Darren Rowse of ProBlogger is running another interesting writing project -- write on "Top 5". With the topic of mortgages, this is an easy one.
We all just assume that we will be paying a mortgage forever, and we don't even count it when we think about the debt we carry. Most people only count their credit cards and other loans as 'debt'. In fact, mortgages are so pervasive that the vast majority of real estate transactions include a combination of bank, realtors and legal professionals. Banks often take the lead on real estate transactions, so if the bank isn't involved most real estate and legal professionals will have to stop and think about what to do!
While it might seem entertaining to buy cash just to make sure your lawyer is on his or her toes, the best reason to be able to buy a property in cash is because your current property is paid off. Some folks will disagree with me because you get a tax deduction for your mortgage interest in the US. But here's the rub: is your tax deduction getting you 100% of your interest costs back? No? Then you might want to avoid paying those interest costs in the first place.
So, your primary reason to pay off your mortgage has to be money in your pocket. What's your mortgage payment now? $1000 a month? More? What could you do in your life with that money available? I'm sure the more you think about it, the more places you can think of to put this money, from home renovations to vacations to retirement savings. Speaking of retirement savings, some financial analysts are actuallly arguing that paying off your mortgage first is a better approach than saving in your 401k. Of course, this assumes that you are going to save that windfall when your mortgage has been discharged.
Your second reason to pay off your mortgage is that you'll save yourself thousands in interest. The difference between a 30 year mortgage and a 15 year mortgage is only two things: how big your payment will be (much bigger with the 15 year mortgage) and how much less you'll pay over the life of your mortgage. You can save yourself tens of thousands in dollars by simply taking a shorter life to your mortgage, or paying lump sum amounts against your loan whenever you can. Why? Bigger payments, like lump sum amounts, go straight to the "principal" of the loan. So, you are paying off more of the loan amount, rather than paying off interest charges. So, if you don't want to commit to the bigger payments every month that come with a 15 year mortgage, then make those lump sum payments. Every time you pay more of the loan amount, you make the next payment more effective, because it also pays more of the loan amount and less in interest charges. And you'll still shorten the life of your mortgage.
Your third reason to pay off your mortgage is that you lower any associated costs, like costs for disability insurance on your mortgage. Once you own your home free and clear, you don't need insurance to cover this amount in the case of disability or death. You and your spouse are protected, and you have a substantial asset in case you ever need it.
That's the fourth reason to pay off your mortgage: you now have a large and valuable belonging that protects you from financial disaster. If something happens and you need cash, it's relatively easy to access the equity in your home. That doesn't have to mean a conventional mortgage either. If you are retired and want to access the equity in your home, you can look into a reverse mortgage that will provide you with money to live on, without requiring any mortgage payment and while also leaving your home in your hands.
The fifth reason to pay off your mortgage? Satisfaction. Won't it feel amazing to pay off that debt and know that you've done it?
Financial analysts say that the wealthiest among us own their own homes. That could be yet another great reason to pay off your mortgage - but we'll save that for another post.
Michael Chantrel