Your financial priorities are different than your neighbor’s or your best friend’s or your parents’.
Take a home mortgage, for example. Plenty of people are happy with paying 15 or 30 years on a mortgage, while others are anxious to get rid of any debt—including their home loan—as soon as possible.
Which is “right”? As with most things related to money, it’s complicated—and more personal—than a single choice.
Here’s what to consider if you’re thinking about when to pay off your mortgage.
Good debt vs. bad debt
Some people think of all debt as “bad,” but that’s not really the case. Experts refer to both good debt and bad debt. A mortgage lands squarely in the “good debt” column.
“How a loan is secured determines whether it’s good or bad,” says Stanley Poorman, a financial professional with Principal®. “A mortgage is secured by an asset—your house—which gives it an advantage. Personal loans and credit cards are not.”
Think of good debt this way: Every payment you make increases your ownership in that asset, in this case your home, a little bit more. But bad debt like credit card payments? That debt is for things you’ve already paid for and are probably using. You’re not going to “own” any more of a pair of jeans, for example.
There’s another key difference between purchasing a home and buying most goods and services. Very often, people can pay cash for things like clothes or electronics. “The vast majority of people couldn’t pay cash for a home,” Poorman says. That makes a mortgage all but necessary to buy a house.
The case for not paying off a mortgage
There are certain reasons why your mortgage may not be worth paying off early at this moment in your life. Use this guide to help.
| If… | You don’t need to worry about paying off your mortgage because… |
|---|---|
| You have a good interest rate. | Rates are historically low—about 3%. “We may never again in our lifetimes find loans this cheap,” Poorman says. |
| You need to increase your emergency savings. | Paying off a mortgage requires you deplete cash, or liquidity, which may leave you without a cushion. Focus first on saving for unexpected events. |
| You’re building retirement savings. | With interest rates so low, “if you invest the money you would've used to pay off your mortgage into a retirement account, your return over the long term may exceed the savings of paying down your mortgage,” Poorman says. |
| You’re getting a decent tax deduction. | If it’s deductible, the mortgage interest may make your effective tax rate even lower. |
| You have other high-interest debt. | Money that “costs” more than your mortgage should get higher priority for early pay off. |
| Your mortgage doesn’t worry you. | If you aren’t stressed by mortgage debt and your budget isn’t stretched by the payment, you may have little reason to pay it off early. |
Tip: If you’re in the fortunate position to be able to pay off a mortgage faster, and the idea works for your finances, consider moving to an every-other week payment schedule, round up the total you pay, or make one extra payment per year.
The case for paying off a mortgage
If eliminating mortgage debt is important to you, use this guide to help you decide.
| If… | You might want to pay off your mortgage early because… |
|---|---|
| You have a high mortgage interest rate. | If you’re paying more than the current rate and can’t refinance, a mortgage payoff may make more sense. |
| You have adequate emergency savings and insurance. | “Catastrophic things happen all the time,” Poorman says. Paying off a mortgage adds another layer of cushion to your protection plans. |
| Your retirement is fully funded. | Those extra savings aren’t needed elsewhere. Use our retirement wellness planner to gauge your progress. |
| Your mortgage interest deduction doesn’t significantly affect your tax return. | If you have a low mortgage balance, you may be gaining little to make a tax difference. |
| You have little or no other debt. | Lack of competition in interest rates and debt totals makes it easier to focus on faster mortgage repayment. |
| You’re close to retirement. | Eliminating a mortgage can free up cash flow for wants and needs after you’ve stopped working (and may enable you to draw down retirement savings less quickly). |
| You dream about being mortgage free. | Debt can be emotional. “What do you want to achieve?” Poorman says. “That’s the question to ask yourself. If a mortgage is a weight on your shoulders, you can prioritize it.” |
Ultimately, the decision to keep your mortgage or pay it off is personal and tied to how you feel about money and security.
“You’re working hard,” Poorman says. “It’s about you and what you want.”
Fit your home into your estate plan? Legal documents and clear goals can help you make the most of this asset.
Ask for help. Not sure how a mortgage fits into your overall financial plan? A financial professional will talk you through next steps. Don’t have one? Check with your HR department or employer to see if your company’s retirement savings plan offers this service. Or, we can help you find one.