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.
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