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.
1. 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 money again.”
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.”
2. 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.”
3. 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 that saving 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 time.
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.”
4. 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 separately.
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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