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Paying off your mortgage has been a monumental goal for decades now. But is it the right thing to do in the 21st century?
Read on to find out 7 reasons not to pay off your mortgage early.
Don’t Pay Off Your Mortgage Early: 7 Reasons
Debt Is Not Always Bad
There is a big difference between good debt and bad debt when it comes to debt. Mortgages are considered good debts because they are fixed and typically have low interest.
Also, if you have a mortgage on a rental property, the debt is the asset.
Reason #1: You Can Get a Tax Break On The Interest
The interest you pay on your mortgage is usually tax-deductible. This deduction can amount to significant savings, especially if you are in a higher tax bracket.
If you pay off your mortgage early, you forgo this deduction.
Reason #2: There Is Potential for Higher Returns Elsewhere
Other investment opportunities will provide a better return than paying off your mortgage early.
Reason #3: You May Have Other Debt With a Higher Interest Rate
Reason #4: Inflation May Offset Savings in Interest
Inflation can offset the amount of interest saved by paying your mortgage off early. If you have a low rate on your mortgage, say 4%, and inflation is 7%, your real interest rate you’re paying is 33%. Yes, the bank is paying you to take on the loan.
The debt has become the asset.
Reason #5: The Interest Rate May Drop Significantly Overnight
The interest rate on any debt is determined by many factors, including bank rates and government policies. If one of these changes overnight, it could cause your mortgage interest to drop significantly – but then why would you want to pay off your mortgage? It doesn't make sense financially.
Reason #6: Extra Liquidity
You may need extra liquidity for other reasons, such as to cover unexpected medical bills or car repairs.
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Reason #7: Your Mortgage Could Help You Create Passive Income
If you have a mortgage, you can create passive income by renting out part of your house. Having roommates can help you cover the costs of your mortgage and then some.
In conclusion, think again if you have a mortgage and are thinking about paying it off early.
Make sure to weigh your options before deciding on the best course of action. In an inflationary environment, it’s usually best to keep the low-interest debt and pay on the less valuable debt each month.
As a certified credit counselor and syndicated writer at MaxMyMoney, Max has coached over 250 Millennials to help take the stress out of money. When Max is not coaching, you'll find him reading financial books, indoor cycling, or visiting local pawn shops looking for swiss-made watches.