4 reasons NOT to pay down your mortgage.
Updated: May 8, 2022
These are 4 reasons why not to pay down your mortgage.
We have always heard about how paying off the mortgage will somehow set you financially free. It is not so true, you still have to pay taxes every year, that part is not going away.
I hear and see people putting extra monthly payments toward the mortgage and cringe.
Let's take a quick look why it is not good to pay down mortgage.
Reason #1 - Your monthly mortgage payment will not change but your salary will eventually go up. Over time this will be the cheapest money you can borrow.
Take this graph, there are ebbs and flows but the overall trend is to go up. Your payment (if you got a 30 yr fixed mortgage) on the other hand stays fixed.
Reason #2 - The first 25 years of the mortgage payments you are mostly paying interest which is tax deductible. Nowadays few things are tax deductible, this is one. Which means the first few years most of the payments you can claim on your tax return.
Look at the amortization table of your mortgage and you will see as time goes by the principal amount of the loan you pay each month will go up slowly, very slowly. Why is this? House always wins, Bank wants to recuperate his money first.
Reason #3 - There are loans for houses, same cannot be said for retirement.
Make sure you are fully funding your retirement funds like the 401k/403b, IRA's. If your retirements vehicles are fully funded then think about your kids and fund them a 529 aka college fund.
Take the case of Sally. Sally is 66 years old, she was always told to have your house paid off is to be secure "so no one can take it from you". Each month Sally allocated money on top of her regular mortgage payments and was able to pay her mortgage a few years early.
She also paid off her car (which we have no objection).
Now she is in retirement with her social security as income trying to stretch it as much as she can.
She did not invest in her 401k in order to pay off her house.
One day she totaled her car, insurance barely gave her enough to buy a used car. She was forced to tap on her savings to buy a car. Most of her money is in the house, unable to be used by her. She is what is called "house rich/cash poor".
It's not like you can sell a door or a brick from the house to buy a car. Eventually she had to sell the house or refinance because she did not have enough for the upkeeps/car etc. Right back to where she was not wanting to be.
Reason #4 - Interests are at an all time low. You can get a 30 year fixed interest rate mortgage for as low as 3%. Expect Interest rates to go up. Inflation going sky high, Quantitative easing aka Government printing money like there is no tomorrow, there is only one way the interests are going, that is UP.
Securing that Interest rate now means for the next 30 years it stays the same.
Look at the graph for the rates in the past 60 years.
Stay safe, stay vaccinated.
Till next time,
Disclaimer - This blog is meant purely for educational discussion of finance. It contains only general information about financial matters. It is not financial advice, should not be treated as such. This is not medical advice, for medical advice please talk to your medical provider.