This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Why Paying Off Your Mortgage Early Is Actually Dumb

BOSTON ( TheStreet) -- Thrifty consumers have long added extra money to their monthly mortgage bills to pay off their homes early -- but it's not clear doing so makes sense in a world of record-low interest rates.

"Today's low rates mean you're basically borrowing money free when you factor in inflation and tax deductibility," says Greg McBride of mortgage tracker Bankrate.com. "Making a larger payment is foolish if you're not doing things like saving for emergencies or retirement first."

Banks usually let borrowers pay extra mortgage principal whenever they want, allowing budget-conscious homeowners to throw in additional money now and then to take years off of a loan's repayment period.

For instance, making 13 payments a year instead of 12 on a $250,000 30-year-fixed mortgage carrying today's average 3.41% rate will cost you an extra $1,110 annually -- but knock 44 months off of your loan's term. You'll also save $20,280 in interest by paying the mortgage off in roughly 26 years instead of 30.

McBride says that in today's low-interest-rate environment, though, retiring a mortgage early has more drawbacks than advantages.

"Most people have much higher financial priorities than accelerating repayment of a low-cost, tax-deductible mortgage," he says.

The expert believes you shouldn't even consider making extra mortgage payments until you first:

  • pay off all high-interest credit-card balances;
  • build up emergency savings to cover six months of living expenses if you lose your job or suffer some other serious setback;
  • make sufficient annual contributions to 529 plans or other college-savings vehicles to cover your or any dependents' future educational expenses;
  • make the maximum allowable contribution each year to your and your spouse's 401(k) and individual retirement accounts. For most married couples, that means putting $17,500 into each spouse's 401(k) and another $5,000 into each person's IRA (the maximum the Internal Revenue Service will allow as of 2013). People age 50 or older can also add another $1,000 "catch-up" IRA contribution, and sometimes put an extra $5,500 into 401(k)s.

"Needless to say, very few people can tick off every single one of those items," McBride says.

But even if you can cover all of the above, McBride still thinks paying off homes early has downsides.

For instance, you can't easily take out the extra equity you've put in if your finances suddenly go south.

"If you lose your job, then what?" McBride says. "All of that money that you've poured into your house isn't something you can get to when you need it."

The expert adds that even if you have lots of spare cash, setting aside retirement money over and above 401(k) and IRA limits will give you more chance to enjoy compound investment returns.

"Time is what harnesses the strength of compounding -- the longer you save for retirement, the better off you'll be," McBride says. "You're better off savings for retirement today and paying off the mortgage later -- not the other way around."

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs