Gauging Your Mortgage

What if you had a big medical expense? A great investment opportunity?

It's not such a problem today with home equity lines of credit and relatively easy refinancing, although the money usually costs a little more.

I could go on, but a summary will be more helpful.

Why you should pay your mortgage off:

• Debt-free peace of mind. You sleep better at night not worrying about debt.
• Lifestyle/career options. You want to retire early or have some lifestyle flexibility not otherwise possible with a big mortgage obligation.
• Retirement flexibility. Eliminating the mortgage allows you to check a big one off the retirement-needs list. And it sets you up for a reverse mortgage during retirement.
• You're a cautious investor. Some prefer to keep the mortgage and invest spare cash for higher returns. If you don't think you can consistently beat the 6% implied return -- risk free -- then pay off the mortgage.
• You have other investment capital. If you have plenty of other capital to chase higher returns in real estate, equity or other investments, paying off the mortgage could make sense.

Why you shouldn't pay your mortgage off:

• Other bases aren't covered. Paying off a mortgage early is a bad idea if you haven't taken care of other financial needs, especially retirement plan contributions. Don't starve your 401(k) or forgo a company match just to pay off the mortgage.
• You plan to move or sell. If you're going to sell your home in the next few years, why bother to pay it off? You may need the capital for a down payment on your next home.
• Better investments elsewhere. Money tied up in a home is "dead" money; it really earns no return except the interest you'd save on a mortgage payment.
• You face AMT. AMT knocks out a lot of deductions, including mortgage interest for equity lines and seconds. But your first mortgage used to acquire the home remains deductible even for AMT.

Bottom line: Paying off a mortgage is a good preparation step for retirement. But the younger you are, the more it makes sense to use the mortgage as cheap financing and build your nest egg in other ways.

If your nest-egg-building plans are otherwise on track, lighting that match can make a lot of sense. At the end of the day, it's dictated by your situation and personal preference.