Don't Even Think About Paying Your Mortgage Early If.....
By: Freeman Liz
March 19, 2010
While you can find gazillions of articles extolling the wisdom of paying off your mortgage early, and suggesting several schemes for doing do, there are many reasons for keeping your money out of your mortgage. Here are several for holding onto your cash.
Your Lender Might Not Let You Have it Back
In the not-too-distant past, you could always hit your home up for a quick loan with a low-cost home equity line of credit. With this emergency fund always at hand, homeowners didn't have to worry about liquidity the way they do today. Now, your lender might not be willing to let you have money you pay towards your principal balance when you need it. In fact, if you have a true emergency, like unemployment, lenders are apt to shy away from advancing you anything. That old saying about banks only lending when you don't need it didn't come from thin air! So, unless you have an emergency fund of two to six months' household bills and expenses (depending on how secure your job, health, and marriage are), don't consider paying down your home loan!
You Might Get a Better Return Elsewhere
Mortgage rates are incredibly low. And after taxes they're even lower. If you pay 5% and are in a 35% bracket, you're effectively paying 3.35%. And there are a lot of investments out there doing much better than 3.25%, even after taxes. Want to keep the tax guy off your back altogether? Don't prepay your mortgage unless your retirement accounts are fully-funded.
The Decision to Prepay a Mortgage Is Often Emotional
Some folks just like the idea of being mortgage free. It makes them feel safer. And that's fine; you're the one who has to sleep at night, and if making a lower return on your money is part of that, it's okay. But the possibility of illness, unemployment, divorce, or other emergency without emergency funds should keep you wide awake too. Ditto the vision of a house-rich and cash-poor retirement. So prepay your mortgage if you must -- just do it after building up an emergency fund and socking away your full tax-deferred retirement allotment.
