Home > Mortgages > Is Paying Down Your Mortgage Fast a Bad Idea?

Comments 2 Comments

Making extra payments on your mortgage? Many people do — they’re anxious to get that mortgage paid down as quick as they can. But especially with interest rates this low, that might not be the best place to put that next dollar.

So What Are The Top Five Reasons To Postpone That Mortgage Burning Party?

  1. 1. Your emergency fund is on the scrawny side. Before you send another extra dollar to your mortgage company, beef up your cash reserves. Sure, you are saving more in interest than you’re earning in your bank account, but what happens if you lose your job? You can’t rip out your bathtub and sell it on eBay for grocery money. And the bank isn’t likely to loan you the money back while you’re unemployed. Likewise, if you’re still saving for retirement, putting that extra money toward your retirement savings is a smart move. You’ll be taking advantage of the power of compounding by putting the money to work for you sooner. You get an extra bonus if adding to your retirement savings garners you more of an employer match.
  2. 2. You are carrying other debt, like credit card debt or a car loan. Those consumer loans should be paid down first. It’s likely your credit card interest is higher than your mortgage rate, and your mortgage interest may offer you a tax deduction that you’re not going to get from a credit card or car loan. Work on reducing your consumer debt to zero before even considering paying down your mortgage.
  3. 3. Capture the arbitrage. Remember not that long ago when online banks were paying 3.5%? That’s about what you can get a 30-year fixed mortgage for these days. Economies are cyclical; it’s only a matter of time until those deposit rates return, and go even higher. And when they do, you’ll be glad to have your money earning more in the bank than the bank is charging you on your mortgage. Imagine the scenario where you could pay off your mortgage if you wanted to, but instead watch the interest you’re earning outpace the interest you’re paying.
  4. 4. Those extra dollars could be put to use elsewhere. Perhaps your career could use a boost from some coaching or certifications? The additional money you’ll earn year after year from investing in your working future may return loads more than the savings on your mortgage.
  5. 5. Keeping a mortgage is a hedge against inflation. I remember when my mother-in-law paid off her mortgage years ago. She jokingly wondered what she would do with the whopping extra $92 a month she now had. Chances are, when they were a young married couple with a few children, that $92 seemed like a fortune. But years later, it was peanuts. That’s what will happen to your mortgage, too. As prices all around you go up, you can enjoy having that one bill that will remain the same. That payment will become cheaper and cheaper, relatively speaking, as time goes on.

So When Should You Pay Extra On Your Mortgage?

Certainly keeping a mortgage is not for everyone. If your DNA is so debt-averse that you can’t sleep at night knowing you owe someone (not exactly a bad character trait to have), paying off your mortgage can give you peace of mind and a good night’s sleep. When you have all of the other aspects of your financial plan in place — your emergency fund is stocked, you’ve saved enough for retirement or are well on your way, you are carrying no other debt — then go ahead and make those payments if it helps you sleep better at night.

Planning to sell your underwater or just-treading-water house in the not too distant future? You might be in a position to need to bring money to the closing table or walk away with a small amount of cash, not leaving much for the down payment on your next home. In that case, paying extra on your mortgage for a period of time prior to the sale may yield a bit more return than simply stashing the savings.

Especially if you have been able to take advantage of the historically low interest rates we’ve experienced for the past few years, bypassing those extra mortgage payments can gain you more ground in other areas. But those dollars you could have put toward your mortgage and didn’t are only valuable to you if you actually do something useful with them. Letting them be mindlessly consumed by lifestyle spending is the worst alternative to paying down your principal. As with all things in life, being purposeful with your money is the key to being successful.

Image: iStockphoto

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • heavyw8t

    I am curious as to why someone retired that bought a home later in life should care about leaving a mortgage on a house when they die. That is my situation. I will turn 63 soon and I am on year 6 of a 30 year mortgage. 24 years from now I would be 87. I will NEVER see 87 given the health I am in. I would even like to refinance if possible to make my monthly payment lower so I have more cash on hand. I really don’t care what my executor does when I am gone.

  • Pingback: Are No-Cost Mortgages Always the Best Deal? | Best Credit Repair()

  • Pingback: Is Paying Down Your Mortgage a Bad Idea? | Debt Cow()

  • Pingback: 5 Reasons Not to Rush Paying Your Mortgage()

  • Jenny @ Frugal Guru Guide

    It’s also enormously easier to survive any financial setback without the liability of owing money on your house. Your chances of foreclosure is hugely reduced, and you have the freedom of being able to move if you must no matter what the housing market is doing–you may take a big loss, but if it’s that or unemployment for several more years……

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team