Should you pay down your home mortgage?

One question that we are fre­quently asked by our clients at Mentor is whether or not it makes sense to accelerate mortgage pay-ments in order to pay off the loan sooner. This is not as simple as it may seem.

Usually we need to answer this question with a few questions of our own. For example:

Does your lender allow prepay­ments?Sometimes the answer is no, or the fees charged make the prospect unpalatable.

Can you afford to part with the additional money?  Do you have an adequate reserve fund in case of emergency. There is no sense in having lots of equity in your house if you are not prepared for unexpec­ted emergencies that require ready cash. (Note that if you have already established a home equity line of credit you may not need as large an emergency fund.)

If you didn’t pay this extra amount, what would or could you do with the money?  If you carry a high interest rate credit card balance or other loan it’s usually better to pay those off first, especially since they are not tax deductible.

On the other hand, if the mortgage is your only debt you may still be able to invest the money more profitably elsewhere, for example in a higher-yielding CD or a tax-sheltered retirement account. The decision will depend on your mortgage in­terest rate and whether it’s fixed or variable, your tax bracket and whe­ther or not you itemize your deduc­tions.

Perhaps most important is the psy­chological question about how strongly you feel about owning your house free and clear. Especially with older, more conservative clients this factor may outweigh the financial downside of the paydown.

In the final analysis, both finan­cial calculations and a personal as­sessment are necessary to make the decision. At Mentor we can help you weigh the hard dollar calcula­tions, but the personal part of the equation is up to you.