QTell me again why I shouldn't pay my mortgage off early. My wife and I are in our early 50s and we have seven years left on a $65,000 mortgage at 5.25 percent interest. I know most advisers say not to pay extra, that you lose the interest deduction and that you should be able to take that extra money and make more money. But I think there is a lot of financial security in being debt-free. Most of the extra money that I will be using to pay off the mortgage will come from reducing my contribution to my tax-deferred annuity at work. My thought is that once the mortgage is paid off, I will max out my annuity contributions. Here's another factor that plays into my decision: There have been layoffs here at work. If I end up getting laid off, a paid-off mortgage would help immensely. Am I making a mistake by paying off our mortgage early?
AI'm not going to tell you not to pay off your mortgage early. In a homeowner's heart there burns an intense desire to say goodbye to the bank for the last time and own a home free and clear. It's a wonderful moment, and if you have the money there's nothing wrong with accelerating payments to eliminate the debt. I also believe that most people should enter their retirement years with the mortgage paid off.
What's more, I disagree that paying extra on the mortgage is a mistake because you lose the interest deduction. The mortgage interest deduction is a nice benefit, but it's also the most overhyped tax break in the tax code. It's a deduction, which only reduces your taxable income, as opposed to a tax credit, which actually reduces the amount of tax that must be paid. The value of the mortgage interest deduction declines as the interest portion of the monthly payment shrinks. Most importantly, you'll come out ahead financially by saving so much on the interest tab to the bank.
But I have several cautions. My concern is all about a making sure you have a strong margin of safety.
Among the most important reasons for hesitating about paying the mortgage down too quickly is that you don't want all your investment eggs in one basket -- a home. It's important to build up a well-diversified portfolio of savings, both in tax-deferred retirement savings plans and in taxable accounts. A nice nest egg of diversified savings not only protects you from downside risk, but it also gives you the financial means to take advantage of opportunities when they come along.
In other words, the key investment question when evaluating where to put your money is this: "What is the downside? What could go wrong?" Carefully weigh the downside and the upside of accelerating mortgage payments and, if it still works for you -- go for it.
Chris Farrell is economics editor for "Marketplace Money." Send questions to email@example.com.