Are You Better Off With A Paid Off Mortgage?
Should You Pay Your House Off?
For this discussion, let us consider the advantages of paid off mortgages. This could be for home owners who are able to pay cash for a home, or for those who can make extra payments to get their mortgage paid off quicker than the original home loan term. Most of us have a dream of paying off our entire home loan balance and having a “burn the mortgage” party. However, is this always the best way to manage our finances?
Advantages Of A Paid Off Mortgage
Refinance For Cash Back. Look at one interesting take on the issue - Advantages Of Paying Cash For A House. The big pro from this writer is that you could pay off the loan, refinance for cash, and then get back the use of your money by refinancing at a fairly low interest rates. This allows you to close quickly, get a cash discount, and then get your money back so you can use it.
No Loan Company Foreclosure Worries. This is the “peace of mind” argument. You have the security of knowing that your home is paid off. Of course, you will still have other costs of home ownership like taxes, insurance, homeowners association dues, repairs, etc. If you do not have the cash to pay your taxes, for example, you could still risk a lien.On the other hand, if your mortgage is paid off, you could probably do a cash refinance quickly to get money for emergencies.
You May Reduce Some Other Costs. Even people with paid off mortgages probably want to make sure they have good home owners policies in place. However, you would probably not need foreclosure insurance or mortgage life insurance if you had them before.
Save All That Interest! If you ever look at the actual amount you pay for a loan, you probably feel a little sick. If you have a 30 year home note, you may actually pay twice (or more) the value of your home because of interest. On the other hand, if you figure that interest comes right behind death and taxes as sure things in life, you may pay less interest for a mortgage than you would for other loans.
Disadvantages Of Paying Off A Home Loan or Paying Cash For A House
Most of the disadvantages center around a few questions you need to ponder.
- Are you really providing security? Paid off homes seem nice, but so do emergency funds and retirement accounts. If you have your mortgage paid off, but would have trouble coming up with cash to pay the deductible if you need to fix your roof, are you in good shape? It may be better to keep making modest mortgage payments and hold money in reserve for emergencies and future asset growth.
- You need more liquidity. A ready source of cash for business opportunities and other investments may be more profitable than a paid off home.
- You have other debt with a much higher interest rate than your home mortgage. If you have $20,000 in cash to pay off your home or pay off a high interest credit card balance, you may want to get that unsecured debt paid off first.
- You lose your home mortgage interest rate tax deduction. That IRS deduction may be the one thing that puts you over the limit so you can itemize your deductions. Losing it could cost you money. On the other hand, you will pay more than you get to deduct.
What Is The Right Answer?
There is not a good answer for everybody. If you pay off your mortgage, but end up paying high interest rates on other debt, you may not be doing yourself a favor in the long run. On the other hand, a paid off mortgage can provide you with quite a bit of financial security and the ability to direct future funds in other ways.