Pay Off that Mortgage?

For years, many financial planners have been advising clients to pay off their mortgages faster by making extra payments. They argue that you’ll shorten the term of the mortgage, pay less interest, and build up equity faster. Now, in come the contrarians.

Making extra payments may not be a smart idea, they say. You really need to crunch the numbers to see if the money you put into those payments could work harder for you somewhere else.

If you’re paying off a 7% or 8% mortgage and haven’t refinanced, extra payments make some sense. But with today’s rates around 5%, that mortgage debt is costing less. Not only that, Uncle Sam is helping you pay it. If you’re in the 28% tax bracket, every $1,000 you pay in mortgage interest lowers your taxable income by $280, which means you pay less in income tax. And if you’re on a tax bracket cusp, the lower income could even land you in the next lower bracket.

You also need to think about other whether there are places you can invest the money you’d put into an extra mortgage payment that will give you a better return. That’s another problem with extra mortgage payments, say financial counselors, since cash you put into your house is not a liquid asset that lets you get at your money easily if you need it.

Still, most financial advisors agree that emotions often trump the numbers. The psychological payback from getting rid of a mortgage is strong, especially for those who are years into their mortgage or who are approaching retirement age. It’s hard, the financial gurus say, to beat the feeling of euphoria that comes when you make that final mortgage payment.