Should you pay off your mortgage early?

Even with today’s low interest rates, the total amount of interest you may pay over the life of your mortgage can seem like a staggering amount. It's one of the reasons many people set a goal to pay down their mortgages early. But pre-paying a mortgage may not be for everyone. Here are some reasons to consider it:

• Paying your mortgage off will make you almost completely debt free.
• You want to reduce expenses as much as possible so you can put more money into your retirement fund.
• You live in a country, such as Canada, where you do not receive a tax break because you carry a mortgage.
• You plan to move in a few years and will need cash for your next home - for closing costs or for a down payment. Applying more money towards your mortgage balance will increase equity, which can be converted to cash if needed.
• Currently, you do not receive a tax break on your mortgage interest. If your mortgage is small, your interest may not exceed the standard deduction the IRS gives non-itemizing taxpayers. Without that tax break, the actual cost of your mortgage is higher.
• You pay private mortgage insurance (PMI). If you have less than 20 percent of equity in your home, making extra payments will build more equity sooner, allowing you to cancel your PMI. And eliminating PMI will reduce your monthly payments.

But for some people, paying your mortgage off early can hurt you more than help you. Here are reasons to forego pre-paying your mortgage:

• Your mortgage contract includes prepayment penalties.
• You have other high-cost debts. Credit card interest rates are often more than twice that of most home mortgages. Without a doubt, Any extra cash should go toward paying off the balance of those first.
• You want more money in your pocket now.
• You are in a high tax bracket and this additional deduction would lower your income tax bracket as well as your taxes.
• You want to put money into another investment such as the stock market or real estate.

 One good idea to follow with, if possible, is simply to add on your principle portion of your monthly mortgage payment, every month, but again, this should be done only after you pay as much as you can on your monthly credit cards bills, which carry much more interest...and if you have enough cash "left over".

Eli Magen,

Floridian Mortgage Specialist.