classes and investments. By not putting your eggs all in one basket you can minimize the financial impact of one asset type declining in value.
Consider if you put all your extra cash into paying down your debt rather than investing in your retirement or emergency savings, what would happen in the event an emergency such as losing your job or a natural disaster? Equity in your home does not provide flexibility. Lenders only lend to qualified borrowers. If you lose your job getting the equity out of your home to pay for living expenses will be difficult if not impossible. If something happens to your home, insurance companies can often move slowly when providing funds for alternative housing.
Increasing Your Liquid Assets
Before paying down your mortgage make sure that you have built up enough money that can be accessed quickly in the event of an emergency. Most financial planners suggest holding at least 6 months living expenses in cash or a cash alternative.
Funding Your Retirement
Before paying down your mortgage make sure you are maximizing your retirement contributions such as your 401k and IRA. This is especially true if your employer matches 401k contributions. Over time, the tax benefits of your retirement plans coupled with compounding asset appreciation will prove to be a bigger benefit than the interest saved by paying down your mortgage.
Good Debt vs. Bad Debt
Finally paying down your mortgage should never take precedence over paying off credit cards and other “bad debt”.
If you are already fully contributing to your retirement plans, have sufficient emergency cash, have a diversified portfolio and are debt free, then paying down your mortgage can be a wise choice. Speaking with a financial planner prior to paying down your home loan is highly recommended.