Whether to pay off your mortgage seems like it would be a simple item to review. It's actually a bit more complicated than you might imagine. In this blog we will review a few considerations for whether to pay off your mortgage or not.
Typically a mortgage debt would either be paid off early with a lump sum payment or by increasing the amount of the payments over time to pay the debt off more quickly. It is important to review whether this extra cash will be needed for anything else.
Here are some questions to consider before moving forward and paying off your mortgage.
Do you have adequate emergency reserves?
Depending on your personal situation and the type of work you do, we would recommend between 3-8 months of emergency reserves be available to you.
Do you have any upcoming cash expenses, such as the purchase of a car or repairs on your home?
What is the interest rate of your loan?
There may be circumstances with a low interest loan that you will want to consider keeping your cash and investments in the market rather than paying off your loan. If you have a low interest rate mortgage and feel you have an opportunity to earn a higher rate of return in the market, you may consider not paying off your mortgage faster than the normal payoff. Remember, this has risks. Market corrections come unexpectedly and there is no way of knowing how long market corrections will take to recover. In 2008's market correction, many people utilizing this strategy were left with investments worth significantly less than the mortgage debt they still owed. Whether to hold a mortgage and invest the difference will depend on an individual's risk tolerance, market conditions, and your personal tax bracket. All should be reviewed before considering this strategy. While this looks appealing, many investors may find this too risky a strategy.
What is your tax bracket?
Some tax professionals believe that it is best to have the mortgage deductions to benefit your tax return. I agree that the deduction does take taxes off of your highest bracket, but the deduction still does not cover the full cost of the interest paid. In my opinion the tax consideration is really a blend of the net after tax cost of borrowing the money and whether to leave money invested in the market as indicated above.
So, in short don't jump to conclusions. Be sure to review your personal situation carefully. No single strategy is right for everyone. This blog is intended to give a brief overview, in layman's terms and is not intended to be tax advice. Oxford Planning is happy to help with this analysis at any time.