Why Paying Off Your Mortgage Might Not Be a Good Idea

Financial tips

Why Paying Off Your Mortgage Might Not Be a Good Idea

Posted by Infinite Wealth Advisors, LLC
1 week ago | May 10, 2022

Most of us dream of living debt-free someday. In particular, it would feel great to live in a paid-for home. And hopefully you’ll get there! But if you’re faced with a windfall of cash, paying off your mortgage might not be the best idea. And here’s why.

All debts are not created equally. We think of debt as a bad thing. But in the greater scheme of things, mortgage interest rates are usually fixed and very low. Mortgage debt is nowhere near as damaging to your long-term financial plan, as compared to things like credit cards.

Mortgage interest is tax deductible. You can’t say this for certain other types of debt (again, like credit cards). But all of the interest you pay toward a mortgage can be deducted on your income tax return, netting you potentially significant savings.

Other forms of debt should take priority. Credit card debt, for example, compounds over time. You’re essentially paying interest on interest over the years! So if you have the opportunity to pay off outstanding debts, higher-interest ones should come first.

Inflation can offset the interest on a mortgage. Your mortgage rate is probably fixed for the term of the loan, as most are. But inflation varies from one year to the next. When the inflation rate exceeds the interest rate on your mortgage, it essentially turns your debt into an asset.

Everyone needs liquid assets. Let’s say you pay off your mortgage, but then you experience emergency expenses of some sort. Without cash in savings, you’ll be forced to take on debt, and probably at a higher interest rate than your mortgage was. If you don’t have liquid assets, make sure to set up a savings account when a windfall hits.

Investing the money might be a wiser choice. Let’s say your mortgage interest rate is low, at a fixed 3.25 percent (as many are these days). If investing that money elsewhere can earn you a greater interest rate than that, you can actually earn more than you would save by paying off the mortgage.

And of course, any hasty financial decision could lead to regretful consequences. If you’re trying to decide what to do with a windfall, make an appointment with us. We can help you decide the most beneficial ways to either pay down debt or invest the money, so that you don’t miss out on a lucrative opportunity.

 

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