October 17th, 2016 5:04 AM by Jackie A. Graves
Whether it’s figuring out where you want to
live, or narrowing down the houses you want to see, there’s plenty of ways to
do it all from the palm of your hand.
You’ve likely heard about the debt-free
philosophy espoused by financial gurus such as Dave Ramsey. The idea of gaining
financial freedom by paying off all your debts as quickly as possible — even a
mortgage with a low, fixed rate — may be appealing, but it’s not always a wise
strategy, some financial experts say.
With rates still hovering near historic lows,
mortgages are considered “cheap” debt. And unless you’re earning a high income
relative to your living expenses, putting extra money into your home could eat
up a considerable chunk of your monthly take-home pay.
Here are four reasons why you shouldn’t be in
a rush to pay off your home.
You’ll lose monthly cash flow
The concept of borrowers wanting to own their
homes sooner is mind-boggling to financial planner Ric Edelman, chairman and
CEO of Edelman Financial Services.
“The best financial planning advice I give to
people is to carry a 30-year, fixed-rate
loan. No one should be in a hurry to pay it off or to refinance to a 10- or
15-year loan,” Edelman says. “You lose liquidity when you take a dollar and
give it to your lender to pay off a [mortgage] loan; you’ll never see that
Sure, it might feel great to pay off your
home sooner, Edelman says, but those warm fuzzies will dissipate when you’re
trying to make payments on a high-interest credit card or student loans.
“You’ll never eliminate property taxes,
homeowners insurance or maintenance costs,” Edelman says, “and you’ll always
need money in the future to pay for all of these things.”
You might be in a bind during an emergency
Let’s say you lose your job or home values in
your area take a nosedive, the way they did during the Great Recession. If you
don’t have an emergency fund of at least three to six months’ worth of living
expenses — including your mortgage payments — and your money is tied up in a
short-term home loan, you’ll be struggling.
That increases your risk of losing your home,
which defeats the goal of trying to claim ownership sooner, says Brian Koss, an
independent mortgage lender in Danvers, Massachusetts.
“If you can’t make your monthly payment,
having a ton of equity won’t really help you. It’s wonderful, but you can’t
keep it,” Koss says. “And banks tend to foreclose on the homes with the most
equity faster because they make more money.”
You might not be able to save enough for retirement or other financial goals
In a recent Bank of America survey, 92% of
homebuyers said saving for or paying off a home is important, while 91% feel
for retirement is critical.
It’s true that debt can be intimidating. But
if you’re not maxing out your matching contributions to a 401(k) or otherwise
saving for retirement, you’ll be burning a bridge, Koss says. Saving for
retirement early is critical if you want to take advantage of compound
interest, the process by which your investment gains earn their own gains over
If you’re truly gung-ho about paying off your
home ahead of schedule, consider setting up automatic transfers to an
interest-bearing account each month. That can let you pay off your home, say,
20 years down the road, Koss says.
By then, you’ll be more certain of your
income growth, cash reserves and whether you’ve saved enough to fully fund your
retirement — and you can take into account inheritance or whether your children
might need financial help.
“Keep in mind that in the last 10 or 15 years
of a 30-year mortgage, you’re paying the least amount of interest in the
amortization schedule,” Koss says. “By then, it makes little sense to rush and
pay off the back end of that loan.”
You’ll lose tax benefits
Ask any homeowner, and they’ll tell you that
one of the best financial aspects of homebuying comes at tax time. When you buy
or refinance, the IRS generally allows you to deduct interest you’ve paid on
home equity debt of up to $100,000 — $50,000 if you're married and file
Paying your home off sooner means that you’ll
lose that tax perk much earlier, says Ann Thompson, Bank of America regional
mortgage sales manager for Northern California.
That said, the amount you’ll save with the
mortgage interest deduction probably won’t outweigh what you’d save on interest.
The real benefit comes in the initial years of borrowing; but over time, you’ll
pay less to interest and more to principal.
If you have an emergency fund, plan to stay
in your home until you’re old and gray, and you’re in good shape for
retirement, making an extra home payment each year can shave a few years off
your home loan, Thompson says.
But be careful not to sell yourself or your
financial goals short in order to own your home sooner. After all, financial
experts consider mortgage debt good debt, provided you’ve bought within your
means and have a loan that’s manageable for the long haul.
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