While ridding yourself of debt is a common mortgage goal for many, becoming “financially free” isn’t as black and white when it comes to paying off your mortgage. There are several variable s to consider when determining if mortgage freedom is the right stepping stone to financial freedom. Could your money be of better use (and opportunity) elsewhere?
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What Does Your Debt Look Like?
If you are carrying a balance on credit cards or auto loans, it’s probably a good idea you pay those off first for several reasons. While an auto loan is an installment loan and provides a good mix of credit on your credit report, your interest is spent financing a depreciating object. A home is highly likely to appreciate in value.
Credit cards often carry a much higher interest rate than your home loan. If you are paying 15 percent in interest on your credit card balances, paying off that debt is similar to making a return of 15 percent.
What’s the “Real” Interest Rate on Your Mortgage?
Remember that there are several tax benefits to having a mortgage. If you have a fixed-rate mortgage at 4% interest, are in the 25% tax bracket, and qualify for mortgage interest deduction, your interest rate equates to nearly 3%. Odds are high that you would make more than 3% on investments.
How Do Investment Earnings Compare to Your Mortgage Interest Rate?
If your mortgage interest rate is between 3-4.5% (after taking into account mortgage interest deductions) and your investments earn 5%, it doesn’t make sense to pour additional principal into your mortgage. If your mortgage interest rate is 3.5% and your investments earn 5%, your spread is 1.5%. The higher and more stable return you can make on your investments, the better.
What Does Your Retirement Portfolio Include?
Some financial advisors say a good rule of thumb is that your investments and savings should be at least double the value of your home, if the home is paid off. If your retirement savings fall short, investing could be the better route.
While paying off your mortgage may give you peace of mind, investing additional funds or paying off other debts could give you a greater sense of financial security down the road.